The Corporate Sustainability Reporting Directive (CSRD) – is it fit-for-purpose?
Companies are racing to finalise their first CSRD-aligned disclosures. However, issuers across several sectors have told us that compliance is neither easy nor cheap; it requires significant upfront costs to establish the necessary IT systems, hire dedicated full-time equivalents (FTEs), and achieve a cultural shift in favour of sustainability. The complexity of the job at hand has resulted in a proposed watering-down of requirements, as indicated by the EU’s Omnibus proposal that emerged at the beginning of the year. But will all the work already completed be worth it?
Our main takeaway from our Milan engagement trip in December was that some banks perceive CSRD as having been developed with corporates, and not financial institutions, in mind, and that there is not enough sector-specific guidance available. This has left banks in a tough spot, as the CSRD’s already-complex requirements are further complicated by the fact that an institution must account for not only its direct impacts, but also the impacts generated by the entities it lends to.
With comprehensive sustainability disclosures only recently becoming the ‘norm’ for large corporates, small and medium-sized enterprises (SMEs) often lack the resources and capacity to provide banks with the data they need. Similarly, the fact that Italy has no national register of residential energy performance certificate (EPC) data makes accounting for the impact of banks’ often sizeable mortgage portfolios a notoriously complicated task.
Our main takeaway from our Milan engagement trip in December was that some banks perceive CSRD as having been developed with corporates, and not financial institutions, in mind, and that there is not enough sector-specific guidance available.
Banks have dedicated significant resources to overcoming these data challenges and recognise the importance of disclosing and reducing their portfolio impacts. For example, Intesa Sanpaolo recently announced a new portfolio decarbonisation target covering its residential mortgage portfolio (currently relying on a high level of estimation to define its baseline) and is providing advisory services on ESG disclosure to its SME customers via its growing network of ‘ESG Labs.’ Nonetheless, banks in general face uncertainty as to whether disclosures in their current state will be acceptable to the regulator, if the rules go ahead as planned.
One bank we spoke to voiced concerns that its progress on defining material ESG key performance indicators (KPIs) would be undermined by the new reporting requirements, as data points like sustainable financing figures are not included in scope of the CSRD. It is weighing the possibility of publishing an additional report to keep these crucial data points alive, which we encouraged it to do to continue communicating its most material impacts.
On a positive note, banks highlighted that the CSRD has elevated the status of sustainability data within key decision-making processes through its integration into internal compliance procedures alongside financial information. Additionally, improvements in IT systems for processing ESG data have accelerated, enabling long-term efficiency gains. Finally, the CSRD will eventually bring improvements in data availability that banks have long been asking for from their clients. How they produce aligned disclosures in the meantime, however, remains to be seen.
Optimism amid a challenging macroeconomic backdrop
Perhaps it was the seasonably bright and crisp Milanese weather in December, but the tone from the various management teams felt upbeat. There are reasons for that: capital and solvency levels are being powered by strong profitability, generating organic capital and still close-to-the lowest cost of risk. The push for commission income, as hedge for lower-trending ECB repo rate, was acknowledged. Some of the players we met are looking at M&A to address this, while others are diverting capital to the internal AM and insurance division and preparing to re-negotiate partnerships with external providers. Some of these financials are achieving the highest full-year net income on record. But this is not a recipe for complacency – trade storms are gathering on the horizon of surplus nations and Italy, alongside Germany and Ireland, is one of them.
Share:
BD015390
