ISSB Disclosure Rules to Take Effect in 2024, FCA Sued Over Inadequate Climate Disclosure, and More

February 17, 2023

The top five climate risk stories this week.

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ISSB disclosure rules to take effect in 2024

Global climate and sustainability disclosure rules will enter into force starting January 2024, the International Sustainability Standards Board (ISSB) has said.

At a Thursday meeting in Montreal, the board made its final decision on the technical aspects of its standards, which it hopes will form a “global baseline” for climate and sustainability reporting. A final version of the standards will now be drafted ahead of their expected release in June this year. 

The board agreed the standards should be made effective in January 2024 following “strong demand” from investors and standard-setters including the International Organization of Securities Commissions (IOSCO), which represents market regulators from some 130 jurisdictions. “[T]hese standards will meet an urgent need in financial markets to get away from the current fragmented situation when it comes to sustainability disclosures,”  said IOSCO chairman Jean-Paul Servais.

The ISSB further decided at Thursday’s meeting that its sustainability rules will explicitly reference the European Sustainability Reporting Standards (ESRS) as a “source of guidance” that reporting companies can use for metrics and disclosures. The ESRS dictate how some 50,000 companies will disclose environmental, social, and governance data under the European Union’s Corporate Sustainability Reporting Directive, which enters into force in 2024.

UK financial authority sued over inadequate climate disclosure

Environmental lawyers have filed a case against the UK’s Financial Conduct Authority (FCA) over its decision to approve the prospectus of Ithaca Energy, a company with significant oil and gas interests in the North Sea. The legal action, orchestrated by environmental law charity ClientEarth, could have significant ramifications for the future of climate-related financial disclosures.

ClientEarth’s case argues that by approving Ithaca’s prospectus the FCA acted unlawfully, as the disclosure does not properly describe the climate-related risks it faces. The regulator is barred from approving a prospectus unless it meets the criteria of the UK’s prospectus regulation. This includes a requirement that companies disclose all relevant risks to investors.

While Ithaca’s prospectus does acknowledge that climate change presents risks to the oil and gas industry in general, it fails to explain how these risks affect its business specifically or how significant these risks are for them as a company. ClientEarth argues this omission is especially problematic considering the company’s plan to develop new fossil fuel assets, which is directly at odds with meeting the goals of the Paris Climate Agreement.

ClientEarth has taken legal action against companies before concerning their failure to disclose information about their environmental impact and human rights abuses. However, this is the first time it is calling out regulators as well as companies who fail in their duties regarding climate disclosure.

The outcome of this court case could set an important precedent regarding what kind of information needs to be disclosed when listing a company on the London Stock Exchange.

TCFD yet to drive climate action at UK pension funds — report

Climate disclosures are not yet influencing UK pension funds’ investment strategies, a new report shows.

Pension schemes with £5bn (USD$6bn) in assets have been required to report in line with the Task Force on Climate-related Financial Disclosures (TCFD) since October 2021, and schemes with over £1bn (USD$1.2bn) since October 2022. However, a study by the nonprofit Pensions for Purpose and consultancy Redington suggests the practice of reporting is not itself driving climate action, with some schemes seeing it solely as a compliance obligation.

The study gives three reasons why TCFD reporting is not changing schemes’ strategies. One is the poor quality of climate data. Schemes do not trust the emissions data they have, which makes them “less willing to take action with companies identified as climate laggards.” 

Two, the short history of climate reporting means schemes lack trend data that shows how their investees are progressing along a low-carbon transition pathway. This makes it hard to identify those portfolio companies that schemes should engage with on climate issues.

Third, the reporting rules themselves emphasize funds’ own portfolio emissions rather than investees’ climate transition plans.

Separately, practitioners interviewed for the study said that TCFD reporting is useful in risk management when it’s focused on the most important climate threats. One asset manager said schemes should focus on their biggest material climate risks, as overly complicated reports aren’t helpful. One pension scheme also said that efforts to calculate climate risk in the pension space are out of proportion with efforts to actually mitigate climate risk.

On metrics and targets reporting, the study found that 21% of schemes have set absolute emissions targets and 42% emissions intensity targets. However, interviewees said their target-setting is challenged by poor data quality and coverage.

Unpriced flood risks may inflate US housing bubble

Residential properties in US flood zones are overvalued by USD$121-237bn because the housing market is failing to price in escalating climate risks, new research suggests.

In a study published Thursday in the journal Nature Climate Change, experts from the Environmental Defense Fund, First Street Foundation, the Federal Reserve, and academic institutions claim this underpricing is fueling a housing bubble that, if popped, could destabilize the US real estate market.

“In general, highly overvalued properties are concentrated in counties along the coast with no flood risk disclosure laws and where there is less concern about climate change,” the study says. “Low-income households are at greater risk of losing home equity from price deflation, and municipalities that are heavily reliant on property taxes for revenue are vulnerable to budgetary shortfalls.”

The study shows that properties in Florida may be overvalued by USD$50bn. Appalachia and northern New England properties are also overvalued, a reflection of how little flood risk is incorporated in the regions’ housing markets as well as high average annual flooding loss figures.

The researchers say the underpricing of flood risk is driven by a “lack of information about potential flood losses,” as well as “cognitive biases in risk perception” and the fact that flood-related damages are often compensated for through government programs. They add that prospective buyers may also be unaware of a property’s true risk because the Federal Emergency Management Agency’s flood insurance rate maps are patchy.

“There is a significant amount of ‘unknown’ flood risk across the country based solely on the differences in the publicly available Federal flood maps and the reality of actual flood risk,” said Dr Jeremy Porter, a senior research fellow for First Street Foundation and one of the study’s co-authors. “As that unknown risk is realized, there are significant implications for both individual property values and the health of the larger housing market.”

Barclays tightens oil sands financing restrictions

Barclays announced new restrictions on oil sands financing after a long-term campaign by shareholders. As of July, the bank will not directly finance new exploration, production, or processing of oil sands. 

Barclays has also barred financing to companies that generate more than 10% of their revenue from these activities. However, it may continue to finance companies that own and operate oil sand pipelines.

Jeanne Martin, head of the banking programme at UK sustainability nonprofit ShareAction, said the move was “an encouraging step forward.” However, she expressed disappointment in the lack of an updated policy regarding fracking or on the bank’s ongoing support for new oil and gas fields. She urged Barclays to update its policy ahead of its 2023 annual general meeting.

Last week, 27 investors with USD$1.4trn in assets wrote a letter asking Barclays to stop financing new oil and gas fields and to curb support for those companies behind such projects.