ISSB Climate Reporting Standards Could Be An Important Preview For U.S. Companies

Forbes Money ISSB Climate Reporting Standards Could Be An Important Preview For U. S. Companies Jon McGowan Contributor Opinions expressed by Forbes Contributors are their own.

I am an attorney who writes about ESG policy, laws, and regulations. Following Jun 28, 2023, 07:15pm EDT | Press play to listen to this article! Got it! Share to Facebook Share to Twitter Share to Linkedin FILE – This photo from Wednesday Dec. 17, 2008, shows the Securities and Exchange Commission (SEC) .

. . [+] headquarters in Washington.

(AP Photo, File) Copyright 2021 The Associated Press. All rights reserved. The International Sustainability Standards Board recently announced its inaugural corporate reporting standards for sustainability and climate risk.

The standards, while not used in the United States, could influence and predict the pending Securities and Exchange Commission requirements. Environmental, social, and governance is a type of investing where non-financial factors are considered when making investment choices. In theory, ESG is about giving investors the chance to choose companies that align with their values.

In a very short time, ESG became an unregulated staple of corporate financial reporting. Over the past few years, publicly traded companies have started posting ESG reports as part of their annual financial statements. The content of these reports varies based on corporate executive’s priorities.

Jurisdictions are slowly moving toward implementing reporting standards to add clarity and accountability. In the interim, the rise of ESG has caused issues for companies wanting to satisfy the demands of fund managers and consumers, while complying with the existing regulatory scheme. Not counting the public repercussions of the ESG debate, there are two main areas of legal concern for corporate directors and fund managers.

The first involves how the company presents its ESG actions, specifically in the area of environmental protections. Companies may embellish their environmental record, presenting themselves as green when they are involved in little or no environmentally friendly actions. This practice has become known as greenwashing.

MORE FOR YOU In Ukraine, $40,000 Can Get You An Armored Personnel Carrier Based On An Ex-Russian T-62 Tank Today’s ‘Quordle’ Answers And Clues For Wednesday, June 28 Exclusive: Carlos Ghosn On His $1. 1 Billion Lawsuit And The “Strange Conflict” At Nissan Greenwashing in marketing may not on its own run afoul of existing laws. However, the inclusion of greenwashing in ESG corporate reports and by ESG funds creates possible legal violations with the Securities and Exchange Commission and other financial regulators.

In 2022, asset manager DWS, majority owned by Deutsche Bank, faced multiple greenwashing allegations in both the U. S. and Germany.

The standardization of reporting is designed to help alleviate greenwashing concerns and legal risk by creating clear guidelines. The second problematic area relates to the fiduciary duty of the fund managers and corporate directors. Both share a similar duty to prioritize shareholders’ interests in making financial decisions.

In the U. S, the top priority is to maximize their profits. In other jurisdictions, like the European Union, managers and directors may also consider stakeholders in their process.

This allows for secondary considerations like environmental and social concerns. The role of ESG in fiduciary duty has been the focus of recent controversy with the Department of Labor. DOL issued an ERISA rule that expanded ESG considerations.

The rule was challenged by congress, but eventually upheld through a veto by President Joe Biden . For now, ESG may be considered, but only as a tiebreaker when presented with multiple options with equal returns. An alternative approach has developed in which environmental concerns are playing a greater role in risk assessment and in calculating future profits.

By determining that environmental actions benefit the short- and long-term profits of a company, directors can take environmentally friendly stances as part of fulfilling their fiduciary duty. This theory is being pushed even further in the United Kingdom, where Client Earth, an environmental law charity, has initiated a lawsuit against the directors of Shell plc for failure to take specific action to mitigate climate change. The likelihood of successful litigation is questionable.

While directors and managers may consider environmental factors in calculating future profits, the methods used are unclear, hence the need for standardized reporting standards. The race towards reporting standards has been, understandably, slow moving. Complex regulatory schemes cannot be created quickly.

The European Union was the first major jurisdiction to adopt a scheme. The Corporate Sustainability Reporting Directive was passed in November 2022. The CSRD is being implemented in phases and was prepared to move forward when it decided it needed more time.

Corporate executives were concerned that the new standards, drafted by the European Financial Reporting Advisory Group were unclear, a common problem with ESG. EFRAG was moving toward ERSC sector specific standards, or standards to be used by different industries, but that was slowed in April . Simultaneously, the International Financial Reporting Standards Foundation began work on its own financial reporting standards.

IFRS measures for financial accounting are used in 168 jurisdictions. Notably, the U. S.

is not one of those jurisdictions, relying on the Generally Accepted Accounting Principles, or GAAP, as adopted by the SEC. The IFRS Foundation created the ISSB to draft the just announced IFRS Sustainability Disclosure Standards. The IFRS Standards are based heavily on the recommendations of the Financial Stability Board’s Task Force on Climate Related Financial Disclosures.

The SEC said it also would base its forthcoming standards on the TCFD recommendations, meaning the parallels between the IFRS Standards and the SEC’s work should be strong. The IFRS Standards are divided into two reporting tiers, IFRS S1 and IFRS S2 , with both going into effect January 1, 2024. IFRS S1 establishes sustainability disclosure requirements, while IFRS S2 sets out specific climate-related disclosures to be used along with IFRS S1.

Both focus on a company’s governance, strategy, risk management, and metrics and target, as they relate to either sustainability or climate. It is within the climate-related disclosures where the most controversial reporting standard lies. Under metrics and target, the IFRS S2 requires the reporting of greenhouse gas emissions.

These reports are divided into three scopes. Scope 1 emissions are those that occur from sources controlled by the company. Scope 2 emissions are indirect emissions from the “generation of purchased or acquired electricity, steam, heating or cooling consumed by an entity.

” Scope 3 emissions are divided into 15 categories, the most notable being “purchased goods and services. ” Within Scope 3, the SEC has received the most pushback on its climate disclosures. Specifically, companies have objected to the demand that publicly traded entities, which fall under the regulation of the SEC, must force privately held companies in their supply chain to calculate climate emissions.

There is speculation that the SEC may abandon the Scope 3 requirements, focusing exclusively on Scopes 1 and 2. No timeline has been established for the release of the SEC disclosure requirements, although those are expected as soon as October. A full understanding of the scope of the requirements will be unlikely until then.

But in the interim, ISSB will give the best preview for companies wishing to prepare. Follow me on Twitter or LinkedIn . Check out my website or some of my other work here .

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