The past year has seen “substantial convergence” among the major emerging climate-related disclosure frameworks, while material differences in reporting requirements remain, according to a new study released by the SustainAbility Institute by ERM and Climate Management & Accounting Platform company Persefoni.
For the study, The Evolution of Sustainability Disclosure, the organizations examined and compared the proposed rules and in-development frameworks unveiled this year by the U.S. Securities and Exchange Commission (SEC), the European Financial Reporting Advisory Group (EFRAG), and the IFRS’ International Sustainability Standards Board (ISSB).
Each of these frameworks were developed amidst growing demand for companies to provide information to investors and other stakeholders on their management of climate-related risks and management of their own climate impacts. Over the past several years, a proliferation of sustainability reporting standards have emerged, leading to what the report describes as an “alphabet soup” of disclosure guidelines, creating significant complexity and expense for issuers, and confusion for investors trying to compare companies’ and industries’ climate performance and metrics.
The similarities of the new emerging reporting frameworks will likely resolve many of these issues, according to the report, while further harmonization would help to further increase comparability and quality of climate-related disclosures.
Tom Reichert, CEO of ERM, said:
“We welcome the increasing alignment in the development of climate-related risk and opportunity disclosure frameworks, which will help companies navigate this complex landscape and manage their reporting requirements more effectively. ERM believes that global alignment on climate disclosure guidelines also has a positive impact on the overall quality of climate data, to the benefit of companies and investors alike.”
One of the key areas highlighted by the report as a lens to examine the similarities and differences between the frameworks is the use by each of the Task Force on Climate-Related Financial Disclosures (TCFD) framework’s recommendations.
Each framework was heavily informed by the TCFD recommendations, though differences in areas such as the addition of metrics or deviation from the recommendations exist. Among the most significant differences between the frameworks is the requirement for Scope 3 emissions, or those beyond companies’ direct operational control, such as emissions generated by suppliers, or from customers’ use and disposal of products. While the EFRAG and ISSB proposals follow the TCFD requirements to include Scope 3 in companies’ climate reporting, the SEC’s proposed rules only require companies to report on Scope 3 emissions if they are material, or if the company has a stated emissions reduction goal that includes Scope 3.
The SEC’s proposal also deviates from the TCFD in the areas of risk management and strategy. The TCFD requires disclosure of both climate-related risks and opportunities, while the SEC requires only reporting on risks, leaving climate-related opportunities disclosure optional. Similarly, while EFRAG and ISSB follow the TCFD guidelines requiring scenario analysis to identify physical and transition climate risks, the SEC proposal does not.
Another significant difference between the proposals is the treatment of double materiality, which refers to requirements to disclose not only on how sustainability issues affect a companies’ performance or financial position, but also on the companies’ own impact. EFRAG’s proposals are based on the double materiality principle, while the SEC’s proposed rules, which focus primarily on the protecting investors from risk, do not require double materiality-based disclosure.
Kristina Wyatt, Deputy General Counsel of Persefoni, said:
“There has been a real need to harmonize what has been termed an “alphabet soup” of reporting standards. The recent proposals from the SEC, EFRAG and ISSB reflect substantial convergence on a direction of travel. Climate risks and opportunities are a top priority for investors and increasingly for companies.”
Kentaro Kawamori, CEO of Persefoni, added:
“As a business community, we must pursue the much-needed convergence and harmonization of global climate reporting standards. This will not only have the benefit of making climate disclosures less complicated, but also more widely accepted.”
Click here to access the report.