Financing the transition to net-zero through better reportingDr. Jane Thostrup Jagd, Deputy Director, Net Zero Finance, We Mean Business Coalition
Sustainability reporting is essential for organizations to articulate and then manage their full scope of business risks, as well as the contributions that they make to the world. It builds resilience, delivers business continuity, and reduces costs. Fundamentally, it provides information that the markets need to make well-considered investments, finance the transition to a net-zero economy and track the progress based on validated data.
As accountants, investors, companies, and analysts come together at COP26 to discuss how to secure better and more useful climate reporting, it is clear that huge progress is being made. The International Financial Reporting Standards Foundation, or IFRS Foundation, has today established the International Sustainability Standards Board (ISSB), providing an essential global standard that will facilitate the widespread and consistent disclosure of sustainability information across sectors. This is based on the vital Taskforce for Climate-related Financial Disclosure (TCFD) framework, which in recent years has been widely adopted by organizations across sectors and jurisdictions.
The current landscape of reporting on climate and other ESG-matters is fragmented, with countless approaches and frameworks available. It has been problematic both for the companies preparing reports – but also for the investors and other capital providers that use them, as the reports have not been comparable and therefore often of limited use.
As more and more countries move from voluntary to mandatory reporting, it is vital that the standards support widespread, consistent sustainability reporting for optimal use by investors. Because the ISSB will be based on TCFD recommendations it provides a crucial opportunity to ensure a truly global and consistent approach to sustainability reporting across different jurisdictions.
Following the ISSB announcement was an event in the We Mean Business Coalition’s business pavilion called ‘Achieving a global baseline for corporate sustainability reporting’. The panel included national bodies such as the IFRS Foundation (the governance body of the ISSB), the European Commission and country-specific authorities from Japan, UK and Canada, discussing how — based on the establishment of the ISSB — a global baseline can be achieved. Alexandra Jour-Schroeder, Deputy Director-General in DG FISMA, European Commission, indicated that it will be possible that the ISSB could be the base of the mandatory reporting framework in the EU, and the Corporate Sustainability Reporting Directive will then be the building block on top of this.
Accounting on climate central to the transition
Accountants have a central role in supporting capital markets as the world moves to net-zero emissions. They can help to ensure that companies disclose their financial risks in a quantified and monetized way in accordance with the generic financial rules like International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (US GAAP). Incorporating climate risks into information that influences investor decision-making will both help to stabilize the economy and also ensure more capital is allocated towards the decarbonization of societies and capital markets.
The status of company reporting and how it can be more useful for investors is central to managing systemic financial risks. This requires more coherence between management reports, with explanations of the company’s performance during the year, the risk assessment, but also emission target setting, and the data, tables and accounting principles in the back of the financial disclosures. It is unfortunately still not always completely aligned – sometimes far from it. Carbon Tracker recently made an analysis of this and found that 72% of the companies do not tell a consistent story across their reporting – and interestingly enough, ‘80% of auditors provided no indication of whether or how they had considered material climate-related matters, such as the impact of emissions reduction targets, changes to regulations, or declining demand for company products, in their audits’.
To assist the companies making better and more consistent reporting, We Mean Business Coalition and Climate Disclosure Standards Board (CDSB) have co-launched a TCFD Best Practice Handbook.
The world has come a long way in securing much better and more useful climate reporting. We are not done yet – but with the arrival of a truly global reporting framework investors will be able to get the best possible information about companies’ climate-risk profiles. This will help them make informative choices to hold, sell, or buy a given stock – or lend money to a given company.
Sustainability reporting matters. This is not only needed to keep companies accountable for the net-zero promises that they make – but also to ensure the capital is directed towards the delivery of a net-zero economy.