What Climate-Related Information Should Companies Disclose?

Pressure for companies to do something about the environment has grown substantially over the past decade. Scrutiny from investors, customers, regulators, proxy advisors, and the media is often targeted at the board of directors. What do they need to know about the disclosure landscape?

Disclosure priorities for companies include those that have a substantial impact on the company or its stakeholders and/or are considered material information by a well-known standard-setting board like the US Securities and Exchange Commission (SEC) or the Sustainability Accounting Standards Board (SASB). Responsibility for the disclosure of material information rests with senior management and boards, and firms often have a formal disclosure committee to decide these matters.

Climate-related disclosure activity is centered around three overarching organizations. The International Financial Reporting Standards (IFRS) covers some 140 country jurisdictions, requiring disclosures about physical risks, transition risks, and climate-related opportunities. It fully incorporates the Task Force on Climate-Related Financial Disclosures (TCFD) and includes SASB’s climate-related industry-based requirements.

TCFD recommendations on climate-related financial disclosures are a good place for companies to start because its 2017 recommendations were designed to solicit decision-useful, forward-looking information that can be included in mainstream financial filings. The recommendations center around four thematic areas representing core elements of how organizations operate: governance, strategy, risk management, and metrics/targets. The organization’s 2022 status report indicates it’s seen an increase in the number of governments and regulators incorporating TCFD into their rules and guidance each year since 2017.

SASB’s niche is providing individual standards, by industry, that identify the sustainability factors most likely to have material financial impacts on a company to inform investors. In November 2021, during the United Nations (UN) Climate Change Conference (COP26), IFRS announced the formation of the International Sustainability Standards Board (ISSB) as yet another unifying attempt. In February 2023, ISSB voted to release global guidelines that attempt to harmonize environmental disclosures available for regulatory purposes, which would go into effect in January 2024.

ISSB’s standards require companies to report emissions from their Scope 1 direct operations and their value chains, including suppliers. These value chain emissions (known as Scope 3) will require extra time, due to the challenge of gathering data from suppliers. (Scope 2 includes indirect greenhouse gas [GHG] emissions from the generation of purchased or acquired electricity, steam, heating, or cooling consumed by the company).

Until its 2023 policy update, Institutional Shareholder Services (ISS), the largest proxy advisory firm in the world, did not have recommendations for climate accountability, despite buying its way into the ESG ratings arena in 2018. In its 2023 report, it asks for detailed disclosure of climate-related risks according to the framework established by TCFD.

Where to Go from Here?

The board of directors generally has two functions: strategy and oversight. It should be no different for ESG.

In terms of strategy, it’s less a question of whether a company should report on climate-related financial information but how it will do so. Boards and management should work together to define their climate agenda by asking questions such as: “What areas are important to our business, our industry, and our investors/employees/consumers?”

The reporting frameworks just discussed will dictate some of this, but there is room for firms to put their own stamp on it. My conversations with directors reveal that most boards struggle to develop the type of long-term strategy necessary for environmental change. Here’s how one director put it: “We strive for a good give-and-take with management once we see their plan, but with climate disclosures looming, we need more expertise. When we revisited our board matrix, it was eye-opening.” To be sure, a board needs either the expertise or the necessary education.

It’s also important to consider the area(s) in which a company can realistically make a difference and demonstrate real progress. Given that greenwashing is a frequent concern with ESG, the last thing companies want is to be overly aspirational. Indeed, 48% of global executives recently told Capital Group they believe greenwashing is still prevalent in the asset management industry.

Boards also need to stay up to speed on potential regulatory changes and their strategic implications. For example, the Heartland Institute, which advocates for anti-ESG bills, has identified proposed or passed bills in 24 US States, with Florida and Indiana the latest to pass such laws. Similarly, the US Supreme Court’s 6­–3 decision in West Virginia v. EPA in June 2022 called into question whether or not SEC has the legal authority to adopt and enforce its proposed climate-related disclosure rule, even while the final set of guidelines are expected in summer 2023.

Since the big three institutional investors (Blackrock, Vanguard and State Street) are looking specifically for a company’s ability to transition to a net zero economy and what business risks that may cause, the specifics of this transition must also be part of strategy. Here, reporting on Scope 1 and 2 emissions (those relating to systems that are within reasonable control of the firm) serve as the minimum.

Oversight flows from strategy. Not only do boards need to know what management is doing in terms of collecting, analyzing, verifying the company’s climate data, but these efforts must be a central part of ESG oversight. According to board members I interviewed, this data should be in hand before disclosure and reporting decisions are made. “At the very least, we need it alongside reporting,” said a board director at a midsized bank holding company. The board needs that information to perform its oversight and assess whether the time and money going toward sustainability are focused on long-term value.

Thus, it’s important to have a dedicated management team accountable for the reporting to ensure information accuracy. Since 88% of institutional investors subject ESG to the same scrutiny as operational and financial considerations, this is a C-suite and board-level responsibility. After Sarbanes-Oxley passed in 2002, boards began establishing disclosure committees. These still matter and can be made up of insiders and board members to enhance coordination and information flow. This contrasts with the nominating and governance committee, which must be composed of independent directors and now accounts for most the board oversight of ESG issues. According to Spencer Stuart’s 2022 Board Index report, however, just 12% of S&P 500 companies have a standing committee dedicated to the environment.

To gain oversight of climate-related disclosures, one must understand disciplines from electricity to emissions to ecology before tackling the myriad frameworks for disclosing information. This idea resonated with directors I spoke with: “We’ve needed to ramp up very quickly over the past three years, and I still don’t feel like I know what I’m talking about,” said a consumer products company board member.

For more information see my Amplify article.













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