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Climate and sustainability disclosure standards ‘will expose weak governance’

Out-Law News | 05 Apr 2022 | 4:31 pm | 2 min. read

New global reporting standards have been proposed to boost transparency over businesses’ impact on the environmental and their efforts to reduce that impact.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons said that the draft new sustainability-related and climate-related disclosure standards, opened to consultation by the International Sustainability Standards Board (ISSB), “enhance” existing reporting requirements and promise to “expose” weak governance over sustainability- and climate-related risk.

“Proposed disclosures include identification of the governance body or bodies responsible for sustainability- and climate-related risks and opportunities within the organisation, how that is reflected in those bodies’ terms of reference, how appropriate skills or competencies are made available, how frequently information is received by that body and how risks and opportunities are identified by it and are worked in to strategy, how targets are set, and how management assists in leading and progressing the issue and integrating its demands across the organisation,” he said.

“To meaningfully provide such non-financial reporting is going to require a fit for purpose governance structure, able to incorporate and facilitate – in both action and reporting output – climate and sustainability considerations. It does not mean that an existing governance framework need be wholly redesigned, but ‘weak’ governance structures would rapidly be exposed,” he said.

Currently, a patchwork of law, regulation and voluntary initiatives regulate the disclosure of information by companies over the way they manage and mitigate sustainability and climate issues. The UK, US and EU, for example, have all set disclosure requirements in law or regulation, with many of the requirements built on the recommendations developed by the Taskforce on Climate-related Financial Disclosures (TCFD), which are otherwise entirely voluntary for organisations to adopt.

The ISSB said the purpose of the proposed new standards is to provide “more consistent, complete, comparable and verifiable information” within companies’ financial reporting on sustainability- and climate-related issues.

Included in the draft new standard on climate-related disclosures are proposed new obligations on commercial banks, investment banks, insurance providers and asset managers. They stand to face new requirements to make disclosures that highlight “risks from financed and facilitated emissions” stemming from their lending, underwriting and/or investment activities. The new disclosure requirements have been proposed at a time when lobbyists for climate action have warned that many major banks are failing to move fast enough to end their financial support for fossil fuel-based projects, despite committing to ‘net zero’ targets.

The ISSB was established at COP26 in Glasgow last year to lead on the development of new baseline global standards in relation to sustainability disclosure. The new draft standards on general sustainability-related disclosure requirements and climate-related disclosure requirements are the first two of a suite of new standards that the ISSB is consulting on. Feedback on the drafts can be submitted until 29 July 2022.

Proverbs-Garbett said the content of the new draft standards should not be a surprise to major businesses since they build on the TCFD’s recommendations and reflect input from organisations such as the World Economic Forum.