The world of sustainability reporting today can feel like trying to make sense of alphabet soup. From ESG to GRI, TCFD, SASB, ISSB, CDP and more, the smorgasbord of acronyms can be confusing.
But one thing is becoming rapidly clear: there’s a shift taking place as the worlds of sustainability and financial reporting converge around climate-risk.
We believe that as the spotlight on climate-risk becomes more focused, there will be massive implications across the global economy, including at the intersection of technology and food and agriculture.
So what exactly is changing and what will it mean? We’ve pulled together a 3 part series to share what we’ve learned as we’ve examined disclosure standards, reporting tools, and how these efforts will translate to climate action.
From severe flooding in Australia and Pakistan to record-breaking heat waves in North America and Europe and unrelenting droughts in California and East Africa, the realities of climate change are hitting communities and economies across the world.
As the economic and social impacts mount, investors and regulators are putting pressure on businesses to disclose how their operations and finances are exposed to climate-risks and how these risks are being managed. If you are a bank lending to farms, for example, they’ll want to know how climate disasters change the default risk on your agri portfolio and what you’re doing to mitigate this risk.
Countries including the UK, New Zealand, and the US, have already proposed rules that would require certain classes of businesses, including publicly-listed companies and financial institutions, to disclose these types of climate-related financial risks. The implications for companies will be massive.
While it is increasingly clear that companies will have to report on climate-related risks facing their businesses, to-date there has been little clarity and consistency on exactly how companies around the world will be expected to make disclosures.
The Task Force on Climate-Related Financial Disclosures (TCFD) provides an overarching framework and guidelines for climate-risk disclosures, but it doesn’t provide specific standards for reporting. To address this challenge, the International Sustainability Standards Board (ISSB) is currently drafting standards for climate-related disclosures. There is hope, and growing consensus, that the ISSB standards will emerge as the de-facto, globally accepted standards for climate-related financial reporting moving forward. A shared baseline will be important in providing global consistency, reliability and comparability in reporting, which has so far been difficult to achieve.
In line with the TCFD framework, the ISSB standards would require companies to provide disclosures in four key areas:
Embedded within this overarching structure, are requirements for companies to disclose the impact of both physical risks and transition risks on their business model, strategy, financial performance and position, and cash flows over the short, medium and long-term.
Loads of companies already do ESG reporting, so this won’t be that hard, right?
Well, not quite.
For the most part, ESG reporting has focused on non-financial information. Sustainability reports are issued separately and independent from financial reports that present cash flow statements, balance sheets, income statements, and changes in equity. Climate-related financial disclosures, on the other hand, require companies to translate their climate risk and mitigation efforts into financial terms and present them alongside standard financial reports. This is a HUGE change.
Often, ESG reporting is done on the basis of materiality assessments, in which companies determine which specific issues across environmental and social sustainability are most relevant to their businesses. Sustainability reports typically present the company’s targets for each of their material topics, alongside policies and programs that will be implemented by the company to support progress to achieve those targets.
In contrast, climate-related financial disclosures will be more specific and analytical than typical ESG reporting. In order to comply with the ISSB’s proposed standards for climate-related financial disclosures, for example, companies would be required to identify where climate risks and opportunities are concentrated in their value chains, report on Scope 1, 2, and 3 emissions and plans to decarbonize, and assess their resilience and performance under different forward-looking climate scenarios.
As the gap between sustainability and finance is narrowed by climate-related financial disclosures, companies are going to be faced with the challenge of collecting, analyzing, and reporting data and information in ways they’ve never had to before. Read more about what the future of climate-related financial reporting might look like in the next installment of our series here.
Tenacious Ventures Management Pty Ltd (CAR 001275760), Tenacious Ventures Management Partnership, LP (CAR 001298484), Tenacious Ventures Fund II Management Partnership, LP (CAR 001298483), and Tenacious Ventures Fund II Staple Co Pty Ltd (CAR 001298487) are Corporate Authorised Representatives of Sandford Capital Pty Ltd (ABN 82 600 590 887), Australian Financial Services Licence No 461981, and are authorised to provide advisory and dealing in connection with investments to wholesale clients only.