The attention surrounding climate-related disclosures has surged in recent years due to the increasing severity of climate change and its impacts on society as a whole. The world pandemic has also showcased the devastating effects major crises can have on the economic landscape. For businesses and governments alike, it is becoming imperative to consider the potential risks stemming from the global phenomenon, as a safety measure against the destructive consequences it can inflict on social, financial and economic systems. Climate change is an undeniable reality, and its consequences have severe impacts. Various stakeholders, such as governments, the private sector, environmental activists, NGOs, and policymakers, are increasingly recognising the urgency to address this issue. As a result, there is a significant demand for climate change reporting activities and regulations. Institutions like the IMF have stressed the significance of disclosing climate-related information. These disclosures are crucial for assessing financial stability, enabling informed market pricing of risks associated with both physical impacts and the transition to a sustainable future, and fostering the growth of sustainable finance.
However, the Climate Change Disclosure (CCD) sphere is under development and lacks the details and clarity to reach its final form. The fundamental concept of climate change lacks an agreed definition. The Intergovernmental Panel on Climate Change (IPCC) defines climate change as change in the climate identified by the changes in the mean and/or variability of its properties over a period of time, due to either natural processes or anthropogenic changes in the composition of the atmosphere or land use.[4] Meanwhile, the United Nations Framework Convention for Climate Change (UNFCCC) defines climate change as changes in the climate in addition to natural climate variability over comparable time periods, due to anthropogenic alteration of the composition of the global atmosphere.[8] The IPCC and UNFCCC definitions deviate from the cause of climate change: IPCC recognises natural processes changing the composition of the atmosphere or land use while UNFCCC does not. Adopting the IPCC definition would require CCD on risk and opportunities of natural processes on businesses, such as natural disasters or extreme climate events.
Neither does an agreed scope of CCD exist. Construed narrowly, “climate change disclosures” mean disclosures of a business’ contribution to climate change. Construed broadly, adopting the terminology of the International Financial Reporting Standards (IFRS), “climate-related disclosures” consist of a business’ contribution to climate change, the impacts of climate change on a business’s operations, and financial risks and opportunities emerging from the changes in climate. This narrow construction fails to cater to less carbon-intensive industries who indirectly contribute to climate change, such as healthcare and professional services. This excuses less carbon-intensive industries from disclosing their contributions to climate change and from being subject to public and enforcement agencies’ scrutiny.
Prior to the IFRS standards released on 26 June 2023, the leading CCD standard was the Recommendations of the Task Force on Climate-related Financial Disclosures. The IFRS Foundation is a public interest organisation that was established to develop high-quality, understandable, enforceable, and globally accepted accounting standards. On 26 June 2023 (effective from January 2024), the International Sustainability Standards Board (ISSB) issued the International Financial Reporting Standards (IFRS) standards, of which the second sustainability standard (S2) concerns climate-related disclosures. The IFRS Standards aim to ‘create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects’.[3] The question posed would evaluate the effectiveness of these standards in bridging the quality and coverage gap of CCD disclosures by businesses.
Growing pressure from stakeholders demanding transparency on the impact of climate change on businesses and also on the impact of business operations on sustainability has led to increased incentive for companies to make disclosures related to climate change. Moreover, financial pressures related to climate change are increasing for companies. In response, the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of financial institutions, has pledged to achieve net-zero emissions by 2050 and already represents 40% of the world's financial assets. Financial institutions are starting to base investment decisions on climate-related risks, impacting industries beyond those with high greenhouse gas emissions. This shift is pressuring CEOs and leadership teams as it affects credit ratings, valuations, cost of capital, borrowing ability, and insurance. [7]
The implementation of ISSB standards has introduced a more streamlined and comprehensive approach to reporting, with the goal of simplifying the complexities associated with sustainability. In response to investors' increasing demand for higher quality and increased transparency, ISSB has set a higher standard for companies to disclose their climate-related information. This includes the requirement for companies to disclose emissions, even those indirectly related to their operational control. When companies speak the same language on sustainability issues across borders, they can better translate environmental action into a competitive advantage. The ISSB also aims to facilitate a smooth transition from existing reporting frameworks. Organisations that have already been utilising TCFD recommendations or SASB standards are well-positioned to adopt the ISSB Standards, as they draw from these frameworks.[6] As a result, businesses should ensure that their climate data is transparent, traceable, and reliable to meet the requirements of ISSB reporting.
Further, countries are recognising the value of entering the CCD sphere. Canada, Japan, and Singapore are currently in discussions regarding the incorporation of sustainability-related disclosures into their regulatory frameworks, and considering adopting or utilising the IFRS Sustainability Disclosure Standards.[2] Similarly, Australia and Malaysia have recently completed similar consultations, while Brazil, Costa Rica, Sri Lanka, Nigeria, and Turkey have already made announcements to adopt or utilise the ISSB Standards.[2] This highlights the adaptability and broad applicability of the new standards. It is anticipated that more countries will join this trend over time as they realise the competitive advantage of embracing these standards.
On the contrary, the ISSB is an independent, international standard-setter. It cannot impose requirements on any jurisdiction or company.[6] Hence, it would be up to those jurisdictions to use the standards to inform their rules to determine which entities will be in scope and the effective dates for compliance. The workload implications for reporting entities in terms of compliance, time, effort, systems and coordination required internally across businesses are significant. A poll conducted at the IR Magazine Think Tank – Europe, held a few days before the launch of the standards, found that nearly 70 per cent of delegates did not feel ready for the introduction of IFRS S1 and IFRS S2.[1] Then there is the question of whether small businesses should be held to the same standards imposed on larger ones. Small-cap firms often do not have the internal resources to meet the level of ESG disclosure investors are looking for.
Critics of climate-change-related disclosures may argue the disproportionate focus on the element ‘E’ in ESG when disclosing climate-related information. In the U.S. Securities and Exchange Commission’s (SEC) proposed climate rule, there are roughly 99 mentions of the term ESG. The rule was crafted to standardise what investors had been requesting – guidelines outlining how companies should disclose their impact on, and adaptation to, climate change. While the SEC’s climate rule focuses on a major factor associated with the “E” in “ESG,” what about social-based risks? These risks are more difficult to account for than environmental ones since there is no consensus on what to measure, which means there are fewer data sets available compared to carbon emissions.[5]
Among the UN SDGs (see below), significant attention is paid to Goal 13, which states the world must take urgent action to combat climate change and its impacts. It has been gaining traction partially thanks to the rise in popularity of ESG. However, it should be noted that Goal 13 is not the only goal the UN agreed is necessary for sustainability on Earth. Indeed, goals 1-6, 8, 10 and 16 directly deal with how we as humans interact with one another and how we ensure a certain standard of living for all humans. This, along with the other goals, all collectively ensure that inequities that lead to conflict and oppression are avoided. More importantly, dealing with environmental-focused goals (like No. 7, 11, 12, 14 and 15) without dealing with human-based goals compromises the effectiveness of those environmental goals. This inextricable link is sometimes overlooked.
To conclude, new ISSB standards certainly play a pivotal role in climate reporting as a sustainability framework, as it impacts businesses on a global scale and hence all those who rely on them. Ongoing revisions and improvements to the framework will be necessary to address emerging issues and incorporate a broader range of sustainability considerations beyond climate change. Nonetheless, it should be acknowledged that the new framework represents a stepping stone in materialising sustainability risks, to better ensure that businesses are transparent, accountable, and capable of addressing the challenges posed by climate change.
References
[1] Distefano, N. (2023, August 29). What the new ISSB Standards mean for companies. Governance intelligence. Retrieved from https://www.governance-intelligence.com/regulatory-compliance/what-new-issb-standards-mean-companies
[2] IFRS. (2024, April 3). Progress towards adoption of ISSB Standards as jurisdictions consult. Retrieved from
[3] International Financial Reporting Standards. 2023. ‘ISSB Issues Inaugural Global Sustainability Disclosure Standards.’ Www.ifrs.org. 26 June 2023. www.ifrs.org/news-and-events/news/2023/06/issb-issues-ifrs-s1-ifrs-s2/.
[4] IPCC, 2012: Glossary of terms. In: Managing the Risks of Extreme Events and Disasters to Advance Climate Change Adaptation [Field, C.B., V. Barros, T.F. Stocker, D. Qin, D.J. Dokken, K.L. Ebi, M.D. Mastrandrea, K.J. Mach, G.-K. Plattner, S.K. Allen, M. Tignor, and P.M. Midgley (eds.)]. A Special Report of Working Groups I and II of the Intergovernmental Panel on Climate Change (IPCC). Cambridge University Press, Cambridge, UK, and New York, NY, USA, pp. 557.
[5] Newsome, H. (2023, February 28). ESG Includes An ‘E’ And An ‘S’ – So Let’s Act Like It. Forbes. Retrieved from
[6] Pierce, E. (2024, April 1). International Sustainability Standards Board (ISSB), Explained. Persefoni. Retrieved May 21, 2024, from https://www.persefoni.com/blog/issb.
[7] PricewaterhouseCoopers LLP. (n.d.). Three examples of climate change risks on business | PwC. Retrieved from https://www.pwc.com/gx/en/services/sustainability/publications/risks-and-opportunities-of-climate-change-on-business.html.
[8] UNFCCC. 1992. ‘United Nations Framework Convention on Climate Change.’ https://unfccc.int/files/essential_background/background_publications_htmlpdf/application/pdf/conveng.pdf.
Useful links
ADEC ESG. (n.d.). The Importance of Climate Risk Disclosure for Business. Retrieved from https://www.adecesg.com/resources/blog/the-importance-of-climate-risk-disclosure-for-business/#:~:text=With%20the%20effects%20of%20climate,that%20lead%20to%20climate%20change.
Bretter, C., & Schulz, F. (2023). Why focusing on "climate change denial" is counterproductive. Proceedings of the National Academy of Sciences, 120(10), e2217716120. https://doi.org/10.1073/pnas.2217716120.
CDP. (2022). Disclosing through CDP: The business benefits. Retrieved from https://cdn.cdp.net/cdp-production/comfy/cms/files/files/000/006/049/original/CDP_Benefits_of_Disclosure_brochure_2022.pdf.
IMF. (2021, April 1). Disclosure and Data on Climate Change. Retrieved from https://www.imf.org/en/News/Articles/2021/04/01/sp040121-disclosure-and-data-on-climate-change.
KPMG Australia. (2022, April). ISSB | IFRS S1 and IFRS S2 | Sustainability reporting - KPMG Australia. Retrieved from https://kpmg.com/au/en/home/insights/2022/04/issb-sustainability-reporting-disclosures-guide.html.
Task Force on Climate-Related Financial Disclosures. (n.d.). Publications. Retrieved from https://www.fsb-tcfd.org/publications/.
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