The EU’s Corporate Sustainability Reporting Directive

A fundamental shift in corporate reporting for the aviation sector

02 April 2024

8 min read

Most large European public and private companies are soon become subject to mandatory sustainability reporting. This is a fundamental shift in corporate reporting and, as is often the case on the precipice of a newly introduced regulation, compliance appears onerous and daunting.

However, the European Sustainability Reporting Standards offer the Aircraft Leasing and Aviation Finance community an opportunity to convey its value proposition to a broadened base of investors and stakeholders, over a timeframe that is measured in generations, not merely annual financial reporting cycles.

Aircraft leasing and aviation finance sector

Stakeholder engagement

Investor, capital provider and wider stakeholder engagement with organisations, or reporting entities, in the aircraft leasing and aviation finance sector has evolved significantly over time, shaped by the dynamic economic landscape of the sector and technological advancements.

Financial statements were the traditional means for entities to engage with stakeholders and convey their value proposition, but in recent years, environmental, social, and governance (ESG) considerations have gained prominence, prompting investors and stakeholders to scrutinize leasing and aviation finance companies not only for financial performance but also for their social and environmental impact. This multifaceted evolution reflects the dynamic interplay between technology, market demands, and societal values in shaping how investors engage with reporting entities.

In addition, rating agencies have increasingly incorporated ESG metrics into their credit assessments and ratings. Some rating agencies may have dedicated ESG rating frameworks, while others integrate ESG considerations into their existing methodologies, so the extent to which ESG metrics influence ratings can vary. Generally, rating agencies recognize that ESG factors can have a material impact on a company's long-term financial performance and risk profile. As a result, these agencies are integrating ESG considerations to provide a more comprehensive evaluation of creditworthiness.

Developments in the ESG reporting landscape

Over the past 30 years, there has been a push for more integrated reporting that combines financial and non-financial information to provide a holistic view of a company's performance. The evolution reflects a global effort to promote transparency, accountability, and responsible business practices.

Sustainability reporting standards have evolved over time to address the growing importance of ESG factors in business. Initially, companies used various frameworks, but the Global Reporting Initiative (GRI) emerged in the late 1990s as a pioneer in setting sustainability reporting guidelines. Over the years, organisations like the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD) have developed specific standards to enhance the consistency and comparability of sustainability disclosures.

During the meantime in the European Union, non-financial reporting requirements were first imposed on large public interest undertakings in 2014 by the Non-Financial Reporting Directive (NFRD). The NFRD was introduced to enhance the consistency and comparability of non-financial information disclosed throughout the EU. However, the NFRD falls short of achieving the primary function of corporate reporting, namely to enable stakeholders to make informed decisions in order to protect their interests, make investment decisions, or hold companies publicly accountable.

The evolution of sustainability reporting standards, influenced by initiatives like GRI, SASB, and TCFD, set the stage for the EU's Corporate Sustainability Reporting Directive (CSRD). The directive represents a significant step toward standardizing sustainability reporting practices across the European Union, reflecting the global momentum towards more transparent and accountable corporate practices.

Key developments introduced as part of the CSRD include:

Harmonization: CSRD aims to harmonize sustainability reporting standards across the EU, ensuring consistent and comparable information.
Scope extension: CSRD expands the scope of reporting to include more companies, building on the foundation laid by the Non-Financial Reporting Directive (NFRD). It applies to large companies, listed entities, and certain other entities deemed significant in terms of societal and environmental impact. In addition, non-EU groups (including the US and Asia) that have more than a de minimis footprint or revenues in the EU are likely to be scoped in to CSRD reporting to some extent.
Digitalisation: CSRD introduces digital reporting requirements, promoting a more accessible and user-friendly format for sustainability information. This move aligns with broader trends in digital reporting and enhances the transparency of disclosures.
External assurance: Initially, CSRD requires an independent assurance provider to express a limited assurance opinion on the compliance of a sustainability report with the ESRSs. In later years reasonable assurance over the sustainability report may be required.

An example of a CSRD-compliant sustainability report

Under the CSRD, the EU has published a set of twelve European Sustainability Reporting Standards (ESRSs) with which reporting entities must comply. It is effective from 1 January 2024 for large European listed and public-interest companies (reporting in 2025), and from 1 January 2025 for all other large companies (reporting in 2026).

The following represents what the outline of an Aircraft Lessor’s sustainability report might look like:

Disclosure of general basis for preparation of sustainability report
The role of the administrative, management and supervisory bodies with particular regard to sustainability matters
A description of the reporting entity’s strategy and business model, including (i) the elements that relate to or affect sustainability matters, (ii) how the interests and views of its stakeholders are taken into account, and (iii) how they are informed by an assessment of material impacts, risks and opportunities.
Tracking effectiveness of policies and actions through targets

The following information is then complied pursuant to the determination of the reporting entity’s reporting boundary, its double materiality assessment resulting in its selection of ESRS Data Points, all further explained below.

Climate Change: Impact, risk and opportunity management and Metrics and targets related to Climate change adaptation, Climate change mitigation and Energy. For a lessor or financier of aviation assets, this is expected to focus on Greenhouse Gas emissions and could include reporting on OEMs and airlines (see reporting boundary below).

Pollution: Impact, risk and opportunity management and Metrics and targets related to the pollution of air, water or soil. This could include analysis regarding byproducts of aviation fuel production.

A reporting entity is also required to disclose any additional entity specific information.

Own workforce and Workers in the value chain: Impact, risk and opportunity management and Metrics and targets related to Working conditions, Equal treatment and opportunities for all, and other work-related rights (Child labour, Forced labour, Adequate housing, Privacy).

Affected communities: Impact, risk and opportunity management and Metrics and targets related to Communities’ economic, social, civil, political and cultural rights.

Business Conduct: Impact, risk and opportunity management and Metrics and targets related to Corporate culture, Protection of whistle-blowers, Political engagement and lobbying activities, Management of relationships with suppliers including payment practices, and prevention and detection of corruption and bribery..

Reporting boundary: Unlike traditional financial statements, the reporting boundary defined by the ESRS considers the entire value chain, from suppliers to end consumers. This inclusive perspective ensures that the environmental and social impacts of a business are accurately captured, providing stakeholders with a complete picture of the reporting entity’s sustainability efforts, but poses a demanding requirement to reporting entities from a data collection standpoint.
Double materiality assessment: The 10 topical sustainability reporting standards contemplate over 90 sustainability sub-topics and sub-sub-topics. A reporter will need to assess which of these they are in scope for reporting by applying a double materiality assessment. In the Aircraft Lessor outline above, for context, 30-40 sustainability sub-topics have been included in the example above.
Data points: a draft List of ESRS datapoints – Implementation Guidance, which includes all 1,178 disclosure requirements in the sector agnostic ESRSs published to date. The datapoints are standardised metrics that allow for consistency in reporting and enable stakeholders to assess the sustainability performance of different reporting entities.

Reporting entities may also need to establish or enhance integrated data systems that allow for the collection and management of sustainability data. This could involve integrating sustainability data within existing enterprise resource planning (ERP) systems to ensure data consistency and accuracy. Additionally, reporting entities will need to creating processes and controls to ensure the accuracy, completeness, and reliability of sustainability data.

A call to action for the aviation finance sector

It remains the general consensus that the aviation finance community is lagging with regard to its non-financial monitoring and reporting capability, citing a lack of prioritization by leadership and expertise within the team as the key deterrents for engagement.

Through the introduction of the CSRD, corporate reporting will make its biggest advancement in several generations. While no one expects financial statements to be consigned to history, Aircraft Lessors and Aviation Financiers are being presented with an opportunity to engage with their stakeholders in a way that presents their value proposition over a much longer term.