A new report “The Evolution of Sustainability Disclosure” released today by the Sustainability Institute by ERM (ERM) and Persefoni reveals that there is substantial convergence among new climate-related disclosure frameworks, namely the proposed rules developed by the Securities and Exchange Commission (SEC) in the U.S., the European Financial Reporting Advisory Group (EFRAG) in the EU, and the International Financial Reporting Standards Foundation’s (IFRS) International Sustainability Standards Board (ISSB). Noting this convergence, the report also points to significant opportunity for greater harmonization, which would increase the comparability and potentially the quality of climate-related disclosure.
The urgency of the climate crisis and lack of common reporting requirements has led to a proliferation of standards in response to investor and other stakeholder demands for more climate-related financial information from companies. This has resulted in an ‘alphabet soup’ of standards that can be difficult to navigate, with both issuers and investors calling for convergence and harmonization.
The SEC, EFRAG and IFRS occupy different positions in the global regulatory and standards landscape.
- In the United States, the SEC’s March 2022 proposal, Enhancement and Standardization of Climate-Related Disclosures for Investors, focuses first and foremost on the protection of investors in publicly traded companies in the U.S. Specifically, it applies to all SEC registrants including foreign private issuers.
- In Europe, EFRAG released guidance in April 2022 on a broad range of sustainability-related disclosure requirements, including the European Sustainability Reporting Standards (ESRS). This proposal will help inform the EU’s Corporate Sustainability Reporting Directive (CSRD) and will eventually apply to all large companies in the EU, companies with listings in the EU, and certain non-EU companies with EU subsidiaries. EFRAG’s ESRS proposal is based on the principle of double materiality, which focuses both on how sustainability impacts reporting companies and how companies impact the environment and society.
- At the international level, IFRS and ISSB do not have the authority to compel disclosure. Rather, as standards setters, their role is to craft sustainability standards that individual jurisdictions and regulators can adopt or otherwise use in their rulemaking.
These three recent proposals demonstrate increasing alignment in the development of climate-related disclosure frameworks. This is critically important in developing a consistent global baseline across reporting requirements and has the potential to impact the overall quality of climate-related data, ultimately resulting in improved insights and outcomes.
The report reveals several key takeaways, including:
- The evolving guidance from the SEC, EFRAG, and IFRS builds on 20+ years of continuous improvement in the field: Ongoing and evolving engagements among global ESG, sustainability, and climate change experts and organizations continue to refine, focus, and improve the overall disclosure landscape for ESG-related information, especially quantifiable GHG data and climate change-related risks.
- Companies should focus on the Task Force on Climate-Related Financial Disclosures (TCFD) framework to help them to evaluate their climate-related financial risks and opportunities and guide current reporting: TCFD provides a framework for companies to use to help them to evaluate their climate-related financial risks and opportunities that applies across industries, geographies, and types of organizations.
- More companies will disclose emissions (Scope 1, 2, and 3): This will increase the amount of available data and facilitate reporting over time. In particular, as more companies report their Scope 1 and 2 emissions data, Scope 3 reporting will become easier and more reliable.
- Commenting on the proposals: Each of the proposals is currently undergoing public consultation before final rules or standards are adopted. Companies, investors, and other interested parties are strongly encouraged to share their comments with the SEC, EFRAG, and ISSB on the current exposure drafts. The deadlines for submission of comments are:
- SEC: Comments are due June 17, 2022
- ISSB: Comments are due July 29, 2022
- EFRAG: Comments on ESRS are due by August 8, 2022
Executive and Expert Quotes:
- Tom Reichert, CEO of ERM, said: “We welcome the increasing alignment in the development of climate-related risk and opportunity disclosure frameworks, which will help companies navigate this complex landscape and manage their reporting requirements more effectively. ERM believes that global alignment on climate disclosure guidelines also has a positive impact on the overall quality of climate data, to the benefit of companies and investors alike. We’re looking forward to seeing further harmonization between the three frameworks that supports the development of a clear global baseline for climate and broader ESG-related disclosure requirements.”
- Kentaro Kawamori, CEO of Persefoni, said: “As a business community, we must pursue the much-needed convergence and harmonization of global climate reporting standards. This will not only have the benefit of making climate disclosures less complicated, but also more widely accepted. Persefoni is proud to partner with ERM on this paper, and we encourage readers to consider this information as they submit public comments on the SEC, EFRAG and ISSB proposals.”
- Kristina Wyatt, Deputy General Counsel of Persefoni, said: “There has been a real need to harmonize what has been termed an “alphabet soup” of reporting standards. The recent proposals from the SEC, EFRAG and ISSB reflect substantial convergence on a direction of travel. Climate risks and opportunities are a top priority for investors and increasingly for companies. The SEC, EFRAG and ISSB proposals don’t line up squarely with each other given the organizations’ different mandates but seeing that their proposals are constructed on essentially the same foundation – the Greenhouse Gas Protocol (GHG Protocol) and the Task Force on Climate-Related Financial Disclosures (TCFD) – is encouraging.”
- Robert LaCount, Partner at ERM, said: “Companies will be encouraged to see the level of convergence between the new climate-related disclosure frameworks. However, there are still important differences, which means that they must carefully assess what’s required and ensure they have the right business strategies, governance processes, and performance data in place to adhere to these guidelines. The good news is that companies that proactively take action on their climate strategies not only place themselves in a better position for the finalized rules, they also gain a competitive edge by becoming more agile in identifying and executing on opportunities and mitigating risk.”