The International Sustainability Standards Board is rallying regulators from the U.S., Europe, Japan and other jurisdictions around common rules for disclosures about climate risk and other environmental, social and governance issues.
The working group of regulators will meet this month and in July to craft a “global baseline” of ESG disclosure standards, according to the ISSB, which in March released for public comment proposed rules on how a company should disclose the ways it gauges and manages ESG risks. A company would also need to publicly describe how sustainability risks, such as drought or flood, affect its total value.
“There is strong public interest in seeking to align where possible the international and jurisdictional requirements for sustainability disclosures,” ISSB Chair Emmanuel Faber said in a statement.
Investors with $130 trillion in assets under management have asked companies to disclose their climate risks, according to Securities and Exchange Commission Chair Gary Gensler. Regulators and lawmakers are also calling for more transparency on sustainability.
Yet chief financial offiercs who try to answer the growing pressure for ESG information must choose from more than a dozen inconsistent reporting frameworks that vary in detail and scope. The patchwork opens opportunities for companies to “greenwash,” or take advantage of ambiguities to exaggerate their sustainability credentials.
“There are just simply too many acronyms out there — there’s too many frameworks,” according to Trevor David, client relations director at Sustainalytics.
“It’s really hard to keep track,” David said on April 26 during a webinar sponsored by Crux Informatics, adding that the number of ESG regulations and standards worldwide has nearly doubled during the past five years.
The ISSB, aiming to bring consistency across borders, intends to urge regulators worldwide to consider adopting its proposals as a foundation for their own domestic sustainability disclosure rules, including those focused on carbon emissions.
“These standards, in general, they’re aimed to improve asset pricing, protect against systemic risk, streamline data collection, align both the global and the U.S. standards and then avoid those financial shocks that could come if there's information out there that’s unreliable,” David Alt, director of responsible investing at Victory Capital Management, said during the webinar.
Gensler in March released an SEC proposal that companies follow detailed rules for reporting on climate risk, asserting that businesses and investors will benefit from clear, uniform disclosures on the costs from global warming.
Under the proposal, the SEC would require companies to describe on Form 10-K their governance and strategy toward climate risk and their plan to achieve any targets they’ve set for curbing such risk.
Like the ISSB, the SEC wants companies to disclose their greenhouse gas emissions, either from their facilities or through their energy purchases, and obtain independent attestation of their data and estimates.
Businesses would also need to report on Scope 3 emissions by their suppliers, vendors and other third parties across their supply chains. The reports would be phased in, subject to safe harbor protections and not required of smaller companies.
“We really need to the greatest degree possible for ESG data to be following the same evolution that financial accounting standards have followed and apply some of those principles to ESG data to the extent possible, recognizing it is different data, there are different challenges,” according to Jennifer Grzech, responsible investing director at Nuveen.
Under fire
The SEC initiative, subject to a comment period scheduled to end May 20, has drawn fire from industry groups and Republican lawmakers.
Most U.S. residents back efforts by regulators to require more detailed ESG reporting, according to a survey by Ceres, a non-profit advocate for sustainability.
Nearly nine out of 10 Americans (87%) support federal mandates for “disclosure on human capital and environmental impact data, making performance comparable across companies and/or industries,” Ceres found in a nationwide survey of 1,115 adults from Nov. 30 until Dec. 9.
“Support for corporate disclosure requirements is strong across various demographic groups, including political, age, and geographic breaks,” Ceres said. “Even climate, traditionally a more partisan topic, sees 87% support for mandatory disclosure.”
European regulators are also nudging companies toward measuring ESG risks. The European Union’s Corporate Sustainability Reporting Directive will require businesses to release annual sustainability reports beginning in 2024, including their impact on the environment.
The proposed guidelines will extend the EU’s sustainability reporting rules to all large, publicly traded companies, expanding the requirements to nearly 50,000 businesses from 11,000 currently.
The ISSB, backed by the architects for global accounting rules, has asked for public feedback on its proposal by July 29. It plans to complete standard-setting by the end of 2022.
The ISSB was created by the IFRS Foundation, a London-based group that oversees the International Accounting Standards Board, and launched in November during the COP26 climate conference in Glasgow.
As with IASB rules, companies could voluntarily adopt the ISSB standards or a regulator could endorse the guidelines and require compliance by companies under its jurisdiction.
“We have a lot of companies that are doing a lot in terms of their climate reporting, and then we have companies that are doing absolutely nothing,” Grzech said. “That creates a problem.”
“We just have such an un-level playing field, and it’s very difficult for us when we’re making decisions about voting,” Grzech said during the webinar.
Companies release sustainability reports at different times, complicating Nuveen’s assessments, she said.
“If we're trying to bring that into a time sensitive situation, like an annual meeting vote, and we have some information from one company and another saying, ‘Well, we're not going to release this until a month later,’ then, you know, we have some disconnects between the data sources we're trying to bring together,” she said. “We have to do a lot of manual work to try to standardize ourselves and address some of these issues.”
