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How to approach Climate Disclosure from a General Counsel

Article Overview

In this week’s edition of Climate Decoded, Peter Bartolino, Executive Vice President, General Counsel & Corporate Secretary of Persefoni, shares his expert insight into what all General Counsel should know when it comes to their organization’s climate journey.

The GC’s Unique Role in Sustainability and Carbon Accounting

The General Counsel (GC, sometimes also referred to as the Chief Legal Officer) is often uniquely positioned and distinctly qualified to take a lead role in an organization’s sustainability journey. Their responsibilities on this topic can be categorized into a few buckets.

First, the GC serves as a key advisor to the organization’s CEO and Board of Directors on assessing and managing ESG-related issues, including carbon accounting and climate disclosure. ESG risks and opportunities are increasingly top-of-mind for company leadership and investors as the SEC Climate Disclosure Rule nears adoption, regulatory requirements are emerging around the world, and companies are ever more focused on avoiding claims of greenwashing. The GC plays a critical role in safeguarding the company's compliance with regulations, its exposure to litigation, and its reputation.

The GC’s office frequently is at the core of a company’s sustainability program. Regardless of what team has “ownership” of the company’s sustainability program, it is critical that the GC’s office remains closely engaged with the sustainability, finance, accounting, and strategy teams, among others. While other teams likely will be engaged in the development of the company’s sustainability strategy and execution, the GC’s office is directly responsible for the company’s compliance and corporate disclosures, which necessarily are integrated with the company’s sustainability program. Maintaining connection and close collaboration across teams is critical and the GC is frequently the fulcrum around which the other groups pivot.  

Third, the GC often serves as Corporate Secretary or is otherwise significantly engaged in setting the agenda of the Board of Directors’ meetings, and its structure and governance. Given the key role of governance in the establishment of effective sustainability programs, the role of the GC in ensuring the board of directors has sustainability on its agenda and is properly informed is critical. The GC also typically plays an important role, along with Investor Relations, in responding to shareholder proposals and other investor engagement. As investors increasingly focus on climate as a key area of engagement, it is critically important that the GC drive close collaboration with the company’s senior management and board, as well as its investor relations department, to ensure the company’s engagement is authentic and accurate. 

Fourth, due to the budgetary and overall authority that GCs have within their companies, they are often key players in the purchase of solutions to enable sustainability-related disclosures and initiatives.

3 key areas the GC should focus on regarding sustainability and carbon accounting 

GCs should pay attention to what is driving ESG disclosure, because the landscape is evolving quickly. There are three key areas to watch.

First, regulatory pressure is growing in the US and around the globe. Some non-US regulations will have extraterritorial effect. For example, the European Corporate Sustainability Reporting Directive will  impact many US companies. In the US, all eyes are on the SEC, which has issued a proposed climate disclosure rule that is  nearing final adoption; California’s proposed SB 253, which would require public and private companies operating in California with annual revenue exceeding $1 billion to report scope 1, 2, and 3 emissions; and the proposed Federal Acquisition Regulation that would require large federal suppliers to report scope 1, 2, and 3 emissions. Internationally, the EU’s Corporate Sustainability Reporting Directive (CSRD) comes into effect next year, and is estimated to directly impact over 3,000 US companies that do business in the EU. The CSRD requirements will also have a global impact on business-to-business expectations for sharing carbon data.  We are also anticipating the near-term finalization of the International Sustainability Standards Board (ISSB) climate reporting standards, which will establish new global norms and are expected to inform regulations in jurisdictions around the globe. The draft  ISSB standards include the disclosure of scopes 1, 2 and 3 emissions and therefore, we expect that countries that implement the ISSB standards in their regulatory reporting requirements are likely to require disclosure of scopes 1, 2, and 3 emissions.

Second, market pressure from a host of external stakeholders is driving greenhouse gas reporting. The demand for sustainable investments is driving companies to report and manage their emissions. Similarly, financial institutions’ net zero commitments are pushing them to require greenhouse gas disclosures from the companies in which they invest. Companies are also under pressure from ESG-focused raters and rankers, such as Bloomberg, Refinitiv, MSCI, and S&P Global; as well as traditional proxy advisory firms, such as ISS and Glass Lewis. Importantly, investors are growing to expect increasing sophistication in sustainability reporting and emissions target setting, with voluntary reporting becoming market-standard. Companies that fall short on their sustainability actions relative to their peers risk subjecting themselves to shareholder proposals under SEC Rule 14a-8 and strong investor pushback.

Third, plaintiffs’ lawyers and the SEC are carefully scrutinizing companies’ climate disclosures and actions. As previously mentioned, plaintiff litigation against greenwashing is becoming increasingly common, and will only become more so as ESG reporting ramps up. Therefore, it is imperative that companies be able to  substantiate their public claims and get their carbon data and calculations right the first time, with the right controls and procedures in place to ensure accuracy and transparency. GCs should understand their companies’ Caremark duties under Delaware General Corporation Law and ensure their companies’ directors and officers are upholding their fiduciary responsibilities. 

What to look for when evaluating a carbon accounting solution

A primary consideration that GCs are increasingly engaged in is how the company should approach carbon accounting to ensure confidence in the accuracy of the company’s disclosures. Companies may approach their carbon accounting in a number of ways, including (a) using in-house personnel, (b) using consultants, and (c) using purpose-built software to facilitate greenhouse gas calculations. Carbon accounting software can offer numerous benefits, including reduced costs, ease of reporting, visibility into real-time calculations, and enablement of third-party assurance of emissions data. The last point on assurance is key. Under the SEC’s climate proposal, large accelerated and accelerated filers in the US would be required to obtain external attestation over scopes 1 and 2 emissions. External assurance will also be required under the CSRD for all the mandatory disclosures. 

As a GC gets deeper into the software evaluation process, there is a series of more detailed questions he or she should ask: 

  • Is this software solution purpose-built to enable assurance of the calculated greenhouse gas emissions? 
  • Does the solution function as an accounting-grade “single source of truth” that can feed into the sustainability report, SEC filings, and other company communications? 
  • Does the solution facilitate collaboration across functions within the company and tracking data sources and accuracy? 
  • Does the solution promote sound TCFD reporting systems based on accurate climate data and integration with internal controls? 
  • Does the solution provider offer credible and exhaustive carbon accounting expertise? 

These are all things that should be top of mind when considering which solution and provider is best fit for an organization’s needs. 

No formal sustainability training? Don’t fret, but don’t take the “wait and see” approach either

Stepping into this space can be overwhelming for a GC who may have little to no academic or professional training in sustainability, but solutions now exist to help GCs manage this process. Whereas companies in the past were left to calculate their emissions manually with no help other than consultants and spreadsheets, companies today are shifting to software solutions, like Persefoni, that enable the production of investor-grade carbon disclosures. This trend of companies evolving from ad-hoc sustainability reporting to reliable, auditable, and transparent systems of record is very similar to the maturation of disclosure controls and procedures and internal control over financial reporting that we saw after the adoption of Sarbanes-Oxley over 20 years ago. 

Over time, this process will become easier. There is a saying, the best time to plant a tree was 20 years ago. The second best time is now. I think the same goes for a company’s sustainability journey. A GC is in a unique position with the ability to have incredible influence over that journey; the best thing they can do is help drive progress and facilitate that first step if a company hasn’t yet taken it. There is significant risk in adopting a “wait and see” approach to carbon disclosure requirements. As with many other types of risk, it is always better to move early than to move fast - to be proactive instead of reactive. This is especially true for GCs, on whom companies rely for their ability to “look around the corner” and mitigate risk, while also helping to formulate strategy and build long term value for the company.

Climate & ESG News Roundup

The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) moves forward

Europe continues to develop new sustainability rules with global implications.

On April 25, the European Parliament's legal affairs committee approved a draft of the CSDDD, setting the proposal up for a full Parliament vote in the coming months. The CSDDD (not to be confused with the similarly named Corporate Sustainability Reporting Directive, or CSRD) will create a requirement for covered businesses to understand and mitigate the adverse environmental and social effects of their value chains. Of particular note to those in the climate space, lawmakers have proposed that directors of companies with over 1,000 employees bear legal responsibility for their companies’ decarbonization plans.

Like the CSRD, the CSDDD will have a global reach, covering an estimated 4,000 non-EU companies in addition to the estimated 12,000+ EU companies affected. The CSDDD will likely be implemented around 2030.

The European Commission Released Clarifications on the Sustainable Finance Disclosure Regulation (SFDR): A Closer Look

As we mentioned in the last edition of Climate Decoded, the European Commission (EC) released a set of answers in April to the European Supervisory Authorities’ long-standing questions on the SFDR (see Annex I and Annex II for details). As a whole, these answers reinforce that financial market participants offering “sustainable investments” must provide detailed disclosures about their approach and methodologies, but they have some discretion in shaping those methodologies under the SDFR. The EC answers reinforce that the SDFR is a disclosure regulation, not a labeling regime. Where the EU Taxonomy provides the guideposts, the SDFR provides the roadmap for required disclosures, and market participants shape the path for specific “sustainable investments.” Importantly, the upcoming implementation of the CSRD will provide additional information to financial market participants as they design and implement their sustainable investment methodologies. Below we summarize three key messages for funds that are marketed in the EU:

  1. EU financial market participants have some limited discretion in categorizing investments as “sustainable:” While the SFDR created a detailed definition of “sustainable investments,” financial market participants have some discretion in operationalizing that term. For example, the SFDR lays out that a “sustainable investment” must “be invested in an economic activity that contributes to an environmental or social objective.” However, the EC’s recent clarifications indicate that financial market participants have discretion in establishing what “contributes” means, though they must disclose their assumptions to the market.
  1. EU financial market participants have discretion over how to run their most sustainable funds: The EC clarified that Article 9 funds (so-called “dark green” funds) can follow an active or passive investment strategy.

  2. Large financial market participants need to disclose the actions they take to mitigate adverse impacts of their financial products: The SFDR requires larger financial market participants to publish information on how they “consider” principal adverse impact (PAIs) in their work. PAIs refer to the negative sustainability-related impacts associated with a financial market participant's advice or investments. The Commission clarified that products subject to adverse disclosure rules must disclose not only what the adverse impacts are but also “procedures put in place to mitigate those impacts.”

MAS advances ISSB standard adoption with launch of Finance for Net Zero Action Plan

The Monetary Authority of Singapore (MAS), the country's financial regulator and central bank, announced the launch of the Finance for Net Zero ction Plan on April 20 in order to catalyze Asia's net zero transition. This move, an expansion on the 2019 Green Finance Action Plan, covers four key areas:

  • Data, Definitions, and Disclosures: MAS will require disclosure of ESG ratings and data product providers' methods for factoring transition risks into their products. Additionally, MAS is creating a roadmap for ISSB-aligned disclosures from key financial institutions (FIs) and listed companies.
  • Climate Resilient Financial Sector: The regulator will supervise FIs' transition plans to ensure best practices and monitor environmental risk management.
  • Credible Transition Plans: FIs' decarbonization plans will be supported by MAS's engagement with international partners to develop sector and region-specific pathways.
  • Green & Transition Solutions & Markets: MAS plans to support the transition by facilitating innovative and reliable transition financing solutions and markets. Specifically, they will incentivize early adoption of disclosures to encourage transparency in sustainable debt markets, scale blended finance, and support carbon credit markets that direct financing to projects that prevent or remove carbon emissions.

Events You Can't Miss

  • Registration is open for the annual GreenFin conference, happening June 26-28 in Boston, MA. Attendees can join the more than 900 finance, investment, and sustainability leaders to learn about the transition to a decarbonized economy. Catch Persefoni’s Emily Pierce sharing her expertise along with SAB members Bob Eccles, Paul Dickinson, and Allison Binns.
  • Accounting professionals can learn how to navigate environmental and social risks and opportunities at this year’s ESG Symposium, hosted by CPA Canada May 30-31. This event is taking place both virtually and in-person in Winnipeg. Attendees can learn from sustainable business leaders, including our own Kristina Wyatt. Register here.
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