The cascading effects of regulation

ISSB update October 2022

Following up on last week’s mention of recent IFRS Foundation board meeting decisions, I encourage you to read the detailed summary published – or listen to the podcast . One of the decisions concerns clarification of the meaning of the ‘global baseline, in that the required disclosures “are designed to meet the information needs of investors, creditors and other lenders; that the information to be provided in such disclosures is subject to an assessment of materiality; and that the information can be presented with information disclosed to meet other requirements, such as specific jurisdictional regulatory requirements, but cannot be obscured by that additional information.” The last point means that companies can include information that may not meet the materiality or other criteria for inclusion in the General Purpose Financial Statements (where sustainability disclosures will live) in order to meet other requirements, so as to allow companies to produce one report for all their reporting obligations.

On the definition of materiality, KPMG produced a short useful summary . Interestingly, alignment with IFRS Accounting Standards on scope and purpose of disclosures and common definitions has the benefit of getting sustainability reporting practitioners to become acquainted with the very thorough documentation of the IFRS. In this case, one can think of the IFRS Practice Statement 2 Making Materiality Judgements as a structured explanation of a common-sense approach.

“An entity might conclude that an item of information is material for various reasons. Those reasons include the item’s nature or size, or a combination of both, judged in relation to the particular circumstances of the entity. Therefore, making materiality judgements involves both quantitative and qualitative considerations. It would not be appropriate for the entity to rely on purely numerical guidelines or to apply a uniform quantitative threshold for materiality.”        

ESRS Community Sector Groups

Last September, the European Financial Reporting Advisory Group (EFRAG) announced the creation of Community Sector Groups to allow external stakeholders to contribute to the development of the sector-specific European Sustainability Reporting Standards. EFRAG has begun holding workshops for each of the first set of sector-specific standards currently in progress (with other workshops planned for 2023/2024 on remaining sectors):

• Agriculture, Farming and Fishing
• Coal Mining & Mining
• Energy and Utilities
• Food and Beverages
• Motor Vehicles
• Oil and Gas Mid to Downstream & Oil and Gas Upstream
• Road Transport
• Textiles, Accessories, Jewelry and Footwear

This serves as a friendly reminder that companies in the above sectors and subject to the Corporate Sustainability Reporting Directive (CSRD) will have not only general standards and topic-specific standards to adopt, but industry-specific ones as well. It’s also (always) interesting to note the parallel with the IFRS Sustainability Disclosure Standards (SDS). While these require companies to provide industry-specific disclosures, they will only suggest applying SASB Standards until such time as the International Sustainability Standards Board can confirm a mandatory set of industry-specific standards.

See the list of EFRAG workshops and register to participate

FCA proposes new rules to tackle greenwashing

The UK’s Financial Conduct Authority (FCA) has released a Sustainability Disclosure Requirements (SDR) and investment labels consultation paper, in which it proposes a series of new measures to protect investors and reduce risks of greenwashing, i.e., when investment firms may be making exaggerated, misleading, or unsubstantiated sustainability-related claims about their investment products. Core elements include sustainable investment labels; qualifying criteria that firms must meet to use a label; product- and entity-level disclosures; and naming and marketing rules. These regulatory initiatives align with those of the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the US SEC’s proposed ESG Disclosures for Investment Advisers and Investment Companies. Similarities and differences between the three regimes are explained in Annex 1 of the document. The FCA will be accepting comments until 25 January 2023 and hopes to finalize its rules and publish a policy by mid-2023. To allow firms to adapt, that the labelling, naming, and marketing and initial disclosure requirements would not come into effect until at least 30 June 2024.

Access the draft SDR paper

The Lancet Countdown on health and climate change

As the countdown to COP27 on climate change intensifies, the headlines and publications on the topic abound – with most of them rightfully alarming. One noteworthy read is the annual Lancet Countdown on health and climate change, an international, multidisciplinary collaboration dedicated to monitoring the evolving health profile of climate change, and providing an independent assessment of the delivery of commitments made by governments worldwide under the Paris Agreement. Not only is it full of data-enhanced information, but it also very aptly contextualizes the climate crisis as one of many profound and concurrent systemic shocks and underlines the very important social consequences to the accelerating and compounding effects of global warming. ?Its call to action is for an immediate, health-centred response so that world populations can not only survive but thrive. Fingers crossed for COP27!

“The 2022 report of the?Lancet?Countdown is published as the world confronts profound and concurrent systemic shocks. Countries and health systems continue to contend with the health, social, and economic impacts of the COVID-19 pandemic, while Russia's invasion of Ukraine and a persistent fossil fuel overdependence has pushed the world into global energy and cost-of-living crises. As these crises unfold, climate change escalates unabated. Its worsening impacts are increasingly affecting the foundations of human health and wellbeing, exacerbating the vulnerability of the world's populations to concurrent health threats.”        

Another noteworthy read is the International Energy Agency’s bellwether World Energy Outlook 2022 , which offers an explanation of the interconnections between the current global energy crisis and the ongoing measures to address the climate crisis. Among other things, it addresses whether its 2021 finding that no new oil and gas fields are needed to get to the Net Zero Emissions by 2050 Scenario still holds, and finds that yes, with the steep reductions in fossil fuel demand under this scenario, fossil fuel demand can be met through continued investment in existing assets and already approved projects, and no new long lead-time upstream conventional projects. However, it notes that doing so in a tense geopolitical context means relying on a smaller concentration of suppliers.

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PwC's 2022 Corporate Director Survey

A global survey of corporate Board directors is always an interesting stock-taking exercise. In its version, PwC points to several blind spots, including when it comes to ESG topics. For example, only 11% of directors believe environmental/sustainability expertise is very important for their board – ranking last on the list of skills and areas of expertise. It begs the question of how equipped these Boards will be when they will have to sign off on regulatory ESG disclosures in their annual filings? But perhaps the most revealing statistic in this report is that only 13% of directors think that reputational risks are a significant challenge to oversee, and just 17% say the same about financial risks. This might well be the root cause for the lack importance attached to ESG issues. There is something directors are not getting, when barely half of them believe that ESG issues are linked to strategy and financial performance. Clearly, the message from investors has not reached them, yet.