By partner Jonathan Eves and senior associate Peter Dunn in the Corporate team at independent UK law firm Burges Salmon

Recent months have seen a continuation of the momentum towards the establishment of standardised corporate reporting on environmental, social and governance (ESG) factors. But is an intensification of climate concerns now causing the E to be prioritised over the S and the G?

Voluntary corporate ESG reporting frameworks

Assessing the performance of companies against (and making capital allocation decisions on the basis of) ESG criteria requires access, via corporate disclosures, to non-financial information. There is, however, no generally accepted global ESG reporting framework and so a number of private sector reporting frameworks have been developed by non-governmental organisations for these purposes.

These frameworks allow companies to self-report non-financial information on a voluntary basis, often in response to pressure from customers and investors. This can require significant resources, so it is larger companies that account for the highest volume of disclosures under these frameworks (which has, in some cases, led to ‘greenwashing’ concerns).

These reporting frameworks include:

• CDP (formerly the Carbon Disclosure Project): environmental reporting framework for companies (and cities) which is focused on climate change, forests and water security.
• Global Reporting Initiative (GRI): the GRI Standards require extensive corporate disclosure against a comprehensive index of ESG reporting metrics.
• Sustainability Accounting Standards Board (SASB): a set of 77 industry-specific sustainability accounting standards covering material ESG factors for each such industry.
• Taskforce on Climate-related Financial Disclosures (TCFD): recommends 11 standard climate-related disclosures in four areas (governance, strategy, risk management, metrics and targets). These primarily require narrative disclosures, explaining how a company has incorporated the consideration of climate-related risks into various aspects of its governance, so that investors can assess how prepared a company is for the shift to a low carbon economy.

This is often referred to as the ‘alphabet soup’ of ESG reporting standards.

Convergence of corporate ESG reporting frameworks

There is a recognition among market participants that, if global ESG reporting standards are to be established, thereby enabling companies to provide stakeholders with standardised reporting (which can be subject to external audit), there does now have to be a process of convergence between these different frameworks.

• On 11 September 2020, five NGOs (including CDP, GRI and SASB) published a statement of intent confirming that they intend to work together (and with the IFRS Foundation – see below) to develop a comprehensive corporate reporting system.
• On 22 September 2020, the World Economic Forum International Business Council (IBC) published a whitepaper, noting the “substantial momentum towards a system-wide solution for ESG reporting”. This proposes a set of voluntary ESG disclosure metrics, called Stakeholder Capitalism Metrics (SCM). The SCMs

• were collated by Deloitte, EY, KPMG and PwC and are deliberately based on existing reporting frameworks (especially the GRI), but also incorporate the UN Sustainable Development Goals. They will be further considered at the IBC’s Winter Meeting in January 2021. Notably one of the 21 ‘core’ SCMs requires disclosure of a timeline to full implementation of the TCFD recommendations.
• On 30 September 2020, the Trustees of the IFRS Foundation issued a consultation paper proposing the establishment of a new climate risk-focused sustainability standards board (SSB). This would make use of existing sustainability frameworks and standards (including the TCFD), to build a single global reporting standard, with an initial focus on climate change – on the basis that “climate-related information is the most pressing concern”. In due course, however, the SSB could broaden its scope to other environmental factors, or even the full range of ESG factors. The consultation will run until 31 December 2020 and was formally welcomed by UK financial regulators and government departments in a joint announcement on 10 November 2020.
• On 8 October 2020, the Financial Reporting Council (FRC) published a discussion paper requesting comments (by 5 February 2021) on a proposed blueprint for a new, more agile, corporate reporting system for the UK, which focuses on value creation and the wider impact of a company on society and the environment. The paper highlights, in particular, the “urgent need” for comparable non-financial information, but notes that, until international standards are in place, companies will need to use “existing frameworks” to meet stakeholder demands.

BlackRock recently considered this need for convergence and its Q3 Global Quarterly Investment Stewardship Report (published on 29 October 2020) stated that, of the various private sector reporting frameworks available, “the one most likely to succeed is the one proposed by the IFRS Foundation”, although BlackRock will “continue to advocate for TCFD and SASB-aligned reporting until a global standard is established”.

UK Green Finance Strategy

In July 2019, the government published its Green Finance Strategy which included a stated expectation that all UK listed issuers and large asset owners would be disclosing in line with the TCFD recommendations by 2022 and established a UK joint taskforce to examine the most effective way to achieve this objective.

On 9 November 2020, HM Treasury published an interim report (and UK joint taskforce roadmap) confirming that because “the climate change challenge is so great” the government will now introduce mandatory TCFD-aligned climate disclosures by 2025, with a significant portion of mandatory requirements in place by 2023:

• From 1 January 2021, commercial companies with a premium listing will be mandated, under a new Listing Rule, to state in their annual reports whether they have disclosed in line with the TCFD’s recommendations, or explain why disclosures have not been made (comply or explain). This is consistent with the proposals of the FCA consultation regarding a new TCFD-aligned disclosure Listing Rule which concluded in October 2020.
• The FCA will consult on proposed new rules for a wider scope of listed issuers in the first half of 2021.
• In early 2021, BEIS will issue a public consultation on new Companies Act 2006 obligations requiring companies registered in the UK to make TCFD-aligned disclosures in their annual reports. It is expected that the necessary regulations would take effect in mid-late 2021.
  

  Peter Dunn

• Separate consultations will be undertaken in respect of occupational pension schemes, asset managers (along with open and closed ended investment companies), life insurers and pensions providers.

In a speech on 9 November 2020, Nikhil Rathi, the FCA chief executive, commented that: “Implementing the TCFD’s recommendations in the UK is just the first step. It must be complemented by more detailed climate and sustainability reporting standards that promote consistency and comparability.”

FRC statement on non-financial reporting frameworks

Many UK companies (particularly listed and large companies) are, of course, already subject to a number of mandatory environmental reporting requirements, including under the Streamlined Energy and Carbon Reporting (SECR) regime. These require the inclusion by companies of quantitative disclosures regarding (inter alia) greenhouse gas emissions and energy use in annual reports.

On 10 November 2020, the FRC published a statement acknowledging that climate change is one of the “defining issues of our time” and, in a thematic review published alongside this statement, it highlighted various shortfalls in the current environmental disclosure regime.

In the statement, the FRC recommends that, in the next reporting cycle, UK public interest entities should (on a voluntary basis) report not only against the TCFD recommendations but, in addition, on the basis of the relevant SASB standards for their sectors. Furthermore, it is stated that the FRC will, in the short to medium term, be considering how companies can report under both the TCFD and SASB to meet the needs of investors.

Referring back to the FRC’s 8 October 2020 discussion paper (noted above), the statement concludes by highlighting the longer-term need for a corporate reporting framework which meets the needs of stakeholders more generally, not just investors.

What next?

The ESG reporting landscape is changing rapidly and companies need to be aware of the direction of travel. The move to mandatory TCFD disclosures in the UK and the ‘climate first’ emphasis of the IFRS Foundation’s consultation suggests that, for now, it is the increasing sense of urgency around climate change that is causing this acceleration. Whether this ultimately leads to comprehensive global ESG reporting standards remains to be seen.