Over the recent months we have seen a veritable explosion of ESG disclosure regimes across the globe. The general regulatory trend at the moment is towards increased transparency and making the disclosure of climate and other sustainability issues mandatory.

Each of these disclosure regimes comes with its own set of detailed rules and confusing acronyms – known as the ESG “alphabet soup”. We know it’s not easy keeping track of what’s what and what happens next with each regime.

This blog post provides a short summary of some of the key corporate disclosure regimes for climate and other sustainability issues – at the global level (i.e. TCFD and ISSB), and in the EU (i.e. CSRD), UK (i.e. SDR) and US (mercifully with no acronym, at least not yet).

It does not cover other types of ESG disclosures such as the reporting requirements in the EU Taxonomy Regulation and EU Sustainable Finance Disclosure Regulation (SFDR), biodiversity disclosures under the Taskforce for Nature-related Financial Disclosures (TNFD) or diversity & inclusion disclosures, but for more on those regimes see our Sustainable Futures blog.

But before we go back to basics on the key regimes, it is worth bearing in mind that the “name of the game” behind all these regimes is the same: to provide investors and other stakeholders with data that is clear, reliable, relevant and comparable. These disclosure regimes are not intended to be a tick-box compliance exercise or a mechanism for virtue signalling or “woke capitalism”. The main driver behind these disclosure requirements is to enable investors to re-allocate capital to the net zero transition and to economic activities that are more sustainable in the wider sense of the word (not just those with a lower carbon footprint). They also enable businesses to better guard themselves against allegations of greenwashing. 

TCFD – Task Force on Climate-related Financial Disclosures 

  • The TCFD was set up by the Financial Stability Board and Mark Carney in 2015 to help investors globally understand their financial exposure to climate risks and opportunities.
  • This lead to the development of a global disclosure framework for climate risks and opportunities to provide investor-useful climate data that is clear, reliable and comparable.
  • The disclosure framework is set out in the TCFD Recommendations and detailed guidance.
  • TCFD disclosures are based on four pillars: governance, strategy, risk management, metrics & targets.
  • Although the TCFD framework is voluntary, it has rapidly become the global gold standard for climate disclosures and some countries are in the process of making TCFD disclosures mandatory (e.g. UK, Canada, and New Zealand).

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ISSB – International Sustainability Standards Board 

  • The ISSB was launched by the International Financial Reporting Standards (IFRS) Foundation in November 2021 to develop a “comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs”.
  • IFRS hopes to do for sustainability reporting what it did for financial reporting with the IFRS Accounting Standards.
  • The Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC) and the Climate Disclosure Standards Board (CDSB) have since been amalgamated into the ISSB - thus reducing the ESG “alphabet soup” a bit.
  • The ISSB disclosure standards will not be limited to just climate – they will cover a wide range of sustainability issues – although the ISSB is developing the climate standard first.
  • The ISSB consulted on two draft disclosure standards: the Draft General Requirements for Disclosure of Sustainability-related Financial Information Standard (which will apply to all sustainability disclosures not just climate) and the Draft Climate-related Disclosures Standard. 
  • The consultation closed on 29 July 2022 and the ISSB is expected to finalise the two standards by the end of 2022. The ISSB will consult in 2022 on which other sustainability disclosure standards it should develop next.
  • The ISSB standards, once finalised, will be voluntary. So it will be up to different jurisdictions to decide whether and how to incorporate them into national law. A number of countries (e.g. UK, Canada, China and Singapore) have already said they plan to incorporate the ISSB standards into national law and make them mandatory.
  • The International Organization of Securities Commission (IOSCO) will decide either later in 2022 or early 2023 whether to endorse the ISSB standards. If they endorse the standards, this would send an important signal to market regulators across the globe that they should seriously consider adopting the ISSB standards in their own jurisdictions.
  • As the target audience for the ISSB standards is investors (rather than a wider range of stakeholders), the ISSB is suggesting that materiality should be based on “enterprise value” – i.e. how climate and other sustainability issues impact the value of the company – as opposed to “double materiality” which includes the impact a company has on the climate and wider society. So what the ISSB standard is intended to elicit is information that (if omitted, misstated or obscured) could reasonably be expected to influence investment decisions.
  • The “enterprise value” vs “double materiality” point (amongst other issues) has been the subject of much debate amongst those who responded to the ISSB consultation. So query whether the ISSB will change its position on that when it issues its final standards at the end of 2022.
  • A number of respondents to the ISSB consultation have also expressed concern over how the ISSB global standards will operate with other climate/sustainability disclosure regimes at the national level, in particular the EU, US and UK regimes. So “interoperability” of all these disclosure regimes is high on clients’ agendas.
  • The draft ISSB climate standard is generally aligned with the TCFD recommendations but is more prescriptive. In some places, there is divergence from the TCFD’s guidance – for example, the TCFD recommends disclosure on scope 1 and 2 emissions, and scope 3 (if appropriate) but the ISSB standards require disclosure of scope 1, 2 and 3 emissions. The ISSB standards also incorporates the SASB industry-specific disclosure standards.

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EU CSRD – Corporate Sustainability Reporting Directive 

  • The EU is in the process of adopting the CSRD – which will extend the scope of the current Non-Financial Reporting Directive (NFRD) to all EU large companies (listed or not) and all EU listed companies, as well as non-European companies generating a net turnover of EUR 150 million in the EU and which have at least one (large or listed) subsidiary or branch with over EUR 40m turnover in the EU, and listed SMEs.
  • At present, the NFRD requires “large public interest entities” to report on a wide range of environmental, social and governance issues relevant to their business. But it does not mandate which reporting standards they need to use when they report that information.
  • The CSRD will require in-scope organisations to report on the information using a set of mandatory disclosure standards that are being developed by the European Financial Reporting Advisory Group (EFRAG) on behalf of the European Commission.
  • EFRAG is currently consulting on the first set of draft sustainability reporting standards, which include cross-cutting standards and topic standards covering specific sustainability topics including climate (but from a sector agnostic perspective).
  • The consultation closes on 8 August 2022 and EFRAG needs to submit the final drafts of the first set of standards to the Commission by November 2022. The Commission will then need to adopt the final standards via delegated acts.
  • EFRAG will also develop a second set of draft disclosure standards that will cover sector-specific standards, as well as sustainability reporting standards aimed at SMEs - but those are not yet available for consultation.
  • The CSRD will apply to in-scope organisations in four stages (for financial years starting on or after):
    • 1 January 2024 - for large public interest entities already subject to the NFRD;
    • 1 January 2025 - for organisations that are not presently subject to the NFRD but which fall within the CSRD’s enlarged scope;
    • 1 January 2026 - for listed SMEs, small and non-complex credit institutions and captive insurance undertakings; and
    • 1 January 2028 - for non-EU companies.
  • The EU Council and Parliament have agreed the final wording of the CSRD but the text now needs to go through a legal-linguist review and be translated into all the official EU languages. It will then be formally adopted by the European Parliament and Council, and published in the Official Journal of the EU. The Directive will enter into force 20 days after its publication in the OJEU and Member States will then have 18 months within which to transpose the CSRD into their national laws.
  • As the target audience for the CSRD disclosures is a wider group of stakeholders than just investors, the EU has opted for the concept of “double materiality” – as opposed to the ISSB’s “enterprise value” materiality test.
  • The pillars of the draft EFRAG climate disclosure standard are aligned with the TCFD recommendations. However, the EFRAG standards go further in providing more guidance on required reporting and requiring a more granular level of detail in reports. The full set of EFRAG standards also apply to a wide range of sustainability topics (whilst the TCFD recommendations only concern climate change).

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UK SDR – Sustainability Disclosure Requirements 

  • TCFD reporting is already mandatory (on a “comply or explain” basis) for premium and standard listed companies in the UK under recent changes made by the FCA to the Listing Rules. In addition, large UK private companies and LLPs will also need to make climate-related disclosures in their annual reports for financial years starting on or after 6 April 2022.
  • The UK government is planning to introduce a new integrated regime for the disclosure of climate and other sustainability issues for UK companies and the financial sector, called the Sustainability Disclosure Requirements (SDR). The plan was outlined in the government’s Greening Finance Roadmap in October 2021.
  • Under the SDR, listed companies and certain financial sector firms will also be required to publish climate transition plans (likely from 2023), as well as report alignment with a UK green taxonomy (which is yet to be developed).
  • The UK government has said it plans to adopt the ISSB sustainability standards into UK law as part of the SDR regime in due course. So the plan is to replace the existing requirements for TCFD-aligned climate disclosures with disclosure in line with the ISSB sustainability standards (including the ISSB climate standard) in due course.
  • The UK government launched the Transition Plan Taskforce (TPT) to develop a “gold standard” for climate transition plans in the UK to help companies and the financial sector produce science-based climate transition plans that are credible, robust and “investable”. The TPT will develop a sector-neutral framework, as well as sector-specific templates and guidance for private sector transition plans.
  • The TPT launched an initial call for evidence on the underlying principles of climate transition plans in May 2022. That consultation closed on 13 July and a draft of the sector-neutral framework will be published for consultation (hopefully around October/November 2022) so that it can finalised in early 2023.
  • However, it is not yet clear how the government will introduce the SDR and whether it needs new primary legislation (i.e. an Act of Parliament) to do this. There was some speculation as to whether the SDR would be included in the Financial Services and Markets Bill but there is no reference to the SDR in the Bill.

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US – SEC climate disclosure proposal 

  • The US Securities and Exchange Commission (SEC) consulted on its climate disclosure proposal in March 2022.
  • The consultation closed on 17 June 2022 and the SEC is expected to publish the finalised rules before the end of 2022. However, it is difficult to predict for certain at this stage what form the final rules will take, particularly in light of threatened legal action.
  • The proposed new rules would require public companies (i.e. US listed companies or companies seeking a US listing) to make climate-related disclosures, as early as the fiscal year 2023 for certain issuers.
  • The proposal would require in-scope filers to obtain an independent attestation report covering, as a minimum, Scope 1 and 2 greenhouse gas emissions disclosure.
  • The proposal would also require accelerated and large accelerated filers to disclose Scope 3 emissions but only if these are material or if the registrant has set a greenhouse gas emissions target or goal that includes Scope 3 emissions, with a proposed liability safe harbor clause for these disclosures.
  • The disclosures in the SEC’s proposal are broadly aligned with the TCFD recommendations. 

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Now what?

To find out more about different aspects of these regimes, see the Linklaters ESG Summer School on Disclosures.

ESG “ALPHABEST SOUP” - JARGON BUSTER  

CDSB

Climate Disclosure Standards Board

 

CSRD

Corporate Sustainability Reporting Directive

 

EFRAG 

European Financial Reporting Advisory Group

 

IFRS

 

International Financial Reporting Standards

IIRC 

 

International Integrated Reporting Council

IOSCO 

 

International Organization of Securities Commission

 

ISSB 

 

International Sustainability Standards Board

NFRD 

 

Non-Financial Reporting Directive

TCFD 

 

Task Force on Climate-related Financial Disclosures


TNFD 

 

Taskforce on Nature-related Financial Disclosures

SASB 

 

Sustainability Accounting Standards Board

SDR

 

Sustainability Disclosure Requirements