From January next year, new reporting ruleswill require companies to assess and report on their climate and sustainability footprint.
The actual implementation will vary by jurisdiction, depending on when the rules are passed locally, but if you are impacted by TCFD the new rules will apply to your company once implemented. This scope of these disclosures works in two ways: companies must report on the impact of climate change and sustainability on their business, and vice versa – the impact they have on the environment, so called ‘double materiality’.
The intention is to enhance transparency on green issues for the benefit of investors and the public. But the implementation is complex, phased and will vary across jurisdictions, sectors and size of organisations.
What's the background?
The relevant rules come from the International Sustainability Standards Board (ISSB) which was formed after COP26 in Glasgow.
The ISSB was set up with four key objectives:
to develop standards for a global baseline of sustainability disclosures;
to meet the information needs of investors;
to enable companies to provide comprehensive sustainability information to global capital markets; and
to facilitate interoperability with disclosures that are jurisdiction-specific and/or aimed at broader stakeholder groups.
Unfortunately, much work remains to be done to achieve these objectives. The ESG disclosure landscape remains crowded and far from homogenous. Aside from the ISSB standards, other relevant bodies / reporting requirements include:
the Climate Disclosure Standards Board (CDSB);
the Task Force for Climate-related Financial Disclosures (TCFD);
The Taskforce for Nature-related Financial Disclosures (TNFD)
the Value Reporting Foundation’s Integrated Reporting Framework and industry-based SASB Standards;
the World Economic Forum’s Stakeholder Capitalism Metrics;
the Global Reporting Initiative (GRI)
Some but not all of these are incorporated into the ISSB.
What are the ISSB Standards?
There are currently two ISSB Standards:
IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and
IFRS S2 (Climate-related Disclosures).
To be compliant with the ISSB Standards, an entity must apply IFRS S1 in combination with IFRS S2 and the Sustainability Accounting Standards Board (SASB) Standards. ISSB reports are intended for investors. The information to be disclosed is about entities’ sustainability-related risks and opportunities. Care must be exercised to ensure that the disclosures are useful to investors. There is a degree of discretion available to those putting together the reports and they will have responsibility to exercise materiality judgements for all requirements in the ISSB Standards. For an overview and guidance see: https://www.wbcsd.org/Overview/CFO-Network/WBCSD-Implementation-Guidance-ISSB-Standards-and-ESRS
How does this apply in the UK?
In the UK, the government and the FCA will publish ISSB-equivalent ‘Sustainability Disclosure Standards’ (SDS)) by July 2024.
What specifically has to be reported?
This is complicated. Every entity will need to:
determine the potential full range of climate-related risks and opportunities it faces;
assess which industry-based metrics are material. As only some of the full range of disclosure topics and metrics are likely to apply to any entity, this will give rise to divergence between even apparently similar businesses;
decide whether it wishes to use transitional reliefs (which will vary by jurisdiction), and if so, at what stage it will expand the range of disclosures;
calculate materiality, as there are proportionality mechanisms in the ISSB Standards; see in particular the detailed Scope 3 measurement framework set out in IFRS S2 for further guidance;
ensure disclosures are clear and written for the benefit of investors
for multi-national organisations, decide how / when to implement across jurisdictions
keep up to date. The goalposts keep shifting. In the near term, for example, the ISSB plans to update the non-climate SASB Standards content in December 2023
There may be significant data challenges in compiling disclosures. For example, IFRS S2 requires an entity to disclose its Scope 1, 2 and 3 greenhouse gas emissions measured in accordance with the Greenhouse Gas Protocol. For asset management, commercial banking and insurance entities there are requirements to disclose certain specific information about ‘financed emissions’ which are associated with the entity’s investments and here the data challenges are stark. The issue is well-known, being the lack of reliable, verifiable data on GHG emissions, meaning that the requirement to disclose Scope 3 GHG emissions is widely perceived as a significant challenge for financial institutions in particular.
How we can help you
A good technical understanding of the applicable reporting standards will be necessary to navigate the complexities of multiple legal reporting regimes and to minimise duplicative efforts. At Punter Southall Law, we have the experience and expertise to assist you with keeping up-to-date with developments, understanding the requirements in different jurisdictions and supporting your work in writing reports and commentaries that meet the requirements of the ISSB Standards.