6 minute read 12 Aug 2021
Finnieston bridge arc

Three dynamics to watch on global climate disclosure standards

By Katie Kummer

EY Global Deputy Vice Chair – Public Policy

Three decades leading and coaching diverse teams. Helping shape EY public policy goals. Mother to twin girls. Sports enthusiast. Movie buff. Strong proponent of workplace neurodiversity.

Contributors
6 minute read 12 Aug 2021

Show resources

  • The future of sustainability reporting standards (pdf)

Ahead of COP26 in November, momentum is growing for a global baseline climate disclosure standard.

In brief
  • There is growing consensus on the need for a baseline climate disclosure standard.
  • Disclosures are a piece in the broader policy approach to mitigating climate change.
  • Despite the uncertainty over future disclosure requirements, the direction of travel is clear and it is time for companies to build institutional capacity.

The climate and sustainability reporting movement originated out of civil society, gaining prominence among a small number of socially responsible, activist investors. In recent years, however, the dynamics of the movement have dramatically shifted, with institutional investors increasingly seeking consistent and comparable reporting that helps them better understand environmental, social and corporate governance (ESG) risks.

As illustrated in EY Global Public Policy’s recent report, The future of sustainability reporting standards (pdf), the expected launch of the International Financial Reporting Standards (IFRS) Foundation’s International Sustainability Standards Board (ISSB) in November, is the most significant and promising development in the move toward consistent, comparable ESG and sustainability reporting standards. While it is expected that the ISSB will promulgate a broad array of ESG standards, the urgency of the climate crisis has caused the Foundation to take a “climate-first” approach to standard-setting. The speed with which the policy environment is evolving has created an imperative for all companies to act in building the institutional capacity necessary to address forthcoming mandates.

The potential of the ISSB and the future of climate reporting and disclosure standards is expected to be a significant focus at COP26, the 2021 United Nations Climate Change Conference, in November. With less than 100 days until Glasgow, we recently hosted a conversation with some of the world’s leading voices on climate disclosure and reporting – Alain Deckers, Head of Unit, Corporate Reporting, Audit and Credit Rating agencies, Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA), European Commission; Curtis Ravenel, Task Force on Climate-related Financial Disclosures (TCFD) Secretariat member and Senior Advisor to Mark Carney, COP26 Finance Advisor and UN Special Envoy; and Dorothy Donohue, Deputy General Counsel of Securities Regulation, Investment Company Institute – to discuss the findings from our new report and the dynamics to watch in the months ahead. Through our discussion, three themes emerged:

1. Convergence vs alignment: A “building block” approach to standard-setting

“There is violent agreement around having a global baseline standard,” Mr. Ravenel said. “There’s no question about that. But the question is: who gets to set that standard? I would call it ‘coopetition’ between the SEC, Europe and the IFRS...but what everyone wants [is] the same thing. How you get there may be slightly different.”

He went on to say, the “devil is in the details.” For instance, is part of the disclosure framework mandatory and part voluntary? How much flexibility should exist to accommodate smaller private companies? Are Scope 3 (indirect) emissions included as mandatory, perhaps for certain sectors? Constructive dialogue is necessary, and Ravenel said he was optimistic, because most of the constituents have been working together for a long time and the “building block” approach to standard setting provides a flexible approach to balance alignment and flexibility.

There is growing support for a building block approach to ESG and sustainability reporting standard-setting (see below) whereby the ISSB produces a global baseline standard for all jurisdictions to adopt (achieving a level of global comparability). At the same time, select jurisdictions can build on the ISSB baseline by developing local standards and rules that respond to local stakeholder needs and expectations.

Reporting sustainability building block

2. Standards are a tool — but they are not enough on their own

As organizations report and disclose more ESG information, they will face more questions around the depth and reliability of their disclosures, risk exposure and resilience, as well as concerns over so called “greenwashing.” A recent study found that just over half of companies that report on sustainability information provide some level of assurance around it. One of the five recommendations in our report is to seek assurance over sustainability information. Companies should ensure that their sustainability reporting has robust processes and controls with a supporting audit trail, similar to what exists for financial reporting.

Assurance over sustainability information

51%

of companies that report on sustainability information provide some level of assurance around it.

Standards, while essential, are only one part of the regulatory framework to think about, Mr. Deckers said, citing the need for assurance and audit — which are addressed in the European Union’s proposed Corporate Sustainability Reporting Directive (CSRD) , for example. Standards are a “means to an end,” he said: enforcement and supervisory actions are also required.

Donohue said her members were also thinking about this, but timing is the main question. “We want the companies to have internal controls around their reporting, and that will provide some assurance, while the auditors and other third parties continue to get more familiar once the standards have actually settled a bit,” she said — a matter of when, not if.

Ravenel added: “In the past, I’ve said: look, we live in a hyper-transparent world. A company that puts out bad information is crazy. … I think there’s a lot of private risk management going on to make sure the information is quite good, but there’s nothing like an assurance standard to ensure that.”

3. Companies need the institutional capacity to address this topic — today

The timing with which sustainability reporting is evolving has left companies asking, “Which standards and metrics should we prepare for?” and “Which should we wait for?” Some companies have chosen to wait on the sidelines until sustainability reporting is mandated in their jurisdiction. This is the wrong approach.

As regulators make progress on climate and sustainability reporting standards, companies can prepare for future disclosures and commit to transparency and accountability today. The future of sustainability reporting standards (pdf) recommends ESG integration across the organization. In particular, that organizations ensure the board is overseeing ESG integration into top-level strategy and that corporate finance functions ensure sustainability and ESG reporting has proper and trusted processes, controls, and data outputs.

The panelists strongly endorsed this view. Ravenel said, “Begin speaking up and down and across your organization, because this is not something that just sits in a sustainability team or in a reporting office.” This impacts strategy - it’s risk, it’s everything.”

Climate Disclosure Webinar Replay

Ruchi Bhowmik moderates a conversation on the prospects for a global climate and sustainability baseline reporting standard.

Discover more

Deckers also emphasized the need to get involved in the rule-making process, beyond the typical lobbying efforts — for instance, there will be calls for applicants for working groups to be established, and those are practical ways in which everyone’s voice can be heard. Some executives may be experiencing fatigue amid so many calls for consultations with regulators. But it’s vital to share your perspective in an effort that could be as transformative as generally accepted accounting principles (GAAP) and IFRS were when they were introduced. “There is no point sitting on the sidelines and then complaining if you don’t like the results at the end,” Deckers said.

And with so much happening, Ravenel encouraged the audience to take a step back and reflect on the ultimate goal of all this effort: good information. “Good information is the lifeblood of good decision-making,” Ravenel said. “We have had not-good information. We are trying to solve that problem so we can accelerate this transition to a more just and sustainable future. You have to do this boring plumbing work to get there ... Let’s not forget about that. It’s not tinkering around the edges — it’s foundational.”

Summary

With momentum building for a long-elusive global baseline standard on climate disclosures, the private sector should build institutional capacity today and understand both that mandatory reporting is on its way and that these standards will be just one part of the policy changes needed to fight climate change. 

About this article

By Katie Kummer

EY Global Deputy Vice Chair – Public Policy

Three decades leading and coaching diverse teams. Helping shape EY public policy goals. Mother to twin girls. Sports enthusiast. Movie buff. Strong proponent of workplace neurodiversity.

Contributors