UK told to adopt ISSB standards, Democrat urges SEC to implement climate disclosure rule, and more.

November 3, 2023

The top five climate risk and disclosure stories this week.

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UK told to stick with ISSB standards for sustainability reporting

The UK should adopt the International Sustainability Standards Board’s (ISSB) disclosure requirements without substantial changes, financial institutions and companies responding to a recent consultation have said.

Prominent investors such as the USS and Railpen pension funds and Norway’s sovereign wealth fund used a call for evidence from the UK Sustainability Disclosure Technical Advisory Committee to advocate for alignment between UK disclosure rules and the ISSB requirements, saying doing so would support consistency with international norms.

Non-financial companies urged the same. Oil giant Shell wrote that “any deviation from or addition to the ISSB Standards could lead to divergent reporting practices and undermine global progress towards ensuring the disclosure of consistent and comparable financially material sustainability information.”

Other respondents said that adopting the ISSB standards without significant alterations would prevent increased costs for businesses.

The call for evidence, made in July, was intended to canvass opinions on the ISSB’s sustainability and climate-related standards, known as IFRS S1 and S2, and their suitability for the UK context.

The UK government plans to introduce ISSB-aligned rules in 2024, with implementation beginning in 2025. The government pledged to “only divert from the global (ISSB) baseline if absolutely necessary for UK-specific matters.”

House Democrat urges SEC to implement climate risk disclosure rule

A senior House Democrat has pressed the US Securities and Exchange Commission (SEC) to go ahead and implement its climate risk disclosure rule for public companies.

Maxine Waters, Democrat of California and Ranking Member on the House Committee on Financial Services, wrote to SEC Chair Gary Gensler on Monday to hammer home the rule’s importance to investors. “Without access to standardized information, investors are left guessing which companies are best positioned to manage climate risk safely and are profitable long-term investments for their investment portfolio,” she wrote.

The SEC was expected to publish the final rule in October, according to a regulatory agenda published by the agency earlier this year. A proposed version of the rule was issued in March 2022.

Waters encouraged the SEC to include a requirement for companies to disclose Scope 3 emissions from their supply chains and other indirect sources. This follows California’s recent mandate to enforce emissions disclosure reporting from 2027. 

She also urged the agency to make sure requirements on disclosing climate targets and transition plans are included, together with rules on disclosing the impacts of climate-related physical and transition risks in their financial statements. Waters wants the rule to maintain attestation requirements to ensure disclosures are reliable, too.

Dutch investors push for financial sector inclusion in EU due diligence rules

Institutional investors in the Netherlands are lobbying the European Union to bring the financial sector fully in scope of its landmark Corporate Sustainability Due Diligence Directive (CSDDD), which is currently being negotiated by the European Council, Parliament, and Commission.

CSDDD passed the European Parliament in July. The directive would force companies to identify and either prevent, end, or mitigate adverse impacts on human rights and the environment — including climate change and biodiversity loss. It would also require companies to create climate transition plans that align their business models and strategies with a 1.5°C global warming pathway. 

So-called “trialogue” discussions between the three EU legislative bodies to finalize the directive have been stymied by disagreements on the role of the financial sector in the rules. The European Council supports giving individual EU member states the choice of whether or not to include the financial sector within the scope of CSDDD. However, Responsible Investor reports that this is seen as a non-starter by some countries, because it would fragment the EU single market. 

In a letter published Thursday, the Dutch Federation of Pensions Funds, the Association of Dutch Insurers, and Dutch Banking Association pressed for the financial sector to be covered in full. Going forward with an opt-in approach “risks creating a patchwork of rules in Europe”, they wrote.

The associations also argued that financial institutions are already covered by the Corporate Sustainability Reporting Directive (CSRD), which requires them to make climate, environment, and human rights disclosures. Consistency between CSDDD and CSRD application would therefore be helpful to the sector.

Investors demand impact assessments — survey

Three-quarters of investors want companies to assess their impacts on the environment and society, the results of a survey published by Institutional Shareholder Services (ISS) show.

Moreover, 44% of these respondents add that these impacts can be expected to affect companies’ financial performance in the medium- to long-term, while 31% say they should be considered material whether or not they have financial implications. Just 6% of investors believe that materiality assessments should be narrowly focused on impacts that have direct financial ramifications for companies. 

Published Tuesday, the ISS survey covered 455 respondents — 239 from institutional investors and investor-affiliated organizations, and 216 from companies, corporate-affiliated organizations, and other non-investor respondents.

The survey reveals regional differences in attitudes towards materiality assessments. Almost 90% of non-US investors say that materiality assessments should include companies’ environmental and social impacts, while only 58% of US-based companies agree. The findings underline the divide over whether sustainability reporting should be conducted through a “single materiality” lens, meaning companies only focus on how environmental and social factors impact their financials, or a “double materiality” lens, in which companies’ impacts on these factors are also taken into account.

On being asked what actions or disclosures they believe are appropriate for companies to undertake in this area, the top five responses chosen by at least half of the investor respondents were disclosure, targets to reduce impacts, a recent materiality assessment, scenario analyses, and a third-party audit. Disclosure was chosen by nearly all investor respondents.

Regulators should upgrade climate risk assessment tools — report

Financial regulators have to upgrade the tools and methods they use to assess climate risk, a new report out of the think tank Finance Watch says.

Supervisory authorities are currently using economic models that are ill-suited to predicting the “true impact of climate change” and are therefore underestimating the costs of inaction, the report claims. They should revise these models to better align with climate science and assess future economic impacts more realistically, it adds. 

“If economic models are not adapted, they will undermine the case for both mitigation and adaptation and make the future costs and impacts even higher,” the report reads.

Finance Watch also urges regulators to conduct climate scenario analyses that estimate financial losses more realistically and embrace new prudential tools to address systemic climate risk. Scenario exercises that produce an incomplete picture of how climate change could impact financial institutions’ balance sheets may lead to poor decision-making and faulty cost-benefit analyses.

On the subject of prudential tools, Finance Watch proposes a new loan-to-value (LTV) tool for calculating banks’ exposures to fossil fuels: “climate LTV.” This tool would trigger a capital surcharge once a certain threshold of climate-related risk is reached, ensuring that financial supervisors are better equipped to address climate risk in the financial system. Such an approach would enable regulators to make informed decisions and maintain financial stability in the face of growing climate threats, Finance Watch argues.