(Credit: Canva Pro)Voluntary corporate reporting for climate-related disclosure is undergoing a shift toward regulation-driven reporting. Understanding the current global frameworks, as well as establishing internal carbon accounting capabilities, will help business leaders prepare for a seamless transition to this new reporting landscape.
Corporate climate-related disclosure as we know it is the result of a long evolution. Since the Carbon Disclosure Project (CDP) was founded in 2001, we have seen two decades of increasing pressure for information to help understand the financial impacts of those risks. Investors, employees, customers, and regulators all began asking companies for more information about how they are responding to climate change. Many companies also set ambitious decarbonization targets to show the market they are serious about not only responding to climate change but also addressing it. As the pressure for reporting grew, a complex landscape of reporting standards and frameworks emerged. Companies felt competing pressures from different stakeholders seeking different information under different reporting frameworks. Without common standards for tracking and reporting on this information, companies face a challenging conundrum.
We are now at an inflection point, and there is cause for optimism. Climate reporting is going through a regime change: from a system relying on voluntary disclosures to one guided by regulation. And the good news is that these new standards and requirements are aligning around a common core, giving the markets more comparable information, and giving companies clearer direction. To understand the implications of this shift, it is helpful to reflect on where we are coming from.
Several drivers push companies to make sustainability efforts. A 2021 Deloitte survey of C-suite executives found that 49% strongly agreed that their sustainability efforts will burnish their company’s brand reputation—the most commonly cited benefit. Similar percentages noted improvements in employee morale and customer satisfaction. Executives also recognize that sustainability impacts their intangibles, a significant driver of value according to research from the Center for Sustainability and Excellence.
Markets also recognize this value, and stakeholder pressure is on the rise: in 2021, 70% of C-suite executives reported feeling pressure from investors and board members to act on climate change. Even back in 2019, 82% of investors said that companies should be required by law to issue sustainability reports.
These increasing pressures have driven a boom in voluntary reporting. The number of companies registering emissions targets with CDP increased nearly 3x from 2018 to 2021.
What all these drivers have in common is that they are largely dissociated from any formal or external requirements to act. Indeed, up until just recently, corporate climate action—including related disclosures—have been a near-total voluntary exercise.
The trouble with the current voluntary reporting regime, however, is that in the absence of regulation, the role of establishing norms has been left to private actors. This resulted in an alphabet soup of organizations with similar-sounding names and overlapping (but not totally matching) definitions, processes, and standards.
To say that the proliferation of standard-setters and reporting frameworks that emerged in the voluntary reporting marketplace left companies and investors underserved would be an understatement. The variations between different organizations’ metrics, requirements, and intended audiences limited the usefulness of reporting for all.
Slowly but surely, these challenges are being addressed.
The transformation started with efforts to bring private order to the voluntary regime. The Task Force on Climate-Related Financial Disclosures (TCFD) was established in 2015 with a regulatory welcome from the Financial Stability Board (FSB). The TCFD Recommendations were released in 2017, and by 2022, were used by more than 3800 companies in 99 countries to guide their reporting. The TCFD also incorporated the GHG Protocol, helping drive comparability in methodologies.
As the TCFD shaped the landscape for voluntary climate-related financial disclosure, other standard-setters began collaborating to better serve the markets. This collaboration led to the establishment of the International Sustainability Standards Board, or ISSB, founded by the International Financial Reporting Standards (IFRS) Foundation in November 2021. The creation of the ISSB was welcomed by the G20 and regulators around the globe. Its mission is to set high-quality sustainability disclosure standards that meet investors’ information needs.
The ISSB standards build on the TCFD recommendations and incorporate the GHG Protocol, shaping a more consistent and comparable disclosure landscape. As the ISSB standards evolve to include other topics, they will continue to build on the contributions of SASB, CDSB, and others to support a common core of disclosures and metrics designed to meet the needs of investors.
As voluntary reporting coalesces around new norms, regulators are also working together to meet the demands of the market. In the past three years, many jurisdictions implemented requirements for TCFD reporting, effectively translating those recommendations into expectations. Now regulators around the world are enhancing existing rules and implementing new regulations, translating expectations into more rigorous requirements.
The end of 2022 saw the EU officially adopt the most wide-reaching reporting rules anywhere in the world – the Corporate Sustainability Reporting Directive (CSRD). The CSRD’s impact will stretch beyond EU borders, applying to large multinationals around the world and impacting commercial relationships everywhere. Critically, the cornerstones of the TCFD framework and the GHG protocol are part of the foundation of the reporting requirements under the CSRD. In the US, the SEC issued a climate-related disclosure proposal to enhance existing guidance. The proposed rules were inspired by the TCFD - final rules are expected in 2023. Finally, the ISSB standards will be finalized in June, kicking off a transformation in the global regulatory landscape. The ISSB standards are designed to support regulators, building on the precedent of IFRS accounting standards. Major financial hubs, including the UK, Japan, and Singapore, have already signaled plans to incorporate the standards into regulation.
As regulations roll out, three trends stand out:
First, the shift to regulation-driven reporting means companies will need to establish stronger controls around sustainability governance. In most jurisdictions, required disclosures will be included in annual financial reports. In Europe, climate and sustainability disclosures will be required to be verified by an external assurance provider - similar assurance requirements are likely to be adopted elsewhere. C-suites and boards will be held accountable not only for climate-related disclosures but also for data management. The bottom line - companies need to focus on controls and reliability.
Second, companies will need to focus on GHG emissions. All signs point to GHG emissions disclosures being mandatory, and many companies will be required to report their Scope 3 emissions. Banking regulators around the world are also focused on climate-related risk, and financial institutions can expect an increased focus on financed emissions. These enhanced regulations will catalyze a cycle - more reliable disclosure will elicit better data, enabling more reliance on primary data over time. The bottom line - Scope 3 matters, and it will get easier.
Finally, new regulatory regimes will drive new market expectations. GHG emissions disclosures will become an expectation in commercial relationships - in supply chains, across borders, and as conditions for capital. Even for companies that do not find themselves directly subject to new regulations, there will be new expectations for reporting. The bottom line - companies can and must prepare.
Businesses should not be surprised by what comes next. After all, we know what to expect.
Organizations can and must begin preparing now. For those racing to keep up, three simple guidelines can help set the right path.
(Credit: Emily Pierce)Emily Pierce is Vice President, Associate General Counsel, Global Regulatory Climate Disclosure at Persefoni. Persefoni's Climate Management & Accounting Platform (CMAP) provides businesses with a software solution to manage their organization's climate-related data, disclosures, and performance. Emily previously served as Assistant Director in the Office of International Affairs at the U.S. Securities and Exchange Commission (SEC), where she was responsible for a variety of international regulatory policy issues. Emily managed the SEC’s engagement in the International Organization of Securities Commissions (IOSCO), serving as co-chair of IOSCO’s Technical Experts Group, which engaged with the IFRS Foundation’s International Sustainability Standards Board (ISSB).
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