The International Sustainability Standards Board has published its first two proposals for the creation of global disclosure standards, and has opened a consultation with market participants.
The first document sets out general sustainability-related disclosure requirements while the second specifies climate-related disclosure requirements. They are based on the recommendations of the Task Force on Climate-Related Financial Disclosures and incorporate industry-based disclosure requirements from the Sustainability Accounting Standards Board. (The 77 industry-specific SASB standards are currently maintained by the Reporting Value Foundation, which will merge into ISSB by the end of June.)
This means that under the general requirements proposal – or exposure draft, in ISSB parlance – organisations need to provide material information on all significant sustainability-related risks as well as opportunities that are considered necessary to assess enterprise value using SASB standards. The same applies for climate-related disclosures.
Consultation on the proposals will be open until 29 July 2022 with the view to issue new sustainability standards by the end of the year.
Is it a big deal? Yes. What gets measured gets done, as the saying goes. And anyone who’s ever looked at sustainability knows of the huge challenges in measuring the impact of environmental, social and governance (ESG) factors on a company in a meaningful and comparable way. International accounting standard-setter IFRS, which created the ISSB, is the perfect body to take this challenge on. (For the impact of companies on the environment and society we need to look elsewhere – but that’s for another time.)
Up next: IFRS says it will publish “shortly” an initial proposal for a sustainability disclosure taxonomy, which would enable the structured electronic tagging of a company’s sustainability disclosures.
Have your say: “Rarely do governments, policymakers and the private sector align behind a common cause. However, all agree on the importance of high quality, globally comparable sustainability information for the capital markets,” said ISSB’s chair Emmanuel Faber. “These proposals define what information to disclose, and where and how to disclose it. Now is the time to get involved and comment on the proposals.”
The expert advisory panel on the EU’s much-vaunted green taxonomy has proposed a radical rethink, which would allow inclusion of ‘intermediate’ activities that don’t satisfy the existing tough criteria but do help the transition to a greener economy. This would create a ‘traffic light’ framework that would extend the scope to cover all economic activities. Amber-labelled activities would fall between “causing significant harm to the environment” (red) and “making significant positive contributions” (green).
Fifty Shades of Green? Critics have claimed that a major flaw in the EU taxonomy is that it is binary, and that this inflexibility makes it poor at handling transitions to a greener economy. The EU commission has denied this. But UN special climate envoy Mark Carney and others have been vocal in demanding a “Fifty Shades of Green” approach, while Association of Southeast Asian Nations countries have pressed ahead with a traffic-light model.
On the face of it, the experts on the EU’s Panel for Sustainable Finance agree with the criticisms. The commission would now seem bound to adopt a far more flexible structure within the taxonomy, while not actually scrapping it. Certainly, the claim that the EU taxonomy is the global gold standard looks weakened.
The panel report says: “It is possible to have a taxonomy that does one thing well, such as clarifying what constitutes a green, substantial contribution to environmental objectives. It is also possible to have a taxonomy that does that and more, such as robustly describing different environmental transitions by referencing different performance levels. This is what an extended taxonomy can help achieve. However, there are trade-offs which must be considered as well, particularly the higher level of complexity of the extended taxonomy framework for the different economic actors.”
Taking in biodiversity, and more. The EU’s Panel for Sustainable Finance has also produced a separate report on the technical screening criteria for the four remaining objectives of the EU taxonomy, which include the previously addressed climate change mitigation and adaptation. These are water resources, pollution, the circular economy and biodiversity. And this is the final report by the Panel’s technical working group.
The chair of the European Central Bank supervisory board, Andrea Enria, has said the European Banking Authority will not hesitate to impose capital add-ons if banks fail to properly manage climate risk. He warned them to act immediately rather than waiting to be coerced into doing so by regulators. The central banker also reiterated complaints that banks are emitting a lot of vague information about green topics, to obscure the insufficient quality of their disclosures.
Enria said: “Whenever we present a comprehensive set of supervisory tools aimed at fostering progress in this area, we are also confronted with the ‘capital question’. When will we start charging capital for C&E [climate and environment] risks? How will the capital charges be calculated? These questions imply that it’s simply a case of coming up with an algorithm that links climate risk exposures to basis points of capital requirements. I find all this a bit frustrating. It conveys the impression that banks would be moving in the direction indicated by their supervisors and properly capture relevant risks only if threatened with the big capital stick.”
The US Securities and Exchange Commission has refused to block shareholder resolutions on the issue of how banks, insurers and other institutions align with net zero. Insurance giant Chubb was rebuffed after taking unsuccessful action against activist investor Green Century, which wants shareholders to ask Chubb to cease underwriting new fossil fuel supplies.
Green Century’s Andrea Ranger said: “I can’t overstate the importance of today’s SEC ruling. We can now ask insurance companies to adopt policies that align with the IEA [International Energy Agency] report findings, which we believe makes clear that fossil fuel expansion has no place in a ‘net zero by 2050’ future. Insurers like Chubb have enabled the fossil fuel industry to continue business as usual, which has delayed much-needed adoption of clean energy technologies.”
Green shift. This marks another shift by the SEC towards green-friendly policies under the Biden administration. Many republicans, however, are actively looking for opportunities to thwart its new approach.
In other policy news
Switzerland’s Federal Council launched a consultation on mandatory climate reporting for large Swiss companies that would come into effect at the beginning of the 2023 financial year and be based on the Task Force on Climate-related Financial Disclosures.
Canadian banks would face capital requirements for fossil fuel exposures under a proposed law before Canada’s parliament. Introduced by independent senator Rosa Galvez, the Climate-Aligned Finance Act would require capital adequacy requirements to be proportionate to the climate risks generated by financial institutions.
Bursa Malaysia, the country’s stock exchange, has issued a consultation paper proposing that listed issuers are required to disclose “common sustainability matters” and provide disclosures aligned with Task Force on Climate-Related Financial Disclosures recommendations.