Debates are currently underway in both the EU and the US about how companies should report on the risks that climate change is bringing to their business – and vice versa. As responsible investors search for the most sustainable companies to back, the outcomes of these debates could not be more important for global efforts to rapidly cut emissions.
Since the 2015 Paris Agreement, thousands of companies have voluntarily set ambitious, science-based emissions reduction targets. Forward-looking businesses want to be transparent about their climate commitments and accountable for their progress. Thanks to the Science Based Targets initiative (SBTi) we have a consistent framework for setting and reporting against emission reduction targets. Investors interested in increasing the sustainability of their investments can compare the commitments made by different companies across markets and industries, to reach an informed opinion on their comparative climate ambition.
However, this is only one side of the story. Whilst understanding how companies are progressing against their emission reduction targets is key, investors also want to understand the climate-related risk of their investments. And this is why the decisions made in the next months are so important, as they will form the legal frameworks against which companies will have to report.
Fortunately, regulators recognise the importance of these standards in setting robust, clear rules and consultations are currently underway, led by the Securities and Exchange Commission (SEC) in the USA, and the European Financial Reporting Advisory Group (EFRAG) in Europe, that will shape what these standards look like.
At COP26 in Glasgow the International Financial Reporting Standards (IFRS) Foundation announced the creation of the International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of sustainability disclosures. This has the potential to be a game-changing initiative, but it will only have any impact if the individual jurisdictions responsible for making reporting legislation, specifically refer to ISSB and use it as a baseline.
Since COP26, some of those jurisdictions (the SEC, EFRAG and International Financial Reporting Standards (IFRS) Foundation) have delivered pioneering legislative and standard-setting efforts.
However, these draft pieces of legislation and standards are not fully aligned with each other, which risks undermining what they set out to do – to make it easy for investors to compare which companies are most exposed to climate-related risk. It is key that investors can accurately compare what risk individual companies are exposed to, so they can choose to invest in the most sustainable businesses. It is also key if you’re a company operating in multiple geographies that you don’t have to report to different frameworks – as it becomes time consuming and a waste of resources.
Therefore, all sustainability reporting standards, if they refer to the ISSB will ensure companies can report just once in a way that is transparent and robust, minimising the opportunities for greenwashing and accurately indicating to investors where the most sustainable investment options lie.
We recently wrote to the heads of these initiatives, on behalf of the more than 7,000 companies that we work with, urging greater collaboration and alignment of reporting standards across jurisdictions.
The ISSB recently established a working group to improve global consistency. The group is wide ranging, including representatives from the Chinese Ministry of Finance, the European Commission, the European Financial Reporting Advisory Group, the Japanese Financial Services Authority, the Sustainability Standards Board of Japan Preparation Committee, the United Kingdom Financial Conduct Authority and the US Securities and Exchange Commission.
Amongst other things, we urge members of this group to ensure the ISSB is established as the ultimate global baseline for companies to report against.
With these reforms, 2022 will be remembered as the year that a global reporting standard on sustainability disclosures became reality. By working together, we will unleash the potential of corporate climate leadership in pursuit of our shared goals of halving emissions by 2030 and securing a just, sustainable future for all.
Jane Thostrup Jagd is deputy director of net zero finance at the We Mean Business Coalition.