This week, we sit down for a Q&A with Emily Pierce, Chief Global Policy Officer at Persefoni, as she surveys a wide range of climate policy developments and connects the dots to outline the big picture. We’ll explore how evolving global policies are reshaping the business landscape, why carbon data should inform business strategy, and why 2024 is a crucial year for companies to focus on preparing for the frontier ahead.
Q: As we close out the year, many companies are focused on preparing for the new corporate reporting standards, regulations, and legislation that have been finalized since June, including the new IFRS Sustainability Disclosure standards, the final European Sustainability Reporting Standards, and California’s suite of climate reporting laws. And, of course, many companies are waiting with anticipation for the SEC’s final rule on climate-related financial disclosure. As you talk to companies across industries, what are you hearing? What advice are you providing to them?
A: As companies react to the new or finalized standards, rules, and laws for corporate climate-related disclosures, most are naturally focusing on compliance details: Am I within scope? What about my subsidiaries? Exactly what, when, and where do I report?
I encourage companies to also focus on the "why" behind these regulations. Corporate reporting obligations are changing because regulators are responding to market demands, and at the same time, climate-related policies are shaping market dynamics. We tend to focus on corporate reporting in the investor context, and of course, that is the SEC’s mandate and sole focus. It is also the intended audience for the IFRS Sustainability Disclosure Standards, designed for adoption by securities regulators around the world. For investors, regulators are responding to demands for more consistent, comparable, and reliable disclosures about how climate risks may impact a company’s business, and how a company identifies, measures, manages, and responds to those risks.
But as companies think through what they need to report where, it’s also important to understand that other policymakers also have an interest in requiring companies, public and private, to provide information about their climate-related risks, including the risks associated with their GHG emissions and their carbon-related claims. California’s suite of climate-related laws (SB 253, SB 261, and AB 1305) is an example of policymakers requiring corporate reporting and disclosure to help a state government understand and assess risks, safeguard consumers, and inform the public. The European Corporate Sustainability Reporting Directive is also part of a broad policy approach using the tool of corporate reporting to meet the needs of many different stakeholders and inform their decision-making, drive more sustainable business practices, and support the European Green Deal.
As companies prepare for compliance, they should also consider the drivers behind the changing reporting landscape, what those drivers demand, and how they will shape future market dynamics. Across the emerging requirements, there are three guiding themes that emerge: corporate reporting about climate-related issues will need to be more connected, more comprehensive, and more credible.
Q: You mentioned the need for more connected corporate reporting. Can you explain what that means and why it's important?
A: One of the key differences between yesterday’s voluntary corporate sustainability reporting and tomorrow’s regulated corporate sustainability-related financial disclosure is the requirement for a clearer connection between sustainability issues and financial reporting. This is the crux of why securities regulators are stepping in.
In early 2019, IOSCO (the International Organization of Securities Commissions) issued a Statement on Disclosures of ESG Matters by Issuers, observing that as companies responded to market demand for sustainability information with voluntary reports, there was a potential gap—material information disclosed voluntarily might also need to be disclosed in regulated securities filings. Fast forward to June 2023: the International Sustainability Standards Board released the IFRS Sustainability Disclosure Standards to provide a globally-applicable foundation and framework to drive consistent and comparable approaches for companies to determine what sustainability-related information to disclose in their financial statements. Connectivity, location, and timing are key aspects of the ISSB’s General Requirements (IFRS S1). The takeaway is that under these new standards, sustainability reporting will need to be more connected—provided alongside regulated financial reporting, issued at the same time, and covering the same time period.
IOSCO endorsed these standards, and now many of its members are actively considering ways to incorporate them into their regulatory approaches. Similarly, the European Corporate Sustainability Reporting Directive (CSRD) requires companies to place their sustainability reporting in the management commentary of their Annual Report, and the SEC’s proposal would “enhance and standardize” the disclosures companies make about material climate-related financial risk in the 10-K.
In addition to connecting the “when and where,” companies will also need to draw connections in their disclosures. The new era of regulation will require more focus on linking sustainability risks and opportunities to current and anticipated financial effects—and where appropriate, to specific items in the financial statements. Putting aside the question of what the SEC might require under Regulation S-X, companies should consider these connections. I encourage companies, even those outside Europe, to review the recent ESMA (European Securities and Markets Authority) report on disclosures of climate-related matters in financial statements. The report provides examples of “real-life” climate-related impacts in financial statements and foreshadows expectations for improvement.
I also recommend companies monitor and engage in the IASB’s (International Accounting Standards Board) work on the inclusion of climate-related information in financial statements. The IASB will be coordinating with the ISSB, furthering the connectivity between the sets of standards. You can follow the progress here for insights into the evolving standards and practices that will further connect financial and sustainability reporting.
Q: Companies need to also move beyond compliance to take a comprehensive approach to their climate and broader sustainability strategy. What drivers are calling for this comprehensive lens?
A: Across the board, new standards and regulations will require more comprehensive corporate reporting, whether that is added coverage of other sustainability topics or increased detail on climate.
It’s clear that the European Sustainability Reporting Standards (ESRS) are more comprehensive on many fronts, but let’s also look at the ISSB. Its standards require reporting of all financially material sustainability risks and opportunities, extending the analytical framework of the TCFD beyond climate. In addition, in the interim period before the ISSB develops detailed standards for other topics, IFRS S1 directs preparers to consider the SASB standards for guidance. By taking this comprehensive approach, the SASB standards will help preparers provide users with a more holistic view of their material sustainability risks and opportunities.
On climate, many companies are evaluating what it means to transition from reporting against the TCFD Recommendations to reporting pursuant to the ISSB Standards. Or, what it will mean when their regulator makes this transition. This shift will require companies to prepare for more comprehensive climate-related reporting, including covering topics like resilience, scenario analysis, and transition risk. And this means tackling and disclosing scope 3.
Again, putting aside the wait for the SEC’s final requirements, all signals point towards scope 3 being a regulatory requirement and a market norm. The ESRSs, ISSB, and California law all include scope 3; they recognize that a carbon footprint without scope 3 is not only incomplete, it can also be misleading. Investors also know that scope 3 is, for many companies, the vast majority of their overall emissions, and as more and more global companies are required to disclose scope 3, others will be expected to follow. Companies should also note a recent message from ESMA that scope 3 is also an enforcement priority. In this report, ESMA emphasizes that investors consider disclosures on scope 3 GHG emissions an essential input for making sustainable investment decisions. Even in jurisdictions where scope 3 might not be required, companies will want to think carefully about whether disclosure is necessary to round out the picture and prevent the required disclosures from being misleading.
We also have to look at other drivers of demand for comprehensive emissions data. Yes, investors value it, but there are many other reasons for a company to take a comprehensive approach, especially to emissions reporting. Companies need to consider the impacts of other regulations and policies across the financial system, along with government policies to address climate risk. Toss in consumer protection measures like product labeling, green claims codes, and anti-greenwashing rules, coupled with the potential for lawsuits, and you've got a clear signal that there's a growing hunger for more detailed information. In a nutshell, it will not be enough to just go by the rules that apply to you; it will be about meeting the broader market demand for reporting that goes beyond the basics.
Q: You mentioned the broader financial system and risk management. What are some policy developments focused on resilience of the broader financial system and how do these policies connect to corporate disclosure?
A: We are seeing policymakers work together to take a comprehensive look at the financial system to identify systemic risks, understand the impacts, and develop plans to help economies navigate climate risk and a major economic transition. What we're witnessing is a call for companies to adopt a comprehensive approach to transition planning, first using reporting standards to help them identify and understand their climate risks, but not stopping there. The next step is developing solid plans to manage the transition effectively, and making comprehensive disclosures about those plans.
When it comes to transition plans, the UK Transition Plan Taskforce recently issued disclosure guidance that builds on the ISSB standards and is a useful resource for all companies—not just those in the UK—and it is seeking feedback on sector-specific guidance. This summer, the Financial Stability Board established a Transition Plans Working Group, convening global financial regulators and supervisors to focus on the relevance of transition plans to financial stability considerations and an “orderly transition.” Other regulators are also taking steps forward: the Monetary Authority of Singapore has issued guidelines for banks, insurers, and asset managers on transition planning, currently open for consultation. The guidelines stress the importance of a comprehensive, multi-year assessment of climate-related risks, consideration of other environmental risks, and transparency through disclosure. And of course, we can’t end 2023 without a reminder to watch the news for developments on transition plan requirements in Europe under the Corporate Sustainability Due Diligence Directive now that a provisional deal has been reached. Companies that start making the connection between climate reporting and transition planning now will not only be ready for regulation that may come, but also more resilient.
Interestingly, financial supervisors are seeking this information as well. They're asking themselves, "How are we managing these risks in the financial system?" Here in the US, the Federal Reserve issued Principles for Climate-Related Financial Risk Management for Large Financial Institutions addressing these issues. Globally, banking and insurance supervisors are taking similar approaches, with many specifically calling out the importance of understanding a bank’s exposures to financed emissions as part of that bigger picture. In Canada, the largest banks and insurers are expected to include scope 3 financed emissions in their risk reports for fiscal years ending in 2025. In Europe, the European Banking Authority has recommended enhancements to the capital requirements framework to capture environmental and social risks. And last, but certainly not least, the Basel Committee on Banking Supervision released a consultation on banks' disclosure of climate-related risk. The consultation builds on the ISSB standards, and notably, proposes financed emissions by sector as a possible quantitative metric.
As the financial system transitions and financial institutions seek better climate and carbon data to inform their own risk assessments, companies that are willing to look beyond their direct compliance requirements will be ready.
Q: It’s become quite clear that corporate carbon data has been having a credibility challenge. What are you seeing in the regulatory sphere to address this?
A: Credibility is not only the key to compliance, but also a theme driving regulations across the market. On the corporate reporting side, the key change is that external assurance will be a factor, especially for carbon emissions reporting. It is required under the CSRD and California SB 253, the SEC proposal includes it, and many regulators will be proposing assurance requirements alongside steps they take to incorporate the ISSB Standards. The International Auditing and Assurance Standards Board (IAASB) consultation on an international standard for sustainability assurance closed recently - we’ll be watching for the final in the new year.
But it's not just corporate reporting that needs to be more credible. Retail investors investing in funds that are marketed as sustainable also need more credible information, and regulators are responding. Funds are facing new requirements to make more comprehensive disclosures about their sustainability claims, and GHG emissions metrics are a useful KPI. The UK FCA’s Policy Statement on Sustainability Disclosure Requirements is one example. In Europe, financial products with GHG reduction targets may soon face more detailed disclosure requirements about those under proposed amendments to the Regulatory Technical Standards for the SFDR. And at COP 28, IOSCO issued a comprehensive report on securities regulators efforts to address greenwashing. As funds are required to provide more transparency when marketing sustainability funds to investors, they will seek more reliable information from their investees.
Credibility is also critical in the world of targets and offsets, and that includes claims made to consumers. We are also seeing regulators step in here. In addition to more detailed disclosure requirements about targets that will be required from companies, concerns over the credibility of corporate claims are being addressed through regulatory measures like California’s AB 1305, particularly in relation to the purchase or sale of carbon offsets and the achievement of targets. The carbon credits market is also ripe for regulatory intervention, even in the voluntary markets. At COP28, IOSCO proposed 21 safety measures for the Voluntary Carbon Markets, drawing on its members’ experiences and principles for regulating other secondary markets. The U.S. State Department-led Energy Transition Accelerator also specifically targets Verified Carbon Marketplaces (VCMs), aiming to bolster trust and credibility in the carbon markets.
Q: It sounds like carbon data needs to be the cornerstone for companies’ strategies moving forward. What other drivers or incentives require carbon credibility?
A: Markets are rewarding decarbonization because decarbonization has benefits. The need for carbon data isn’t being driven by securities regulation, it is being driven by market rewards, consumer preferences, financial costs and incentives, reputational benefits, and a recognition that higher carbon emissions are a reflection of higher risk. Other government policies, from net-zero commitments to carbon taxes to incentives for decarbonization are accelerating this reality.
For example, as governments seek to meet their own targets and manage their own supply chain risk, they are factoring these risks and emissions exposures into their procurement strategies, such as Canada’s requirement for federal suppliers to disclose their GHG emissions and set reduction targets. The United States has proposed a similar requirement for federal contractors.
Carbon taxes are also driving the need for more accurate carbon data, as organizations will be required to pay per ton of carbon emitted. The Carbon Border Adjustment Mechanism (CBAM) in the European Union and Singapore's carbon tax are examples. These policies not only encourage emission reductions but also have tangible economic implications for companies embracing sustainable practices. Other incentives, such as those unveiled at COP28, where pledges exceeded $80 billion, including the groundbreaking $30 billion 'Alterra' fund, underscore the urgency for comprehensive decarbonization efforts.
As these “non-financial” climate and carbon policies unfold, the financial relevance of carbon emissions deepens, reinforcing the fact that comprehensive, connected and credible climate data is material to investors.
Q: Let’s go back to the details. You’ve flagged a number of signals that can help companies be prepared, but there is still a lot of speculation, with many of the specifics still to be determined. When will we know more, and when should companies start to take action?
A: We have thrown out a lot of links in this newsletter in an effort to point to these signals! It has been a busy few weeks for regulators, giving us exciting reading for the holidays. But seriously, all these signals are pointing to the need to prepare. Companies do have time, but 2024 is the crucial year for companies to have their climate disclosure compliance processes, technology tools, and internal staffing plans in place.
For one, the ISSB standards are officially effective as of January 1, 2024! We’ve seen several countries take official steps forward to incorporate them, and next year I think we will hear from many more. At COP 28, more than 390 organizations joined a Declaration of Support showcasing a collective global commitment to advancing the use of these standards as the common framework for sustainability-related financial disclosures. As part of that, 23 regulators, official-sector standard setters, and regional bodies issued further statements emphasizing regulatory support for the standards, reinforcing IOSCO’s endorsement.
As consultations continue to roll out in 2024, fiscal year 2025 is likely to be the starting line for many new regulations.
Europe’s CSRD is also effective on January 1, 2024 for public interest entities, essentially encompassing the "extra-large" listed companies subject to the directive. In 2025, the scope expands to all “large” listed and non-listed companies in Europe. All of those companies will start collecting data, and for most, that will include scope 3 emissions. 2024 is the year for these companies to prepare, and it is also a crucial year for companies with European business partners to prepare for the market dynamics ahead.
And under California SB 253, greenhouse gas reporting requirements are expected to kick in for 2026, based on FY 2025 data. Companies will also be required to publish information about carbon offsets and carbon claims in accordance with the requirements of AB 1305, requiring strong data support as well.
Regulatory and policy developments will continue, there will be twists and turns, and we’ll have more details to share in the new year, but the outline of what companies need to do is clear. Use the year ahead to identify data sources and gaps, build and test systems, and develop the controls and risk management processes necessary to be ready for the demands of 2025 and beyond.
Other ESG and Climate News
Agreement to phase out fossil fuels forged at COP28
This year’s COP28 climate summit in Dubai reached a milestone conclusion. In a historic first, after a grueling negotiation process, nearly 200 countries agreed on Wednesday December 13 to the "[t]ransitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science," marking the first time such a statement has been included in a global climate deal.
While some energy-producing countries had attempted to remove certain language about fossil fuels from the text, and previous drafts had mentioned fossil fuel reduction as merely an option for countries, the final version clearly calls for the transition away from fossil fuels in order to achieve net zero. The agreement also calls for tripling renewable energy capacity globally and doubling the global average annual rate of energy efficiency improvements by 2030. While the agreement is historic, several challenges remain, including addressing the need for concrete implementation plans, financial support for developing countries, concerns about energy security and job losses, and mechanisms to keep countries on track. Despite these challenges, the COP28 agreement is both a noteworthy step forward in the global fight against climate change and also a reflection of the accelerating landscape in the area of climate awareness, carbon disclosure and decarbonization.
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