Transparent Net-Zero Targets Require Courage

Transparent Net-Zero Targets Require Courage

TOEZICHT RAPPORT

In Short Large listed companies (OOBs) must be transparent about net-zero targets. The long-term aspects are surrounded by challenges and uncertainties. They are on the right track in their annual reports in substantiating their net-zero targets up to 2030. However, the path to 2050 remains vague. Courage is needed to do this well; to dare to say what a company already knows, but which may still be uncertain. The AFM supports this with recommendations, good practices, and a self-assessment.

1. OOBs are quite transparent about net-zero targets up to 2030.
2. After 2030, the route to net zero is surrounded by many challenges and uncertainties, such as technological and financial challenges and risks from climate change. Companies are still vague about how they will achieve net zero in 2050. From 2024, the CSRD mandates transparency on this.
3. To be more transparent, the AFM offers companies recommendations, good practices, and a self-assessment.

TOEZICHT RAPPORT Transparent Net-Zero Targets Require Courage

In Short Large listed companies (OOBs) must be transparent about net-zero targets. The long-term aspects are surrounded by challenges and uncertainties. They are on the right track in their annual reports in substantiating their net-zero targets up to 2030. However, the path to 2050 remains vague. Courage is needed to do this well; to be transparent, even about matters that are uncertain. The AFM supports this with recommendations, good practices, and a self-assessment.

TOEZICHT RAPPORT Summary 3

1. Introduction 6
2. How transparently do companies outline the path to net zero? 9
3. Insight into the data process contributes to transparency 18
4. Research Methodology 21
5. Key Concepts 22 Appendix: Self-assessment 24

Contents

Transparent Net-Zero Targets Require Courage 3 TOEZICHT RAPPORT

Summary

Good reporting on net-zero targets is important in the sustainability transition.

The AFM has investigated how transparent companies are in their reporting on net-zero targets. These targets are an important part of the transition to a sustainable society. Stakeholders, such as investors, governments, and NGOs, are increasingly demanding that companies be transparent about their impact on the environment, social aspects related to the company, governance, and the financial impact of these factors on the company. The Corporate Sustainability Reporting Directive (CSRD) gives shape to this and requires companies to report on detailed sustainability information based on the European Sustainability Reporting Standards (ESRS).

CSRD

For whom? Organizations of public interest >500 employees (large OOBs). Medium and small listed companies, except micro-enterprises. Non-EU companies with turnover >€150 million in the EU.

2017 | 2024 | 2025 | 2026 | 2028 All large companies | Large OOBs | NFRD

As of January 1, 2024, the CSRD entered into force for large OOBs.

For whom?

The first reporting year of the CSRD

Large listed companies with more than 500 employees fall under the new reporting obligations of the CSRD from this year. This means that companies have to deal with a strong expansion of the amount of sustainability information they are required to report.

The CSRD entered into force on January 1 and replaces the Non-Financial Reporting Directive (NFRD), implemented in the Netherlands in the Decision on Disclosure of Non-Financial Information (BNFI). The scope of the CSRD will be further expanded next year with, among others, large non-OOBs (2025) and medium and small listed companies (2026).

Research into reporting on net-zero targets

Net-zero targets are an important part of the transition to a sustainable society. For this research, we analyzed 27 companies that reported on net-zero targets in the 2022 management report: one-third of the population to which the BNFI applies. These companies are listed on the AEX, AMX, or ASCX, or are companies listed in Europe that have the Netherlands as their home country. In addition, we conducted in-depth interviews with 5 of these companies.

Research results with good practices and a self-assessment to get started

Listed companies are on the right track in their annual reports in substantiating their net-zero targets up to 2030. The path to 2050 remains vague.

Transparent Net-Zero Targets Require Courage 4 TOEZICHT RAPPORT

In about half of the companies studied, we see that they clearly and transparently explain what falls under the scope of the emission data and targets and how this data is generated. More transparency is needed, especially regarding Scope 3.

In addition to CO2, there are other greenhouse gases that contribute to global warming. When these other greenhouse gases result in a notable emission, it is important to transparently explain these greenhouse gas emissions. Here we see room for improvement.

To assess the feasibility of the net-zero targets, reporting on progress is important. We see companies reporting on their historical emission performance. Explaining historical performance in relation to progress and the feasibility of emission targets is an area for improvement.

There are many challenges and uncertainties in achieving net-zero targets, such as technological and financial challenges, as well as physical and transition risks due to climate change. The AFM expects transparent explanations of the uncertainties and challenges that the company recognizes.

In addition to emission reductions, companies also use carbon capture and storage (CCS) offset projects and carbon credits to achieve net zero. It is important to be critical about the use of voluntary carbon credits and carbon-offset projects. IOSCO and the AFM previously raised questions about the quality of voluntary carbon credits, such as the risk that compensation via these credits hinders the necessary focus on own emission reductions, and concerns about the integrity of the claims and the risk of greenwashing.1 2

To realize net-zero targets, companies use pilots, partnerships, and other initiatives. The impact of these on emission reductions often remains unclear. Even though there is much uncertainty about the expected impact, a transparent explanation of this helps users form an image of the feasibility of the net-zero targets.

In our research, we see that most companies are transparent about which entities are part of the sustainability reporting, and where deviations exist between sustainability and financial reporting. We believe it is important that these deviations are clearly stated in the annual report.

The process of collecting, processing, and managing sustainability data is in a development phase towards higher levels of data quality maturity at many companies. The reliability of sustainability information often does not reach the level of financial information, due to, among other things, limited availability of data and uncertainties in data, especially for Scope 3. Transparent explanation of data quality is an important point of attention.

The in-depth interviews revealed that companies have relevant information about net-zero targets that is not included in the management report. This distinction between available and reported information is decreasing with the introduction of the CSRD. Interviews also revealed challenges in obtaining information from the value chain. Engagement from suppliers, among others, is important to increase transparency about greenhouse gas emissions from the chain, and showing courage in this engagement is also important.

Transparency about net-zero targets is important because it provides insight into the path and feasibility of achieving these targets. Transparency reduces information asymmetry between the company and stakeholders. This is also important with regard to greenwashing and greenwishing, such as the assumption that new technologies will solve the problems later. The path to net zero is not simple, but it is of great importance.

Transparent Net-Zero Targets Require Courage 5 TOEZICHT RAPPORT

With the messages in this report, we encourage listed companies to improve sustainability reporting regarding net-zero targets. We do this with good practices, recommendations, and a self-assessment.

The AFM offers companies a self-assessment. This is a tool with which companies can determine, based on questions, how robust and transparent the information on net-zero targets is, and formulate actions for improvements. The self-assessment is included as an appendix to this report and can also be downloaded separately from the AFM website in the news item about this report.

Transparent reporting requires courage

We encourage companies to make sustainability information more robust and to apply (new) regulations on sustainability correctly and in a timely manner. This requires courage; to be transparent, even about matters that are uncertain. We see good examples in our research of transparent reporting on net-zero targets. The room for improvement revealed by our research leads to the following recommendations. These recommendations help companies prepare for the CSRD.

Concrete, well-substantiated, and understandable • Use clear language when discussing targets, also for the longer term. • Explain whether goals are scientifically substantiated. • Be transparent about collaborations, pilots, and other initiatives and what their expected impact is on net-zero targets.

Completeness • Provide a clear, transparent explanation of what falls under Scope 1, 2, and 3. • Include Scope 3 in targets and explain the challenges associated with this scope. • Name all relevant greenhouse gases, their sources, and how these gases can be reduced. • Be transparent about which entities are part of the sustainability reporting and where there are deviations in scope between sustainability and financial reporting.

Progress, challenges, uncertainties, and reliability • Ensure clarity on the progress of climate goals. Report clearly on historical emission performance and on the effectiveness of policies and actions to achieve targets. • Indicate what challenges and uncertainties exist and what their possible influence is on the feasibility of emission targets. Think here about investments needed to achieve the goals and indicate what negative impact might be caused. Use scenario analyses to make the effects of uncertain outcomes visible to the user. • Indicate which methods are used to achieve net-zero targets. Think of emission reductions, carbon capture, carbon storage, offset projects, and carbon credits. Also indicate how reliable they are and whether they are used for avoidable or unavoidable emissions. • Indicate the method of data collection, processing, and control. Explain to what extent data are estimated and how (un)certain they are.

Following up on the recommendations is important in realizing transparency about achieving net-zero targets up to 2050.

Transparent Net-Zero Targets Require Courage | Introduction 6 TOEZICHT RAPPORT

1. Introduction

Company net-zero targets are an important part of the transition to a sustainable society.

Europe wants to be climate-neutral by 2050. Greenhouse gas emissions must therefore be significantly reduced. This is one of the important measures to promote a sustainable society. The Corporate Sustainability Reporting Directive (CSRD), which stems from the European Green Deal, must contribute to this. The CSRD requires companies to report more on sustainability information and to use the European Sustainability Reporting Standards (ESRS). The accountant must also first provide limited assurance and later (possibly) reasonable assurance on the sustainability report. The CSRD and the ESRSs apply from the 2024 financial year for large OOBs, and many other companies will follow in the subsequent years.

CSRD

For whom? Organizations of public interest >500 employees (large OOBs). Medium and small listed companies, except micro-enterprises. Non-EU companies with turnover >€150 million in the EU.

2017 | 2024 | 2025 | 2026 | 2028 All large companies | Large OOBs | NFRD

As of January 1, 2024, the CSRD entered into force for large OOBs.

For whom?

Transparency regarding environmental and social aspects, the results, and their financial impact has become increasingly important and is now included in the CSRD. How a company positions itself regarding these aspects is relevant information for users of annual reports. Climate change, the destruction of ecosystems, and human rights violations are matters that a company can no longer ignore, as they directly (think loss of agricultural land), indirectly (for example, through lawsuits and/or pricing), or morally affect the company. This information is relevant for users. For example, to determine whether the investor wants to (continue) investing in this company. The government, NGOs, and investors can also assess whether the company contributes sufficiently to a more sustainable society.

Transparent capital markets benefit from transparent reporting, and that is what the AFM promotes with its supervision of the reporting of listed companies. Sustainability has priority in the AFM strategy 2023-2026. After our broader exploration "No Time to Lose," which was published in March 2023 in preparation for the CSRD, this research specifically focuses on transparency regarding the path to net-zero targets in annual reports.

Transparent Net-Zero Targets Require Courage | Introduction 7 TOEZICHT RAPPORT

1.1 Our Research

Research into transparency regarding net-zero targets in annual reports

The arrival of the CSRD and the associated ESRSs, the importance that investors and other users attach to transparency regarding net-zero targets, and the call from ESMA in its 2022 European Common Enforcement Priorities (ECEP) have been the reason for the AFM to conduct this research.

The goal of this research is to gain insight into the transparency of the explanations regarding net-zero targets. With the CSRD in mind, we share this insight with the sector and ask the sector to show more courage to be transparent in explanations of net-zero targets. The research questions focus on:

• The target: Have intermediate and/or final targets (net zero) been explained and are they clearly described and delimited if necessary (e.g., Scope 3 explained) and how is the target formulated (relative and/or absolute target)? • Transition plan: To what extent are relevant parts of a transition plan for reducing emissions included in the sustainability report, and is this scientifically substantiated? • Progress: Is the company transparent in reporting on progress to realize climate goals? • Uncertainties and challenges: Is it clear what uncertainties and challenges exist, for example regarding technical developments, financial challenges, and government regulations, and how does the company deal with them? • From gross to net targets: What role do carbon credits, offsets, and carbon capture and storage (CCS) play? • Cooperation: How do partnerships contribute to emission reduction? • Delimitation: Which entities has the company involved in its reporting, and is the possible effect clearly made? • Data: How transparent is the explanation regarding the reliability of data related to net-zero targets?

27 listed companies involved in the research

The AFM involved 27 companies in its research that have stated a net-zero target. These companies are listed on the AEX, AMX, or AECX, or are companies listed in Europe that have the Netherlands as their home country. The selected companies form about one-third of the population under reporting supervision of the AFM (under the BNFI). With data analysis, we arrived at a selection of over 40 companies with 2030, 2050, and net-zero targets. Subsequently, the 27 companies were selected based on criteria where climate plays an important role. Based on the above questions, we analyzed the 2022 annual reports of these companies. These questions align with the self-assessment for companies, which is included as an appendix to this report. From the analyses, five companies were selected for in-depth interviews to better understand the background of their policy and reporting on net-zero targets.

The research results are presented in qualitative terms. The table below shows how the qualitative terms relate to the findings at the 27 companies studied.

Table 1 Qualitative Terms Qualitative term Percentage of the 27 companies studied Some <20% Several <40% About half >40 – <60% Most >60%

Transparent Net-Zero Targets Require Courage | Introduction 8 TOEZICHT RAPPORT

Courage is needed to explain net-zero targets concretely and clearly

We encourage companies to show courage to make sustainability information more robust and to apply (new) regulations on sustainability correctly and in a timely manner. With this report, we support listed companies in improving transparency regarding net-zero targets. This requires courage; to be transparent, even about matters that are uncertain. With recommendations and good practices from listed companies, we support companies in making big steps to be prepared, as the ESRS requires. In addition, the self-assessment in this report helps companies to assess their standing and, where necessary, identify actions for improvements.

We urge companies to pay timely and thorough attention to the implementation of the ESRSs. For example, 'ESRS E1 Climate' contains concrete regulations on how explanations must be given about, among other things, net-zero targets.

Guide

In Chapter 2, we describe the findings regarding the transparency of net-zero targets, including the scope of the targets, explanations on progress, on uncertainties & challenges, on carbon credits, offsets, or removals, and on partnerships. Chapter 3 discusses the explanation of possible differences in scope between sustainability information and financial information, and the transparency regarding the availability and reliability of sustainability data. In Chapter 4, we describe the research methodology, and in Chapter 5, the key concepts are presented.

Transparent Net-Zero Targets Require Courage | How transparently do companies outline the path to net zero? 9 TOEZICHT RAPPORT

2. How transparently do companies outline the path to net zero?

Some companies are already on the right track, but we see that more transparency is needed regarding net-zero targets towards 2050. Courage is needed to map out challenges and uncertainties, as required by the CSRD.

In line with the climate goal of Paris to limit global warming to 1.5 °C, most companies have formulated targets to achieve net-zero greenhouse gas emissions. Often, the net-zero targets are for the year 2050, with an intermediate target for 2030 in many cases. In doing so, they follow the EU policy aimed at climate neutrality.

In the ESRSs that have been in force since the 2024 financial year, it is stated among other things how companies must explain net-zero targets. This information can be recorded in a transition plan. The ESRSs indicate which information from the company's transition plan must be explained, such as how set reduction targets relate to limiting climate change to 1.5 °C. It must also be substantiated which emission reduction opportunities the company has identified, how these are implemented, and how financing and investments contribute to reducing emissions.

The research shows that many companies already explain concrete goals, plans, and actions to reach an intermediate target of 2030. Some companies clearly explain how they want to achieve final net-zero goals. We also see room for improvement in their substantiation. Think of challenges and uncertainties, the use and effect of carbon capture and storage and carbon credits, the scope and range of reported emissions, and the use and effects of investments.

The in-depth interviews revealed that certain companies have relevant information about net-zero targets that is not included in the management report. The CSRD, with the associated ESRSs, mandates the inclusion of relevant information. This reduces the information asymmetry between the company and stakeholders.

In this chapter, the findings are explained in more detail.

2.1 Clear language use contributes to transparency

Clear and understandable language helps the user of an annual report form a good image of the company and better understand the policy, performance, and targets. This applies in general, but certainly also regarding sustainability information in the annual report.

Our research shows that some companies communicate very clearly and understandably. This makes information understandable and concrete and is essential for users to come to a good understanding of the actual performance.

Use clear language when discussing targets, also for the longer term.

Vague or unclear language use is seen mainly in connection with long-term targets for 2040 or 2050. Naturally, there are more uncertainties in the long term, but it is important for users that companies create more clarity on this.

Transparent Net-Zero Targets Require Courage | How transparently do companies outline the path to net zero? 10 TOEZICHT RAPPORT

2.2 Most companies are transparent up to 2030, towards 2050 it becomes...