Environmental information, the significant absentee in non-financial information statements. Much ado about nothing.

[Article originally published in Revista Análisis Financiero]

By Ana Barreira y Quentin Aubineau

Ring, ring. We’re in the midst of reporting season. Every year, in the months of February and March, major companies release their financial results for the previous fiscal year, along with their integrated and/or consolidated reports. In the coming weeks, this information will be submitted for approval at the general shareholder meetings of these companies. Since the entry into force of Law 11/2018 on non-financial information and diversity in December 2018, companies that meet the criteria established by Article 49.5 of the Commercial Code must prepare a non-financial information statement (NFIS). This NFIS must include “the necessary information to understand the evolution, results, and position of the group, and the impact of its activity with respect to at least environmental and social issues (…)” and be presented on the agenda for approval during the general shareholder meeting.

Following the completion of the 2022 fiscal year, major companies will publish their fourth NFIS. While Law 11/2018 requires NFIS to include the main risks related to environmental issues “linked to the group’s activities,” as well as “key non-financial performance indicators relevant to the specific business activity,” in most cases, NFIS lacks the required environmental information. This is the case for NFIS from financial institutions such as banks and insurers. It should be noted that environmental issues covered by the law do not only refer to climate change but encompass all aspects related to the environment, including biodiversity, water, and pollution, among other issues.

Firstly, the analysis of NFIS from major Spanish banks reveals the extensive amount of data disclosed regarding the environmental footprint of their real estate portfolios. In this regard, very specific information is disclosed about the raw materials used in offices, the amount of waste generated, and energy efficiency measures implemented in their buildings and offices. However, these data are not key performance indicators relevant to the financial activity of the banks, namely their lending and other financial services. Consequently, these data hardly contribute to understanding the bank’s evolution, results, and impact on environmental issues, such as the impact of their financial activities on biodiversity or water bodies. This is significant since a substantial portion of the environmental impact of financial institutions stems from their financial products, rather than their buildings and offices.

On one hand, concerning disclosure of information about climate change, NFIS from financial institutions make a clear distinction between their operational carbon footprint and the Greenhouse Gas (GHG) emissions attributable to their financial products. The NFIS content must include “significant information on important elements of GHG emissions generated as a result of the company’s activities, including the use of goods and services it produces.” Thus, the methodology of the Greenhouse Gas Protocol in relation to calculating Scope 3 GHG emissions from a company’s value chain covers 15 categories, including emissions attributable to investments. Despite this, financial institutions only report Scope 3 emissions corresponding to the use of the company’s products, such as employee travel. It is essential to note that the reported Scope 3 emissions are marginal compared to the total GHG emissions produced by the financial institution’s activities. For example, the integrated report from MAPFRE for the 2022 fiscal year, just published, includes non-financial information, but it is noteworthy that the reported Scope 3 emissions (39,957.48 MtCO2eq) do not include the carbon footprint attributable to its investment portfolio (3,354,390.96 MtCO2eq), which is nearly 84 times higher. Furthermore, the insurer indicates a commitment to achieving net-zero emissions in its underwriting insurance and reinsurance portfolios by 2050. However, it does not disclose GHG emissions data attributable to these portfolios or “voluntarily set medium-term reduction targets for reducing GHG emissions and the means implemented for this purpose,” as required by the current legal framework for non-financial disclosure. To understand the situation of financial institutions in relation to climate change and the implications of their decarbonization commitments, it is crucial that their NFIS include specific data on GHG emissions attributable to their financial activities within Scope 3 emissions, as well as concrete measures being implemented to reduce them.

On the other hand, NFIS must include information related to biodiversity protection, as well as “impacts caused by activities or operations in protected areas.” However, the NFIS of major Spanish banks for the 2019 and 2020 fiscal years did not incorporate any information in this regard, indicating that they did not consider it relevant to their activity due to the location of their offices in urban areas. In the 2021 NFIS, the latest published to date, while Banco Santander, BBVA, and Banco Sabadell acknowledged the impact of their activity on biodiversity, CaixaBank still considered this aspect immaterial to its activity, and Bankinter was the only bank that stated it was “working on measuring and assessing the impact of financial activity on biodiversity.” Four years after the law came into force, Spanish banks’ NFIS still do not comply with legal requirements, lacking specific data regarding the impacts of their activity on biodiversity.

Given the key role of the financial sector in the decarbonization of the economy, it is necessary for financial institutions to meet the requirements for disclosing non-financial information about the environmental impacts of their activities. This is even more important with the recent adoption of the directive on corporate sustainability-related disclosures, which will come into effect in 2025 and is more demanding than the current legislation. However, as demonstrated by the content of Spanish financial institutions’ NFIS, the current requirements are not being met, casting doubt on the ability to meet the demands of this directive. In recent years, numerous metrics and international initiatives have proliferated, which, although useful for advancing reporting, are not subject to oversight. At the same time, if the legal framework in this area is not respected, everything remains empty gestures that will not suffice to keep us within the limits of the planet. Much ado about nothing.

Ana Barreira

Ana Barreira is a lawyer and founding Director of the International Institute for Law and Environment (IIDMA), an organisation that this year celebrates its 25th anniversary. She is co-president of the energy and environment section of the Madrid Bar Association.

Quentin Aubineau

Quentin Aubineau is a lawyer specialized in international and European environmental law. He holds a degree in Law and History from the University of Orléans (France) and further specialized in international and European environmental law with a Master’s degree from the University of Aix-Marseille (France).