Regulations will bring scale

JUST Capital survey: Americans Want to See Greater Transparency on ESG Issues and View Federal Requirements as a Key Lever for Increasing Disclosure

Surveys of individuals’ opinions on the matter are rather rare in the ESG reporting space. This survey from JUST Capital shows the general public in the US to be massively in favour of companies behaving responsibly towards the environment and society. More importantly, they believe companies should disclose their performance and they support federal action to require standardized disclosures: “90% of Americans say it is important that there is a common, standardized reporting structure for companies and an average of 87% support the federal government requiring corporate disclosure on human capital and environmental impact data, making performance comparable across companies and/or industries.” Perhaps most noteworthy, in my opinion, is that this position seems to transcend the (otherwise gaping) political divide. This makes me wonder if the regulators, aka the U.S. Securities and Exchange Commission (SEC) will get the support they need to push through regulations to make more fulsome, standardized disclosures on climate change and other ESG issues.

Read the survey analysis

More on SEC's expected climate risk disclosure rules

Speaking of the SEC, a few weeks ago Senator Elizabeth Warren sent a letter to SEC Chair Gary Gensler calling for the “release of the strongest requirements possible” in the context of internal disagreements between SEC Commissioners over whether Scope 3 emissions should be included in disclosure requirements. She also asked for a clear timeline for publication of the climate disclosure rule and the rulemaking process that will be kicked off with its release, by February 23 (I haven’t seen it yet). On a related note, apparently corporate issuer interest groups (not sure which ones) are asking that regulations include legal protections against lawsuits in case of erroneous data. This is interesting because it speaks to the low level of confidence companies have in their own data, and one of the reasons there’s so much reticence to disclose. In my opinion, it could also apply to the amount of forward-looking information that will inevitably come with new disclosure requirements, especially around climate change (think net zero commitments!). Such a safe harbour provision could be an interesting mechanism to enable companies to provide more complete disclosures while they attempt to solve for the data reliability issue.

Read Senator Warren's letter

SEC Statement on the FASB’s Agenda Consultation

In the corporate sustainability reporting space, there is much talk about the interconnection with financial performance, and the need for the former to rise to (at least) the same level of rigour as the latter. In a recent statement on the Financial Accounting Standards Board (FASB) consultation, the SEC’s Acting Chief Accounting had this to say: “We believe there may be opportunities for the FASB to take thoughtful action on targeted areas of accounting, disclosure, and financial reporting that are consistent with the objective of general-purpose financial statements, in response to the evolving business environment, transactions, and investor needs regarding climate-related issues. For example, the near-term time horizon for financial statement disclosure requirements about risks and uncertainties could be an additional area for consideration. We encourage the FASB to continue to perform outreach with investors and other stakeholders and to monitor development of climate-related accounting and financial reporting issues.” This serves as a reminder that that there are actually two great convergence trends currently happening in corporate sustainability reporting: (i) between the multiple existing standards and frameworks, and (ii) between financial and sustainability disclosure standards. And that’s to say nothing about regulations!

Read the statement

European Commission lays down rules for companies to respect human rights and environment in global value chains

The European Commission has adopted a proposal for a Directive on corporate sustainability due diligence, i.e. it lays down rules for companies to respect human rights and the environment in global value chains. More specifically, it establishes a corporate duty for companies to perform due diligence to identify, prevent, mitigate and account for external harm resulting from (i) adverse human rights and (ii) environmental impacts in the company’s own operations, its subsidiaries, and in the value chain. Companies in scope will need to take appropriate measures (‘obligation of means'), in light of the severity and likelihood of different impacts, the measures available to the company in the specific circumstances, and the need to set priorities. Acknowledging that it starts with tone at the top, the proposal also introduces directors' duties to set up and oversee the implementation of due diligence and to integrate it into the corporate strategy. In addition, when fulfilling their duty to act in the best interest of the company, directors must take into account the human rights, climate change and environmental consequences of their decisions. Larger companies will also need to have a plan to ensure that their business strategy is compatible with limiting global warming to 1.5 °C in line with the Paris Agreement. This regulation will apply to EU-based companies with 500 or more employees and 150 million euros or more of revenues, as well as to smaller companies (250 or more employees and 40 million euros or more of revenues) in defined high impact sectors, which are defined in the text. Of note, it will also apply to non-EU companies whose EU operations fall under the same thresholds. In my opinion, this is a significant development in getting companies to shift their mindset and behaviour to integrate sustainability considerations into their strategy and business model. This is not just a legal obligation to report on what they’re doing, it’s a legal obligation to take action. Companies can get fined for non-compliance, and victims can take legal action for damages. Also noteworthy is that the European Commission positions this proposal in the context other directives and regulatory proposals, including the Corporate Sustainability Reporting Directive (CSRD), which it says covers “the last step of the due diligence duty, namely the reporting stage. The proposal will be presented to the European Parliament and the Council for approval. Once adopted, Member States will have two years to transpose the Directive into national law and communicate the relevant texts to the Commission. By the way, the European Council “agreed to” (for lack of a better word) the CSRD last week, moving it along the adoption process. One final note, the language of this proposal closely resembles that of the revised GRI Standards, which make explicit reference to the concept of due diligence and explicitly incorporate human rights throughout the standards.

Access the proposal summary and documents

More European Sustainability Reporting Standards working papers

The European Commission has released more working papers related to the European Sustainability Reporting Standards (ESRS). The Sector Classification Standard working paper identifies 40 industry sectors based on the Statistical Classification of Economic Activities in the European Community (NACE) classification system together with reference to additional economic activities as described in the EU Taxonomy. Why is this important? The document explains it best. “(i) The business activities determine the sector group the undertaking [i.e. the company] is operating in and determine business relationships and value chains. ?(ii) The business relationships and value chains determine the specific impacts, risks and opportunities of the sector the undertaking is operating in. (iii) The impacts, risks and opportunities determine the undertaking’s sustainability matters. (iv) The undertaking’s sustainability matters determine the undertaking’s disclosure requirements.” We should all memorize this – and share abundantly.

In addition, Batch 2 comprises working papers on pollution, water and marine resources, and circular economy. These working papers are not open to public consultation; they represent work-in progress documents leading to the exposure drafts to be submitted to a future public consultation. I encourage anyone curious about what future corporate sustainability disclosure requirements will look like to take a peek. Of note, the requirements include disclosing negative financial impacts of sustainability issues, while disclosure of financial opportunities is optional.

[Draft] European Sustainability Reporting Standard SEC1: Sector classification standard

[Draft] European Sustainability Reporting Standard E2: Pollution

[Draft] European Sustainability Reporting Standard E3: Water and Marine Resources

[Draft] European Sustainability Reporting Standard E5: Resource Use and Circular Economy

What to know about the UN’s major upcoming climate change reports

Next Monday February 28, the UN Intergovernmental Panel on Climate Change (IPCC) is expected to release its latest report from Working Group II, Climate Change 2022: Impacts, Adaptation and Vulnerability. This will be followed in April by another report from Working Group III dealing with the mitigation of climate change. I stumbled across an article that explains why these two reports are so important, what we expect them to find, and what they mean for climate action. I encourage you to read this article, and then take a peek at the IPCC reports when they come out. The IPCC does an excellent job of summarizing and simplifying their report conclusions for everyone to be able to grasp them. Given that everyone is talking about climate change these days, it helps to have the facts in hand.

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