Good morning.
1. It seems that not a single day goes by without an event or speech on sustainability and ESG. I’ve been keeping count and I can say for certain that for the past one year there has been at least one pronouncement, every month by an international body on raising standards, harmonizing standards, standardizing metrics, forming a standard setting body to harmonize standards and standardize metrics.
2. So there has been a veritable torrent of news, and it can be hard to keep up, but certain themes are beginning to emerge. I would like to begin by referring to a recent presentation (on 15 Mar) by Allison Herren Lee, the acting chair of the US Securities and Exchange Commission (SEC), brilliantly entitled (in some versions that I have seen) “The SEC’s change of climate on climate change”[1].
3. Ms Lee observed that investors are demanding more and better information on climate and ESG and that demand is not being met by the current voluntary framework. Ms Lee then raised the possibility of a mandatory framework for climate related disclosures.
Assurance and certification
4. Some clues as to how this mandatory framework may look like can be found in her request for comments on whether such disclosures needed to be audited, whether CEO or CFO certification should be required and whether there should be a management sustainability analysis section similar to the management discussion and analysis (MD&A). She then talked about setting up a dedicated standards board under SEC oversight like the Public Companies Accounting Oversight Board (PCAOB).
5. In other words, Ms Lee sees a symmetry between the assurance and attestation regime currently in place for financial statements and the assurance and attestation for climate related matters.
Climate disclosures can be material
6. Ms Lee’s remarks follow the announcement on 4 Mar by the SEC Division of Enforcement that it was setting up a Climate and ESG Task Force to identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. I want to underscore these last three words: “under existing rules”.
7. That is to say, it is possible that climate disclosures have become so important to investors, and so material to investment decision making, that a failure to make a timely climate disclosure or a false or misleading climate disclosure, can be a breach of a company’s continuous disclosure obligations today.
8. That is a big step up in terms of board and management accountability for climate disclosures and ties in with Ms Lee’s request for comments on whether such disclosures need to be audited and certified.
9. This news certainly made me sit up and I am sure some of you in the audience are sitting up too, especially if you are the director of a listed company.
Guiding companies on what to measure and how it should be measured
10. I have to say that the emphasis on climate disclosures is consistent with what we have been hearing from the market. Studies show that market participants want the current quality and quantity of ESG disclosures to be strengthened, especially climate related risks and opportunities. Participants are also calling for regulators to facilitate better disclosures.
11. The question then for us as regulators is, how prescriptive should we be? The calls for harmonization and all that are not new. Can we leave it to the voluntary frameworks to forge a convergence? In this regard I am heartened by the joint statement of intent made by the five leading framework and standard setting bodies to develop a single coordinated solution, announced in Sep 2020[2]. In the appendix of the joint statement is an illustration of how this solution can provide the basis for a comprehensive corporate reporting system on climate change using the four pillars of the Task Force on Climate-related Financial Disclosures (TCFD).
12. The four pillars are governance, strategy, risk management and metrics and targets, and each of these pillars has two or three recommended disclosures. What the solution does is to map each of these TCFD disclosures to disclosures under the Sustainability Accounting Standards Board (SASB) standards, Global Reporting Initiative (GRI) standards, the Climate Disclosure Standards Board (CDSB) framework, the CDP questionnaire, and the Integrated Reporting (IR) framework.
13. Can we as regulators then take a leaf from that book in in guiding companies on what to measure, and how it should be measured? The joint solution for TCFD does precisely that for climate disclosures. Four pillars, 11 recommended disclosures, mapped to the five leading reporting organizations
Conclusion
14. In conclusion, let me recap the direction of travel. The evolution of sustainability reporting standards appears to be taking a similar path to financial accounting standards. I stand corrected but I believe it took a good 30 years for the accounting standards to mature to its current form. We do not have the same luxury of time, especially for climate disclosures. There has been a dramatic increase in investor demand for climate disclosures, so much so that it is well on its way to becoming material price sensitive information, if it is not already so. There is a role for regulators to do more to guide companies in terms of what to measure and how to measure. The joint solution for TCFD is a good example of how this can be done.
15. In the coming months, we are looking to launch a public consultation on our own sustainability reporting rules, with a focus on climate-related disclosures, as well as the question of assurance, so do watch this space!
16. Thank you for your time and have a great discussion ahead!
[1] https://www.greenbiz.com/article/secs-change-climate-climate-change-and-esg?
[2] Statement of Intent to Work Together Towards Comprehensive Corporate Reporting. https://bit.ly/2Flu0Fb?
