Climate Risk Disclosure Rules May See a 'Soft Launch': ISSB and SEC Adjust Rule Timelines

For months, chief financial officers in the United States and abroad have faced the prospect of comprehensive and costly climate risk disclosure rules from regulators. Recently, the timing and details of these standards have become clearer—while climate risk disclosure requirements may take effect soon, the final versions are likely to be more moderate than the initial proposals.

The International Sustainability Standards Board (ISSB) said on February 16 that it plans to publish guidance on sustainability and climate risk reporting by June.Global guidelinesAfter an "urgent" recommendation from its staff, the ISSB also set the effective date for January 1, 2024. The board is supported by developed and developing economies in the Group of Twenty (G20), and its sister organization is the accounting standard-setting body recognized by 167 regulatory jurisdictions worldwide.

Meanwhile, the U.S. Securities and Exchange Commission (SEC) recently said it plans to issue final rules by May requiring public companies to report greenhouse gas emissions and climate change risks. The SEC's proposal has drawn opposition from companies, lawmakers, state officials, and other stakeholders. Critics said in more than 14,000 comment letters that advancing the rule would overstep the agency's authority, impose burdensome compliance costs on companies, and require disclosure of information that is not material to investor decisions.

"In my 15 years of practice, this is the most attention I have seen an SEC rule receive politically, in the press, or in commentary," said Darryl Smith, a partner at law firm Eversheds Sutherland.

According to lawyers focused on regulation and sustainability, the SEC may soften its proposal in response to criticism. The ISSB has provided a model for easing compliance burdens by allowing companies to build up their climate risk reporting gradually.

The ISSB last week approved a "package of relief measures" for companies during the initial months of implementation, according to ISSB Vice Chair Sue Lloyd, as discussed on apodcastFor example, companies would be exempted for one year from the requirement to report in detail on so-called Scope 3 greenhouse gas emissions from suppliers and vendors in their supply chains.

Additionally, Lloyd said on the February 16 podcast that the ISSB's guidance for measuring all categories of a company's greenhouse gas emissions—including direct emissions and those from energy suppliers—would initially allow the use of estimation methods, gradually transitioning to greater precision.

"We have developed a measurement framework that allows companies to use estimates and technology, enabling people to have a slightly 'softer' start—a dangerous word for me—but indeed a more moderate starting point for measurement," Lloyd said. "Over time, we expect people's approaches to become more sophisticated."

Smith said in an interview that even if the SEC follows the ISSB's phased implementation approach, U.S. companies will still need to prepare for disclosing more detailed climate risk information.

"Regardless of the details of the final rule, you will see an increase in climate disclosure in SEC reports," Smith said. "There is already a very robust framework for materiality, and many investors have made clear that they view climate-related risk disclosure as material information."

Goal setting

According to the SEC's490-page proposalit aims to require companies to describe in their Form 10-K their strategies for addressing climate risks, including any goals set to mitigate such risks and plans to achieve them.

Companies would need to disclose their greenhouse gas emissions data, including emissions from their own facilities (Scope 1) or from energy purchases (Scope 2), and obtain independent assurance on these figures.

According tolawyers focused on regulation and sustainabilityto avoid litigation, the SEC is considering phasing in Scope 3 reporting requirements. They said the agency may also raise the threshold for when companies must report climate-related costs in line items of their audited financial statements. Under the proposal, companies would need to report any climate-related cost that constitutes 1% or more of a line item.

"These are the two most controversial aspects of the proposal and the two most burdensome for companies," Smith said. "They have been targets from the start."

C-suite executives and sustainability experts say that clear and widely accepted disclosure standards would help eliminate the confusion caused by dozens of conflicting sustainability measurement and rating frameworks, thereby clearing obstacles to more detailed climate risk reporting.

"There are measurement and rating challenges, but at the same time I feel this is often used as an excuse for inaction," said Marjella Lecourt-Alma, CEO and co-founder of Datamaran, in an interview. "This is unavoidable—so you just have to do it."

United Nations Secretary-General António Guterres said last month (January) in Davos, Switzerland, that the lack of clarity in climate risk measurement and regulation has allowed some companies to "greenwash," exaggerating their progress toward net-zero carbon emission goals.

"More and more companies are making net-zero commitments, but the benchmarks and standards are often questionable or vague," he said. "This can mislead consumers, investors, and regulators with false narratives, and foster a culture of climate misinformation and confusion, opening the door to greenwashing."

Easing the burden

Certain industries find it easier than others to measure progress in reducing greenhouse gas emissions.

"In the real estate sector, it's fairly straightforward," said Étienne Cadestin, founder and CEO of ESG consulting firm Longevity Partners. "You have a building; it's basically a box," whose embodied carbon from construction and greenhouse gases from operations and occupant movement can be measured. "So, in terms of defining net-zero carbon for the real estate industry, it's very clear."

Many commercial real estate companies rely on the Global Real Estate Sustainability Benchmark (GRESB) to measure progress on carbon reduction and other ESG factors.

"In my industry, having no ESG strategy today is tantamount to suicide," Cadestin said in an interview, noting that investors often shun properties lacking emission reduction plans. "If you reduce carbon emissions, you improve air quality and lower health costs," he said. "It's a win-win."

Smith said electric utility companies, which have provided detailed reports to regulators for years, will also find it easier than companies in many other industries to comply with disclosure requirements. "Environmental and climate disclosure has been a top priority in the utility sector for more than 15 years."

The financial industry faces a much greater challenge, he noted, as investment banks need to measure the carbon emissions of companies across their entire portfolios. "Collecting and providing accurate and verifiable information at such scale—that will be a huge challenge," he said. "The information you can get currently is limited and must include many assumptions, which reduces its value, accuracy, and actionability."

A daunting task

At first glance, Anheuser-Busch InBev, the world's largest brewer, selling 630 beer brands in 150 countries, seems to face a daunting challenge in measuring carbon emissions. However, the company's short list of production ingredients—water, hops, yeast, barley, and other grains—and its reliance on local farmers and small suppliers in 150 countries have prompted it to pursue sustainability relatively early.

"In the nearly 20 years I've been with the company, we've been doing sustainability even before we knew what sustainability was," said Chief Financial Officer Fernando Tennenbaum in an interview. "From the start, it was clear to us that we needed to use these resources efficiently, ensuring they are available not just for our use that year, but for the next 100 years."

Anheuser-Busch InBev has committed to sourcing all of its purchased electricity from renewable sources by 2025 and plans to achieve net-zero carbon emissions across its entire value chain by 2040.

Tennenbaum said these goals require close collaboration with suppliers and vendors. Farmers need adequate financing and access to technology; owners of mom-and-pop shops can reduce costs by upgrading to energy-efficient refrigeration equipment.

"We are a global company, but our business is very local," he said. "So from the start, it was clear that if communities don't thrive, we don't thrive."

Anheuser-Busch InBev, headquartered in Leuven, Belgium, uses at least five different frameworks to measure sustainability. "There are several standards, and everyone is trying to find the one that appropriately captures their business," Tennenbaum said. When measuring sustainability, the company asks: "How do we do this without creating a huge bureaucracy where the focus is not on sustainability but on writing reports?"

Datamaran's Lecourt-Alma said CFOs can avoid administrative bloat, reduce costs, and uncover new profit opportunities by ensuring their sustainability approach complements their business strategy. Datamaran is a software analytics provider focused on environmental, social, and governance (ESG) metrics.

"The first step companies need to take is to treat ESG as a governance and strategic priority," she said. "Focus on areas where you can have the greatest impact, then assign responsibility at the highest levels of the company."

Integrating business strategy with reporting on climate risk and other sustainability aspects requires proficiency in using a common measurement framework, ISSB Chair Emmanuel Faber said in apodcaststatement

"ISSB board members generally recognize that we are developing a new language," he said. "If we don't start gaining experience using this language, we cannot learn it together."

"We know that preparers, users, regulators, or ourselves will not use this language correctly from day one," Faber said. "But the only way we can ever use it correctly is to start early."