Grouping together on climate change
The G7, also known as the Group of Seven, comprises the world's seven largest advanced economies: Germany, Italy, Canada, France, Japan, the United Kingdom and the United States. Their meeting, hosted by the UK in June 2021 is expected to focus on a small number of topics in addition to the Covid pandemic: one of these topics being climate change. The UK has set a climate change target to reducing emissions by 78% by 2035 compared to 1990 levels, and to reach net zero by 2050.
Looking back at our article on Net Zero from 6 months ago, there are two key factors that will drive forward corporate action on climate change in the coming months and years ahead: finance and regulation, and each of these will influence corporate reporting in the future.
At a meeting of G7 finance ministers earlier this month, a commitment was made to make it mandatory for corporates to report climate impacts and investment decisions. This commitment will be discussed by the wider G20 group of nations with the aim to achieve international consensus ahead of the next United Nations Climate Change Conference in November 2021 (COP26). This development follows the UK’s lead in November 2020, where plans were announced that will force any company with more than 500 employees and more than £500m in annual turnover in the UK to disclose in their annual reports the potential risks associated with climate change in line with the Task Force on Climate Related Financial Disclosures (TCFD). These regulations are expected to come into effect from April 2022.
At the G7 finance ministers’ meeting, there was also support for work by the International Financial Reporting Standards Foundation (IFRS Foundation) that seeks to develop a new global standard for sustainability reporting, reflecting the TCFD framework. The IFRS Foundation intends to create a new International Sustainability Standards Board (ISSB) to focus firstly on corporate climate disclosures and later on other areas that are of interest to investors and impact enterprise value. As so clearly identified by Dr Carol Adams in her response to the consultation surrounding this initiative, herein lies a critical drawback in these plans.
The very name of the International Sustainability Standards Board is misleading and will add to confusion. “It is confusing because there already exists a Global Sustainability Standards Board (GSSB) that develops sustainability reporting standards for investors and other stakeholders that are concerned with the impacts of an organisation on sustainable development” (Dr Carol Adams, May 2021). Nevertheless, the IFRS Foundation have stressed that their standards are concerned with enterprise value and not the impact of an organisation on sustainable development. It is patently clear, even now, that the interests of investors are not always aligned with the goals of sustainable development. As Dr Adams points out in her response, the commonly held understanding of “sustainability reporting” is not, as stated by IFRS Foundation, reporting on “ESG matters that are relevant to investors”. Furthermore, the lack of definitions by the IFRS Foundation for their use of terms such as ‘value creation’ and ‘sustainability performance’, leaves the initiative open to accusations of greenwashing.
In Europe, companies are watching closely the development of regulations that the European Commission (EC) are expected to bring forward during 2021 for controlling the environmental claims of companies. According to the Green Deal passed in March 2020, “companies making ‘green claims’ should substantiate these against a standard methodology to assess their impact on the environment”. Companies may be required to use a life cycle analysis approach to substantiate claims about the environmental performance of their products. This could also have implications for corporate sustainability reporting, which is an area we will explore further in a future article.
Right now, as we look towards the G7 group of nations for leadership on climate change, it is clear that the playbook for the corporate sector is changing fast. There is a swirling confluence of: increasing regulation; shareholder activism; drives towards standardisation; focus on the financial interplay between investment on sustainable development and value for investors. This confluence provides a potent fuel-mix for companies that see opportunities to align action on climate change with commercial success.
Jon Woodhead, June 2021