The best case is that companies will start reporting audited ESG information and climate-related numbers from 2025 through, even by then, companies will still be granted significant exceptions and leeway in reporting so-called scope-3 data related to their value chain, including the climate-related disclosures most sought after by investors.

The mounting delays leave EU-based funds in the difficult position to manage their own obligations under the Sustainable Finance Disclosure Regulation. In addition, the disclosure of quantitative metrics remains subject to companies’ materiality assessments, including the data required under the SFDR.

Global ESG disclosure standards: we are not there... yet

Uneven international standards pose challenge for debt capital markets

This is of particular importance for fixed-income investors because the universe of debt issuers and debt instruments, incl. ESG and green bonds, is a significantly larger than the number of traded equities that fall under these regulations. From a credit investors' perspective, it is important that double materiality is enforced in practice to ensure that companies deem climate and workforce-management information to be material and opt in sufficient numbers to disclose the relevant metrics. Failure to do so will have knock-on effects on value chain reporting for other companies and make it impossible for credit investors to integrate ESG information into their fundamental analysis in a systematic way.

Above all, the concessions granted at the last minute reflect the fact that many companies, especially the smaller ones that were so far not captured by the EU’s existing Corporate Sustainability Reporting Directive (CSRD) are simply not ready to report ESG and climate disclosures.

A globally accepted ESG disclosure framework is also out of reach despite almost two years of deliberations because the ambitions of the EU and the US in this field diverge materially, with latter expected to have much lower requirements compared with Europe. While the ISSB’s proposal appears to cover the middle ground between the two regimes, it’s unlikely that US companies will adopt these, given their reliance on US GAAP accounting. Thus, progress in this area is about pragmatism and will continue to be investor driven, absent international agreement.    

With litigation risk in mind, EU softens requirements for companies

Against this backdrop, litigation risk is a major concern for companies and investors alike. Company directors risk being sued for making disclosures based on “limited assurance”, third-party data, or models, while fund managers face compliance violations and are vulnerable to claims of mis-selling.

The EU authorities, aware of these concerns, already allow a three-year reporting period for value-chain related disclosures. Companies with fewer than 750 employees have been given an extra year to disclose scope-3 greenhouse-gas emissions and workforce-related information. Safe harbour provisions are likely to further dilute the requirements: e.g., when transposing ISSB standards into national law.

Don’t expect greenwashing to be stamped out anytime soon.

Europe’s grid operators brace for a surge in capex; regulated tariffs start to rise

In the meantime, one set of companies in Europe is facing a monumental task in terms of ramping up investment to meet the demands of the transition to the low-carbon economy: the operators of the region’s electricity grids.

As Sebastian Zank, deputy head of corporate ratings, explains, the utilities are offsetting much of the strain on their balance sheets with self-help measures – asset sales, reduced shareholder pay-outs – plus growing support from regulators who are belatedly revising regulated tariffs higher.

The catch is that the improved returns on regulatory asset bases (RAB), enlarged by the massive investment underway, will take time to materialise.

Increased remuneration on investments might apply only or mostly to new investments and usually kick in when current regulatory periods end – hence the importance of companies’ recent and continuing efforts to stabilise their finances amid investor nervousness about how extra capital expenditure will be financed.

The scale of the capex challenge varies by country but represents multibillion-euro sums for Europe’s main grid companies in the years ahead, much higher than that invested in the recent past.

Take Germany. Investment in the transmission grid could amount to EUR 75bn by 2030, according to utility to EnBW AG, which implies an increase of average yearly capex to EUR 9.4bn for the four German transmission grid operators, up 27% from the aggregated amount invested in 2022.

Sebastian’s full report is available for download here.