Sustainable finance taxonomies
Companies worldwide are required to disclose their emissions and adopt environmentally friendly practices. This is crucial to secure investor financing and bank loans. Investors and banks are now more interested in supporting environmentally responsible companies. Companies demonstrating sustainability have a higher chance of receiving financial support.
In addition, European companies more significant than a specific size have been required to comply with non-financial reporting requirements since 2017 under the European Union's Non-Financial Reporting Directive (2014/95/EU). This directive makes non-financial reporting (NFR) mandatory. A recent study focused on the quality of non-financial reporting in the compulsory reports of the 100 largest banks operating in Germany over three years.
The study developed a novel framework to measure the quality of non-financial reporting (NFRQ) and examined various determinants, including experience, format, framework, and audit, that impact NFRQ. The findings revealed that the NFRQ in banks' mandatory reporting is below average, despite showing significant positive development over the years. This indicates room for improvement in the quality of non-financial reporting by banks in Germany.
Furthermore, China has introduced the SDG Finance Taxonomy, which aims to accelerate capital flows that advance the Sustainable Development Goals (SDGs). The Taxonomy provides a framework for investors and project developers to structure their investments and business strategies in an SDG-aligned manner. It enables them to measure and manage the impact of their investment and financing activities on the SDGs. China's adoption of the Taxonomy reflects its commitment to high-quality development, innovation, poverty reduction, pollution control, and socioeconomic empowerment.
These regulations, the SDG Finance Taxonomy, and the study's findings underscore the importance for companies, including banks, to incorporate environmentally friendly practices and showcase their commitment to sustainability. By doing so, companies can improve their chances of securing financial support, enhance their environmental performance, build a positive reputation, and attract customers who value sustainability. The study's results also highlight the need for more vital reporting practices in the banking sector, including robust frameworks, experience, appropriate formats, and rigorous auditing processes. Enhancing the quality of non-financial reporting is crucial for ensuring transparency, accountability, and stakeholder trust in the banking industry.
In conclusion, the study provides insights into the quality of non-financial reporting in banks operating in Germany and emphasizes the importance of improving reporting practices. By identifying the determinants that impact NFRQ, the study contributes to advancing the understanding of non-financial reporting in the banking sector. It provides valuable guidance for enhancing reporting quality in the future. The global regulations, the European Union's Non-Financial Reporting Directive, and China's SDG Finance Taxonomy underscore the global momentum towards sustainable and responsible business practices.
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