By Tamara O’Brien, TMIL’s roving reporter
The truth, as crackpot TV series The X-Files had it, is out there. The truth is universally agreed to be a Good Thing. Problem is, where is it? And whose truth is it when we find it? With elections happening around the world, politicians everywhere are loudly insisting on their monopoly on truth. Which perforce means pouring scorn and mockery on the other lot’s version.
But as Claire observed in her monthly blog last August, Fighting for truth across the political divide, ‘A healthy, functioning democracy is about recognising a shared, objective truth in public discourse, whatever your personal politics. With agreement on what is factually accurate, one can then listen respectfully to one’s opponent’s point of view, upholding their right to hold such a view even when – or perhaps especially when – we disagree with it. After all, it’s only through listening that we can actually learn anything from one another.’
As corporate reporters will attest, gathering the data from which to determine that objective truth is hard enough. And so it’s not surprising that truth and who owns it was the nub of today’s webinar (27 June 2024), which began as a (fairly!) straightforward run-through of the current state of play of sustainability reporting regulation in Europe, UK and the US. The discussion also touched on how companies can avoid getting entangled in the interweaving responsibilities that can arise from where they’re listed, where they have operations, and the nature of their value chain.
It’d be hard to find three people more capable of separating these strands than the expert sustainability lawyers on the panel – Adam Wasserman of Finpublica from the US; Jindrich Kloub of Wilson Sonsini from the EU; and Becky Clissmann of Ashurst from the UK. And for anyone who, by dint of their job or natural inclination, looks for the devil in the detail of sustainability reporting regulation – a listen to the full discussion (button above) is highly recommended.
But for an elevator pitch, it’s hard to beat Claire’s contention that differences in regulation between different jurisdictions actually reflect deep-rooted beliefs about the nature of commerce within those societies. What are companies for? How do they support, or subvert, what we value most? Where do their responsibilities begin and end? Trans-national lawsuits are already being brought to settle these questions, so they’re far from academic.
Here’s my summary of the prevailing issues in each jurisdiction, as set out by our panellists. Look hard enough and I think you can spot the cultural differences.
Jindrich, EU: EU sustainability regulation is the most far-reaching in the world. CSRD, the Corporate Sustainability Reporting Directive, is becoming law and is the centrepiece of regulation in the EU, working in conjunction with existing regulation related to sustainable finance disclosure and a taxonomy of ‘green’ activities.
CSRD requires in-scope companies to report their sustainability performance not just in relation to environmental issues, but to social and governance issues too. They’ll be required to publish sustainability statements in their annual reports in line with ESRS, the European Sustainability Reporting Standards, which cover 82 disclosure requirements and nearly 1,200 KPIs. Companies will have to assess which requirements are material to them, using a double materiality assessment not required in any other jurisdiction.
[Ed’s note: Double materiality, as every schoolchild knows(!), means you don’t just report how sustainability issues might affect your company’s financial prospects – you also identify, and, where possible, quantify, your company’s own existing and potential environmental, social and governance impacts on the world. Much more informative to stakeholders, much trickier for reporters.]
On the greenwashing point, CSRD will be an advantage to companies in that it will provide a level of support and assurance for their environmental claims, and thus protect their reputation. Jindrich gave the example of 20 European airlines who are currently being investigated by the EU over their claims to be using sustainable aviation fuel, and other environmental credentials.
Becky, UK: In an honourable exception to Claire’s ‘no boring slides’ rule, Becky took us through a series of diagrams (not at all boring!) giving an overview of how sustainability regulation is playing out in the UK.
The latest wave of new requirements began with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations. Under the Listing Rules, listed entities must comply with the TCFD’s recommendations in their reporting or explain why they have not done so. Separate regulations (known as the CFD Regulations) require disclosures by UK companies and LLPs that are drawn from the TCFD’s recommendations. The International Sustainability Standards Board’s new sustainability reporting standards, IFRS S1 and S2, that were published last year, were also built on the TCFD’s recommendations, while the TCFD itself no longer exists as a separate entity, having been absorbed within the IFRS Foundation. IFRS S1 and S2 are expected to be endorsed in the UK shortly. Many more directives and frameworks peppered Becky’s slides, safely contained in colour-coded boxes.
The UK government of the time committed to making IFRS 1 and 2 mandatory for certain companies, once endorsed, and also said it would think about how the recommendations of the Taskforce on Nature-Related Financial Disclosures could be incorporated into domestic policy too. The UK’s Labour Party (which won the UK election the week after the webinar) has said they’ll do pretty much the same thing when in government. And there’s more, much more, to come.
All this alignment is very welcome, Becky continued, but companies need to understand what they have to report on under the relevant legislation or standard, and how those standards interact, so they can report in the most efficient way possible. Digging into the weeds will be unavoidable, but the EU’s EFRAG, author of ESRS, and the IFRS have jointly published helpful ESRS – ISSB Standards Interoperability Guidance on how to do it.
Adam, US: Last but not least – but undeniably third in our fantasy ‘sustainability disclosure regime’ league – is the US picture, which Adam outlined for us.
After two years of consultation, the SEC approved its corporate disclosure requirements in March 2024. Broadly, the climate-related disclosure rules require US issuers to report material information regarding climate risks and larger US issuers to also report on GHG emissions. Only single materiality disclosure is required, and they will only have to report Scope 1 and 2 emissions, omitting Scope 3. Social and governance factors are hardly mentioned.
Despite the bar being set pretty low compared to EU and UK standards, the SEC’s Climate Disclosure Rule has met with stiff opposition from Republican Attorney Generals, the Chamber of Commerce and others. It’s led to several lawsuits being consolidated into a single case for consideration by a Federal Court of Appeals. Pending this litigation, the SEC has delayed implementing the disclosure rules, so their current status is uncertain. In a survey, more than half of attorneys think they will survive in part, while a quarter believe they will be overturned entirely.
California remains the outlier here. Its Climate Corporate Data Accountability Act, passed in October 2023, requires companies to report all three Scopes and is slated to come into force from 2026. Another key piece of legislation is the Climate-related Financial Risk Act, which requires covered companies to report on material climate risks and opportunities.
It will come as no surprise that greenwashing hasn’t been subject to much new regulation. Some rules apply to some funds, an ESG fund disclosure rule is under consideration, and there are other smatterings (including a few settlements with financial services firms and corporations under existing non-ESG specific SEC rules)… all of which Adam rather neatly described as ‘the SEC dipping its toe in the enforcement space’.
Thus our three jurisdictioneers set out their stalls. Now for the questions.
Q: Is it ok to say different things to investors in different jurisdictions?
A considerable worry for companies with multiple listings is that the SEC might not require companies to report certain things, but if they also operate in more stringent jurisdictions, they may well have to. Does that create a problem for them in the US? Adam replied that the key thing is to make sure you don’t say anything in the US that conflicts with what you’re saying elsewhere. So Claire concluded that it’s ok to disclose more in, say, a UK filing; just be careful not to contradict anything you’re also saying to the US.
Q: What do you think audiences want to get out of reporting, and how will the sustainability requirements enable that?
For Jindrich, sustainability reporting has a purpose beyond the immediate goal of giving information to investors, asset managers, customers and consumers. And that is, to drive corporate change towards a sustainable green transition. ‘If you ask a company “do you have a transition plan?” and the answer is no, it doesn’t sound good to investors! So that makes companies think about putting one in place. And in this way you drive change.’
In contrast, said Adam, the SEC in the US is focused less on driving business behaviour, more on providing information for investors. ‘The rules are helpful only insofar as they provide a standardised way to disclose that information, allowing for more comparability between companies.’
Becky has observed a kind of pragmatic idealism in action. What the audience wants to get out of it, she said, is an honest, clear story about what a company is doing to improve its sustainability. And though it can sometimes feel like the reporting tail is wagging the corporate dog, the upside is that it focuses minds internally. ‘I’ve seen executive teams say right, we’ve got to do this now. And when they start digging into the details, getting information about climate risks and opportunities, they do see that it’s an important part of their risk management.’
Q: Having a net zero target is seen as risky in the US, from a litigation and messaging perspective. But other jurisdictions are encouraging it. Thoughts?
The way to mitigate the risk, said Adam, is to provide as much detail as possible as to how you’re getting there. If you just say ‘We’re going to hit net zero by 2050’ without the means to support it, that’s going to create risk. Whereas if you say ‘Here’s what we’re doing, and here are the calculations and assumptions we’re making’ – those are ways to reduce risk. But you have to make sure you truthfully provide the information, warts and all.
So here we are, back to the basics most of us learned in school. Don’t bluff your way to an answer, teacher can spot it a mile off. Find the truth and tell it your way. Show your workings out. And that’s all there is to proving yourself an intelligent, trustworthy human being… or politician… or company.
Start early!
In a final word of advice, all three panellists urged preparers to start the process sooner rather than later – there’s no getting away from the complexity of all this, so the sooner you understand how these requirements apply to you, and where those complexities lie, the better!