Over the course of 2022, expectations around corporate ESG reporting have evolved rapidly as regulators and standard-setters introduced new frameworks to enhance the quality, reliability and availability of environmental, social and governance-related data. While the nature of these proposed standards varies, a significant focal point across the board is the importance of climate change as investor demand for climate-related data and disclosures continues to grow.
SEC’s proposed climate ruleThe SEC’s proposed rule aims to address the governance of climate-related risks and their potential impacts on business, strategy and financial performance. In its initial proposal, released in March 2022, the SEC suggested the rule might be finalized by the end of the year; due to the sheer volume of responses received during the comment period this summer, however, it is highly likely the timeline will be pushed to 2023 and may face further delays due to potential legal challenges.
Several common concerns have emerged from institutional investors, corporate issuers and other respondents, including the SEC’s legal authority to establish the rule, the Scope 3 emissions disclosure requirement, the cost of compliance with the proposed rule and balancing industry-specific metrics with global consistency.
While the specifics of the final rule are still uncertain, investors remain clear in their expectation that companies must strengthen their climate-related oversight, disclosure and performance. In the 2022 ISS Global Benchmark Policy Survey, 79 percent of investors say an absence of adequate disclosure with regards to climate-related oversight, strategy, risks and targets rises to the level of a ‘material governance failure’ for significant greenhouse gas emitters and should potentially result in an ISS recommendation against a director or directors.
International Sustainability Standards BoardIn March 2022, the International Financial Reporting Standards (IFRS) Foundation announced the creation of the International Sustainability Standards Board (ISSB), a standard-setting body dedicated to developing globally accepted sustainability reporting standards. As part of its effort to streamline and simplify the ESG reporting landscape, IFRS has consolidated with several key organizations across the space, including SASB.
The ISSB’s proposals aim to establish two sets of standards: general sustainability-related disclosure requirements and climate-related disclosure requirements. In developing these standards, ISSB is focused on addressing material sustainability matters, including thematic and industry-based requirements, that are relevant to investors’ decision-making and may impact enterprise value creation, preservation or erosion over time.
In a recent announcement, the ISSB has made it clear that the use and disclosure of climate scenario analyses will be required under the standards. This comes on the heels of the ISSB’s statement that disclosure of Scope 3 emissions, or the indirect emissions throughout a company’s value chain, will also be required by the standards.
Both climate scenario analyses and Scope 3 emissions remain a challenge for corporate issuers to tackle. The TCFD’s fifth annual status report, published in October, reveals that only 16 percent of companies describe the resilience of their strategies under different climate-related scenarios.
More than half of respondents identify this disclosure as the ‘most difficult’ of all recommendations. Similarly, 43 percent of companies surveyed express extreme difficulty in disclosing Scope 3 emissions, citing challenges such as data collection and methodology issues.
Preparing for the road aheadAs development and implementation of these reporting standards continue to progress in 2023, companies should begin taking steps to prepare for the requirements. By proactively establishing or enhancing disclosure in line with the TCFD recommendations, companies can be better positioned to comply with the SEC’s proposed rules.
Additionally, companies can conduct materiality assessments to identify ESG risks and opportunities that are most material to their business and stakeholders to prepare for the ISSB standards.
Ultimately, the purpose of these reporting standards is to provide investors with reliable information on financially material ESG risks to make informed investment decisions.
It is critical for companies to proactively engage with investors year-round to better understand their priorities and, in turn, develop more effective ESG reporting and strategies.
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