How ISSB Prototypes Impact SEC Climate Disclosure Rules
The new International Sustainability Standards Board (ISSB) promises to shift the global landscape of environmental, social, and governance (ESG) reporting, perhaps even for public companies in the United States.
When the International Financial Reporting Standards Foundation announced the ISSB’s creation during COP26, the 2021 United Nations Climate Change Conference, it also released prototype climate and general sustainability disclosure requirements. While U.S. regulators have been notoriously reluctant to adopt global reporting standards, elements of the prototype requirements could appear on the U.S. Securities Exchange Commission’s climate disclosure proposal, originally expected to land in October. This is especially true if the commission intends to achieve Chair Gary Gensler’s stated goal of “consistent and comparable” climate disclosures.
The SEC’s October timeline likely was set before it became clear the ISSB’s formation, including prototype disclosure requirements, would be announced in November. But now that we’re here, the model requirements for climate-related and general sustainability disclosures align with what the Workiva team thought might show up in a proposed SEC climate disclosure rule.
A closer look at the prototype
For one thing, the climate-related disclosure prototype incorporates recommendations by the Task Force on Climate-related Financial Disclosures (TCFD), and its industry-specific disclosure requirements were derived from Sustainability Accounting Standards Board (SASB) standards—both used by a growing number of organizations.
At a high level, the draft standard requires disclosures that give consumers of a company’s financial reports information about:
- How the company monitors and manages climate-related risks and opportunities
- Climate-related risks and opportunities that could change the business model over time, as well as how those risks and opportunities affect financial performance and the resiliency of the corporate strategy
- Climate risk management
- Metrics and target for measuring performance
Clearly, the board is looking for both quantitative and qualitative disclosures to meet investors’ needs, something the Value Reporting Foundation expected might happen.
Metrics and targets
Let’s dig a little deeper into the proposed metrics and targets in the prototype. I’m paraphrasing, but the draft standard directs companies to disclose:
- Industry-specific metrics
- Management’s targets for mitigating or adapting to climate risks and opportunities
- Key performance indicators (KPIs) for measuring progress on management’s targets
But they’d also have to disclose metrics that would apply to companies across all industries, including:
- Scope 1, 2, and 3 greenhouse gas emissions, so direct emissions from controlled entities, indirect emissions from generation of the energy a company purchases, and emissions from the value chain
- How much of a company’s assets or business activities are vulnerable to transition risks (or the risks that come from adapting to efforts to curb climate change) and physical risks
- The proportion of revenue, assets, or other business activities aligned with climate-related opportunities
- Capital deployed toward climate-related risks and opportunities
- The internal price used for greenhouse gas emissions and how a company applies the carbon price in running the business
- How much of executives’ total compensation is affected by climate-related considerations
If the SEC adopts these requirements, it will certainly consider the costs of compliance. If the past is a guide, and as Chair Gensler indicated to U.S. lawmakers, the SEC may take a phased approach to mandates and perhaps scale the requirements to the size of a business.
No matter what the SEC decides, companies can start thinking about how to formalize processes for ESG data collection, ESG data management, reporting, and auditing ESG data. This is especially true when you consider the required timing for annual 10-K filings (February or March for calendar-year filers) as compared to typical timing for voluntary ESG disclosures (often in Q2). I can already hear sustainability teams asking their SEC reporting teams in exasperation, “You need this data by January?!?”
To that end, and especially if they haven’t started already, organizations should urgently consider:
- Who should own the ESG reporting process within your organization?
- Who should own ESG data? Should it be the subject matter experts of each ESG pillar? Should it be a core ESG team?
- Should ESG and SEC reporting teams use the same reporting platform to better connect data for consistency across disclosures?
- How can you use ESG data collection software or reporting technology to quickly scale without burning out your ESG team?
There’s much more to come in the world of ESG standards. I’m sure we’ll have a few things to say. Subscribe to the Workiva blog for updates, straight to your inbox.