Standard-setters consider softer start to climate risk disclosure
A backlash against proposals to require detailed corporate reporting on climate risk may compel more gradual application of the rules
|Friday, February 24, 2023|
By Jim Tyson for CFODive.com
CFOs in the U.S. and abroad for months have faced the prospect that regulators would set sweeping and costly rules for disclosure about climate risk.
The timing and details of the standards have recently grown clearer — climate risk disclosure requirements, while likely to take force soon, may end up softer than originally proposed.
The International Sustainability Standards Board said on Feb. 16 that it plans by June to release global guidelines for reporting on both sustainability and climate risk.
Following an “urgent” recommendation from its staff, the ISSB also set Jan. 1, 2024, as the effective date. The board is backed by the Group of 20 advanced and developing countries and the sister organization to an accounting rulemaker recognized by 167 regulatory jurisdictions worldwide.
Meanwhile, the Securities and Exchange Commission recently said that before May it plans to release a final rule requiring publicly traded companies to report on greenhouse gas emissions and the risks from climate change.
The SEC proposal has drawn fire from businesses, lawmakers, state officials and other stakeholders. Critics have said in more than 14,000 comment letters that by pushing forward with the rule the agency would overstep its authority, subject companies to onerous compliance costs and require disclosure of information immaterial to investor decisions.
“I’ve been practicing for 15 years and this is by far the most attention an SEC rule has seen from a political or news standpoint, or a comments standpoint,” said Darryl Smith, a partner at Eversheds Sutherland, a law firm.
In response to the criticism, the SEC will likely blunt its proposed rule, according to attorneys who specialize in regulation and sustainability. The ISSB has already set an example for ways to ease compliance by allowing companies to gradually build climate risk reports.
The ISSB last week approved “a package of reliefs” for companies during the first several months of implementation, according to ISSB Vice Chair Sue Lloyd. For example, it will waive for one year the requirement that companies detail so-called Scope 3 GHG emissions by suppliers and vendors across their supply chains.
Also, ISSB guidelines for gauging all categories of a company’s GHG emissions — including its direct emissions and those by its energy suppliers — will initially allow for estimation and a gradual move toward precision, Lloyd said in a Feb. 16 podcast.
“We have developed a measurement framework that allows companies to use estimation and techniques that will enable people to have a little bit of a softer start, which is a dangerous word for me, but a softer start to how you do that measurement,” Lloyd said. “Over time we would expect people to become more sophisticated in their approach.”
Even if the SEC follows the lead of the ISSB and gradually phases in its rules, U.S. companies need to prepare for disclosing much more detailed information on climate risk, Smith said in an interview.
“Regardless of the final details of the proposed rule, you will see increased climate disclosure in SEC reports,” Smith said. “There already is a very robust framework in terms of what information is material, and a number of investors have been very clear that climate-related risk disclosure is material information in their view.”
As described in its 490-page proposed rule, the SEC aims to mandate that companies describe on Form 10-K their strategy toward climate risk, including plans to achieve any targets they have set for curbing such risk.
Companies would need to disclose data on their GHG emissions, either from their facilities (so-called Scope 1 emissions) or through their energy purchases (Scope 2). They would also need to obtain independent attestation of their data.
The SEC, hoping to avert litigation, is considering phasing in a Scope 3 reporting requirement, according to attorneys who specialize in regulation and sustainability.
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The agency may also increase the threshold at which companies must report climate change costs on each line item of their audited financial statements, they said. Under the proposed rule, companies would need to report any climate-related costs totaling 1% or more of a line item.
“Those are two of the most controversial aspects of the proposed rule, and two of the most burdensome aspects for a company,” Smith said. “Those have had a bull’s eye on them from the get-go.”
Clear, widely accepted standards for disclosure will help clear up confusion caused by dozens of conflicting measurement and rating frameworks for sustainability, removing an obstacle to more detailed reporting on climate risks, according to C-suite executives and sustainability experts.
“There is a measurement and ratings challenge, but at the same time I feel that it often gets used as the excuse for inaction,” Marjella Lecourt-Alma, CEO and Co-Founder of Datamaran, said in an interview. “There’s no escaping it — so you just have to do it.”
Without clarity on climate risk measurement and regulation, some companies get away with “greenwashing,” exaggerating progress in meeting their net-zero targets for carbon emissions, UN Secretary General António Guterres said last month in Davos, Switzerland.
“More and more businesses are making net-zero commitments, but benchmarks and criteria are often dubious or murky,” he said.
“This can mislead consumers, investors and regulators with false narratives, and it feeds a culture of climate misinformation and confusion, and leaves the door open to greenwashing,” Guterres said.
Some industries can more easily measure progress toward cutting GHG emissions than others.
“In the real estate industry, it’s pretty straightforward,” according to Étienne Cadestin, founder and CEO of Longevity Partners, an ESG consultancy.
“You’ve got a building which is pretty much a box,” with measurable carbon used in its construction and GHG emissions from both its operation and from people as they come and go, he said. “So in terms of the definition of net-zero carbon for the real estate industry, it’s very clear.”
Many commercial real estate firms when measuring progress in limiting carbon emissions and other ESG factors rely on the Global Real Estate Sustainability Benchmark.
“Not having an ESG strategy today in my industry is suicide,” Cadestin said in an interview, noting that investors often snub properties that lack a plan for cutting GHG emissions.
“If you’re reducing carbon emissions, you’re going to increase air quality and you’re going to reduce health costs,” he said. “It’s a win-win.”
Electric utilities, after years of providing regulators with detailed reporting, will also find disclosure compliance easier than companies in many other industries, Smith said. “Environmental and climate disclosure has been at the forefront of the utility space for the past 15-plus years.”
The financial industry faces far bigger challenges, he said, noting that an investment bank would need to measure the carbon emissions of companies throughout its portfolio.
“The ability to gather and provide accurate and verifiable information on that scale — it’s going to be a huge challenge,” he said. “The limitations on the information you get at this point, and the amount of assumptions you’d have to include, degrades the value of information and how accurate or actionable it is.”
At first glance, Anheuser-Busch InBev, the world’s largest brewer selling 630 beer brands in 150 countries, would seem to face a daunting challenge in measuring carbon emissions.
Yet the company’s short list of production ingredients — water, hops, yeast, barley and other grains — and dependence on local farmers and small-scale vendors in 150 countries, prompted it to pursue sustainability comparatively early.
“We’ve been doing sustainability since I joined the company nearly 20 years ago, even before we knew what sustainability was,” CFO Fernando Tennenbaum said in an interview. “It was very clear to us from the beginning that we need to be efficient in how we use these resources, and make sure they are not only here for our current year, but for the next 100 years.”
AB InBev has pledged that it will derive all of its purchased electricity from renewable resources by 2025, and it aims to achieve net zero carbon emissions across its value chain by 2040.
Such goals require close cooperation with suppliers and vendors, Tennenbaum said. Farmers need adequate financing and access to technology. The owners of mom-and-pop stores can cut costs by upgrading to efficient refrigeration.
“We are a global company but our business is very local,” he said. “So it was clear to us from the beginning that if we don’t have a community that is thriving, then we won’t thrive as well.”
AB InBev, based in Leuven, Belgium, uses at least five different frameworks to measure sustainability.
“There are several standards, and everybody is trying to find the standard that properly captures their business,” Tennenbaum said. When measuring sustainability, the company asks, “how do we do that in a way that will not create a huge bureaucracy that instead of focusing on sustainability is focused on doing reports?”
CFOs can avert administrative bloat, reduce costs and find new profit opportunities by making sure that their approach to sustainability complements their business strategy, according to Lecourt-Alma at Datamaran, a provider of software analytics focused on environment, social and governance metrics.
“The step that companies first need to take is to look at ESG as a governance and strategic imperative,” she said. “Focus on where you can have the most impact, and then assign responsibility in the company to the highest level of the organization.”
Aligning business strategy with reporting on climate risk and other facets of sustainability requires gaining fluency in the use of a common measurement system, ISSB Chair Emmanuel Faber said.
“There is broad recognition around the table of the [ISSB] board that what we’re developing here is a new language,” he said. “And we’re not going to learn that language together if we don’t start the experience of speaking that language.”
“We know that preparers, users, regulators or ourselves are not going to be right in using that language from day one,” Faber said. “But the only way that one day we’ll be right is to start as early as possible.”