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As the ISSB takes over TCFD, can the SEC avoid supply chain disclosure?

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The International Sustainability Standards Board (ISSB) is to take over responsibility for the Taskforce for Climate-related Financial Disclosure (TCFD) from 2024. While the US SEC is yet to release its own guidelines, the ISSB’s shift towards disclosure across Scope 1, 2 and 3 will make it harder to avoid the inclusion of global supply chains.

  • The ISSB will take over responsibility for the TCFD from 2024.
  • The ISSB has been slow in accepting the need for impact reporting, and there is some concern that this could be a sign that the TCFD could be weakened.
  • However the ISSB new standards include Scope 1, 2 and 3 disclosures and it seems unlikely the SEC will be able to avoid addressing the supply chain.

Following the publication of the inaugural ISSB Standards—IFRS S1 and IFRS S2—the Financial Stability Board has asked the IFRS Foundation to take over the monitoring of the progress on companies’ climate-related disclosures from the Task Force on Climate-related Financial Disclosures (TCFD).

As such, the FSB noted that the Standards mark “the culmination of the work of the TCFD”, which was established in 2017 at the request of the Financial Stability Board.

Today the ISSB’s work is backed by the G7, the G20, IOSCO, the Financial Stability Board, African Finance Ministers and by Finance Ministers and Central Bank Governors from over 40 jurisdictions. The international body for the world’s securities regulators, the International Organization of Securities Commissions (IOSCO), will review the Standards, once finalised, for potential IOSCO endorsement—a move that will encourage their widespread adoption.

The ISSB framework is now the de facto global standard

While there are many different frameworks available for reporting on corporate sustainability, the ISSB framework has been gaining dominance. IOSCO and governments around the world, including G20 leaders and others, jointly support the  need for standards that enable companies to disclose information about sustainability-related risks and opportunities, starting with climate, to support systemic financial stability and for investor protection.

In May 2023, the G7 meeting issued a joint statement that said: “We support the International Sustainability Standards Board (ISSB) finalizing the standards for general reporting on sustainability and for climate-related disclosures and working toward achieving globally interoperable sustainability disclosure frameworks.”

In June 2023, the ISSB released its initial standards, which companies will need to follow from 2024, working towards initial disclosures in 2025. The standards are to be used in conjunction with traditional accounting requirements, providing a unified lens that reflects the interconnections between financial statements and sustainability-related data.

Covering everything from Scope 3 emissions and scenario analysis to biodiversity and the just transition, the standards’ introduction is seen as both an enormous challenge to global businesses and a significant economic opportunity – from driving increased efficiencies, developing new business models and opening new markets.  

There has been some controversy over the development of the ISSB standards, especially give its initial focus on single materiality. The ISSB was initially interested solely on enterprise value, so its initial standards were around the financial impact of climate, biodiversity and other risks on business operations, rather than looking at wider systemic risk.

There is however a growing recognition that double materiality, where equal weight is given to the risks to operations and to the impact of business operations on the wider environment and society, is a necessary step in order to fully understand the long term implications of corporate climate risk. The ISSB is addressing this in such a way that the European Sustainability Reporting Standards (ESRS) should be able to overlay double materiality in its regulation.

Concerns about the robustness of ISSB

For many in the market the TCFD was considered to represent a higher level of integrity, and many jurisdictions (such as the UK) have used it as the basis for their own mandatory reporting requirements. The slow pace at which the ISSB was exploring double materiality, combined with the news that it planned to allow time for companies to report solely against operational climate risks, meant some critics felt that movement on the identification of necessary risk information was too slow. Others felt the lack of contextualisation within its standards, the failure to include the importance of planetary boundaries, was another strike against the ISSB approach.

The ISSB has now incorporated the existing recommendations of the Taskforce on Climate-related Financial Disclosure (TCFD) however, as well as the underlying concepts of the International Financial Reporting Standards and feedback from international jurisdictions.

As it stands, the ISSB standards are expected to create a common language for the disclosure of sustainability considerations that may impact a business’ prospects. In doing so, they will provide a standardised framework through which investors can choose to align their portfolio with sustainable outcomes. 

Implications for the US market

One of the more controversial issues is what impact the framework will have on  disclosure in the US, especially in terms of Scope 3 or supply chain emissions. Following release of initial proposals in March 2022, the publication of SEC’s rules on disclosure were delayed from April 2023, and are now expected to be released in Autumn 2023.

The initial proposals from the SEC included requirements for the disclosure of the projected risks and material impacts on the business, strategy, and outlook caused by climate change; Scope 1 and scope 2 greenhouse gas (GHG) emissions; Scope 3 if the material or the registrant sets an emissions reduction target that includes Scope 3 emissions; governance of climate risks and risk-management processes; and decarbonisation plans with interim targets.

There is a major political battle around ESG in the US, and there has been strong push back from Republican’s on the need for Scope 3 disclosures – with the argument that they prevent investors from selecting the best investments, and potentially negatively impact the fossil fuel industry.

The G7’s endorsement of the ISSB, which includes from the US, signalled that the issue of such disclosures in the US may simply be a matter of time. In March 2023 for example, a survey from PwC and Workiva found that many business leaders in the US were already prioritising ESG reporting, even before guidance was published by the US regulator.

IFRS S1 and IFRS S2 fully incorporate the recommendations of the TCFD

Today the ISSB is working to support effective implementation of IFRS S1 and IFRS S2, which provide for a global baseline of sustainability-related disclosures worldwide, including capacity building and monitoring progress towards the broad use of high-quality disclosures.

IFRS S1 provides a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term.

IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1.

As such, from 2024—as the ISSB Standards start being applied around the world—the IFRS Foundation will take over these responsibilities from the TCFD, which has been monitoring progress towards climate-related disclosures against the recommendations since they were published.

ISSB Chair Emmanuel Faber said: “The TCFD has been a trailblazer in raising the practice and quality of climate-related disclosures, providing much-needed information to investors about climate-related risks and opportunities.”

SGV Take

The ISSB is most likely aware of the number of people concerned about the potential for a corporate takeover of the standards. While the TCFD may have had its faults, many considered its funding by the FSB as reassurance of its independence from corporate interests. To be credible, ISSB standards must be robust and distinctly separate from the needs and short term concerns of industry.

It will also have to address concerns about double materiality, planetary boundaries and the need for urgent action. The standard is focused on the information deemed relevant to investors, but it is becoming increasingly obvious that the financial community is struggling to understand and respond to environmental risk.

While there were some initial concerns that the ISSB was too focused on enterprise value and operational risks, it has clearly evolved. The final version of its debut standards include the disclosure of Scope 3 greenhouse gas emissions (indirect emissions that occur within a company’s value chain, when material), on top of the requirements for Scope 1 (direct emissions from a company) and Scope 2 (indirect emissions from electricity purchased and used) disclosure required.

Although its reporting frameworks may not yet be able to define or address every possible climate or nature-related risk, they moving towards standardisation for the most basic level of reporting. There may be some way to go, but it is difficult enough to get all parties agreed on a forwards path. Still, the ISSB has succeeded in becoming the baseline for a wide range of jurisdictions, providing solid foundations for future action.

Given that its standards are now the global de facto, it is hard to see how the US can avoid the adoption of equivalent rules – unless US companies are no longer interested in expanding beyond their own market.

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