The pressure on companies to do something about the environment has grown substantially over the past decade, after years of many companies either watching from the sidelines or refusing to engage at all. That pressure is coming from all fronts — investors, customers, regulators, proxy advisors, and the media — and is often targeted at the board of directors.
According to a board member of a diversified financial services company: “We want to be apolitical, but it’s kind of hard to be that. It goes back to examining what we say we stand for. Is that in conflict or harmony with certain things that are going on in the world?”
How a company handles environmental concerns — or crises — is central to what it stands for, and it’s becoming increasingly divisive. Not surprisingly, it seems every major country is focused on how environmental information should be disclosed to stakeholders, with a focus on climate-related information. For many years, companies have been presented with a patchwork of conflicting rules and requirements, making it hard to compare them, even within an industry. Executives and boards have been calling for the multiple prevailing standard-setters to not only consolidate but to do so on a global scale. This Advisor examines the landscape of climate-related information disclosure.
The Disclosure Landscape
Disclosure priorities for companies include those that have a substantial impact on the company or its stakeholders and/or are considered material information by a well-known standard-setting board like the US Securities and Exchange Commission (SEC) or the Sustainability Accounting Standards Board (SASB). Responsibility for the disclosure of material information rests with senior management and boards, and firms often have a formal disclosure committee to decide these matters.
Climate-related disclosure activity is centered around three overarching organizations. The International Financial Reporting Standards (IFRS) covers some 140 country jurisdictions, requiring disclosures about physical risks, transition risks, and climate-related opportunities. It fully incorporates the Task Force on Climate-Related Financial Disclosures (TCFD) and includes SASB’s climate-related industry-based requirements.
TCFD recommendations on climate-related financial disclosures are a good place for companies to start because its 2017 recommendations were designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings. The recommendations center around four thematic areas representing core elements of how organizations operate: governance, strategy, risk management, and metrics/targets. The organization’s 2022 status report indicates it’s seen an increase in the number of governments and regulators incorporating TCFD into their rules and guidance each year since 2017.
SASB’s niche is providing individual standards, by industry, that identify the sustainability factors most likely to have material financial impacts on a company to inform investors. In November 2021, during the United Nations (UN) Climate Change Conference (COP26), IFRS announced the formation of the International Sustainability Standards Board (ISSB) as yet another unifying attempt. In February 2023, ISSB voted to release global guidelines that attempt to harmonize environmental disclosures available for regulatory purposes, which would go into effect in January 2024.
ISSB’s standards require companies to report emissions from their Scope 1 direct operations and their value chains, including suppliers. These value chain emissions (known as Scope 3) will require extra time, due to the challenge of gathering data from suppliers. (Scope 2 includes indirect greenhouse gas [GHG] emissions from the generation of purchased or acquired electricity, steam, heating, or cooling consumed by the company).
Until its 2023 policy update, Institutional Shareholder Services (ISS), the largest proxy advisory firm in the world, did not have recommendations for climate accountability, despite buying its way into the ESG ratings arena in 2018. In its 2023 report, it asks for detailed disclosure of climate-related risks according to the framework established by TCFD.
In October 2021, the UK government established rules requiring UK-based companies to disclose climate-related financial information in the form of the Corporate Sustainability Reporting Directive (CSRD). This follows on the April 2021 European Commission (EC) proposal of a CSRD framework that would amend existing reporting requirements to include a broader range of companies. EC tasked the European Financial Reporting Advisory Group (EFRAG) with developing reporting standards that consider existing standards and frameworks, including TCFD’s framework. In late June 2022, the European Parliament and the Council of the EU reached a provisional agreement on CSRD, which further expands the scope of companies covered and describes the phase-in of reporting requirements beginning with financial year 2024.
[For more from the author on this topic, see: “What Climate-Related Information to Disclose? Big Decision, Moving Target.”]
