Global sustainability, climate disclosure standards unveiled, and more.

June 30, 2023

The top five climate risk and disclosure stories this week.

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Global sustainability, climate disclosure standards unveiled

The International Sustainability Standards Board (ISSB) published its inaugural set of sustainability and climate-related disclosure rules on Monday, with the aim of establishing a global baseline for corporate reporting of environmental, social, and governance (ESG) risks and opportunities. 

IFRS S1 addresses general sustainability-related risks and opportunities, while IFRS S2 focuses on specific climate-related disclosures. Both standards incorporate recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) and are based on voluntary reporting frameworks including the Sustainability Accounting Standards Board (SASB) and Integrated Reporting Framework.

“The ISSB Standards have been designed to help companies tell their sustainability story in a robust, comparable and verifiable manner,” said Emmanuel Faber, the ISSB Chair. “We know that better information leads to better economic decisions.”

The standards are designed to produce sustainability and climate disclosures that complement companies’ financial statements, enabling investors to make informed capital allocation decisions. By creating a baseline for disclosure, the ISSB also seeks to eliminate corporate greenwashing and ensure that climate and sustainability claims are supported by credible plans, policies, and metrics.

Individual jurisdictions now have the chance to adopt and integrate these standards into their own sustainability disclosure regulations. Several countries, including Canada, the UK, Japan, Singapore, and Nigeria, are already considering implementing the standards, according to Faber. The International Organization of Securities Commissions (IOSCO), with 130 member regulators worldwide, is expected to endorse the standards, potentially accelerating their adoption.

Carbon credit ‘rulebook’ makes debut

Companies have new guidance for buying and using carbon credits following the launch of the Voluntary Carbon Market Integrity Initiative’s (VCMI) Claims Code of Practice on Wednesday.

The Code sets out four steps a company must follow to make a high-integrity claim about their use of carbon credits. First, they must meet the VCMI’s foundational criteria. Second, they have to choose which of the three claim levels — Silver, Gold, or Platinum — they mean to apply. Third, they must choose carbon credits meeting the Integrity Council for Voluntary Carbon Markets (IC-VCM) Core Carbon Principles. Fourth and finally, they have to disclose information to support their claim, along with independent validation and assurance.

Each of the claim levels recognize different levels of investment in greenhouse gas emissions reductions and removals. Companies that opt for a Platinum claim must purchase and retire high-quality carbon credits equal to or greater than 100% of their residual emissions. At the other end of the scale, a Silver claim can be made by a company looking to offset between 20% and 60% of their residual emissions. Significantly, VCMI claims can only be made by companies that are taking steps to reduce their own emissions — not to offset emissions that they are not working to eliminate.

Before claims can be made under the Code, companies have to meet the foundational criteria, which include maintaining and reporting an annual greenhouse gas inventory, setting and disclosing science-based near-term emissions reduction targets, and publicly committing to achieve net zero emissions no later than 2050.

The VCMI promised to provide additional guidance in November, including details on its measurement, reporting, and assurance framework, additional claim tiers, and claim names. 

The initiative was set up in 2021 as a nonprofit organization to facilitate high-integrity VCMs that “deliver real and additional benefits to the atmosphere.”

Australia consults on climate disclosure rules

The Australian government launched a consultation Tuesday on mandatory climate-related financial disclosure requirements for business and financial institutions, which are slated to come into effect next year.

The consultation paper says the rules as proposed align “as far as practicable” with the ISSB standards and cover the same four main pillars of disclosure on governance, strategy, risk management, and metrics and targets.

Specific disclosure requirements outlined in the consultation paper include companies’ transition plans, climate-related risk management processes, scenario analysis, and industry-specific metrics. Firms will also be required to report Scope 1, Scope 2, and material Scope 3 emissions. 

Implementation of the requirements will be phased in over time. Large entities with over 500 employees, revenues exceeding AUD$500mn (USD$333mn), and assets of more than AUD$1bn (USD$670m) will be subject to these rules from 2024-2025, with medium-sized and smaller firms following in the following years.

The consultation closes on July 21. Afterwards, the Australian Accounting Standards Board will draft detailed disclosure requirements and, if necessary, the government will introduce legislation to put them into effect.

Major institutions line up behind net zero data utility

A climate data portal backed by French President Emmanuel Macron and United Nations’ (UN) Special Envoy on Climate Ambition and Solutions Michael Bloomberg has won the support of big financial institutions in Switzerland and Singapore.

The Climate Data Steering Committee (CDSC), formed in June 2022 by Macron and Bloomberg, is overseeing the development of a Net-Zero Data Public Utility (NZDPU), which is intended to serve as a centralized source of verifiable climate data for companies, governments, and other stakeholders. A pilot launch of the utility is slated for December this year, around the time of the next UN Climate Change Conference (COP28).

On Monday, a raft of Swiss financial trade bodies and institutions — including banking stalwarts UBS and Lombard Odier — endorsed the NZDPU and pledged to try out and add data to the utility. The platform will enable financial institutions to aggregate portfolio-level emissions effectively and develop transition plans. 

“We must eliminate the data gaps and inconsistencies that prevent meaningful progress on climate commitments,” said Mary Schapiro, the CDSC Chair. “With this announcement, the Swiss financial community once again demonstrates their leadership in recognizing the critical role data can play in achieving our collective net-zero ambitions.”

Separately, on Tuesday the Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX Group) agreed to collaborate with the CDSC on improving access to Singaporean companies’ climate transition-related data. As part of the collaboration, MAS will allow some climate data reported by Sinaporean companies to the regulator’s own ESGenome disclosure portal to be transmitted to the NZDPU.

In its first phase, the NZDPU plans to aggregate data on companies Scope 1, 2, and 3 emissions data, as well as non-financial corporate emissions reduction targets. Additional metrics and target data are intended to be added over time.

Half of CEOs have pay linked to sustainability goals

Executive compensation is increasingly being tied to corporate sustainability goals, a survey published by IBM shows.

The survey, which polled over 3,000 corporate leaders from 24 industries, finds that 50% of CEOs and their executive teams are now having their pay linked to sustainability goals. This marks a significant increase from just 15% a year ago. The survey also shows that CEOs who aligned their sustainability strategy with their digital transformation posted revenue growth up to 41% higher than those who did not.

However, there are big gaps between companies’ announced sustainability goals and their actual achievements. IBM finds that although 95% of companies have operational environmental, social, and governance (ESG) goals, only 10% have made significant progress toward meeting them. This disconnect is partly due to the expanding definition of sustainability and organizational uncertainty around what metrics to use.

Furthermore, only 34% of CEOs say they use ESG data to inform their decision making, compared to the 76% who use operational data and 75% who use financial data. 

One issue preventing greater use of ESG data in decision making may be lack of trust in sustainability reporting. For example, IBM finds that only about 45% of CEOs say they are confident in their ability to accurately report on ESG strategy and initiatives.