Climate AI Writer Sample
Climate Reporting Frameworks and Regional Approaches - Europe, USA
1. Climate Reporting Frameworks and Standards
- The TCFD framework
The Task Force on Climate-related Financial Disclosures (TCFD), developed under the Financial Stability Board (FSB), stands as a major milestone in the evolution of climate reporting frameworks and standards. Established in response to investors identifying climate change as a significant risk to business and investment viability, the TCFD was designed to provide clarity for stakeholders, including investors, lenders, and insurance underwriters, on how companies are exposed to climate risks and opportunities. The framework, released in 2017, emphasizes financial materiality and provides 11 recommendations across four thematic areas: governance, strategy, risk management, and metrics and targets. Its influence has grown considerably, with over 4,000 companies endorsing its recommendations by 2023, which has led to an industry-wide adoption rate surpassing 40% in certain sectors. Adoption has been driven by investor demand and the framework's design to be industry-agnostic, which facilitates its implementation across diverse jurisdictions and sectors.
Improvements to the TCFD framework have been leveraged by various regulatory bodies and have informed the creation of other standards, notably the International Sustainability Standards Board's (ISSB) inaugural climate and sustainability disclosure standards, released in June 2023. These standards are intended to become the global baseline, incorporating the TCFD's recommendations, and are endorsed by the International Organization of Securities Commissions, representing the majority of the world's securities markets. In parallel, the European Union's Corporate Sustainability Reporting Directive (CSRD) and the US Securities and Exchange Commission's proposed climate disclosure rule echo the TCFD's pillars, aiming to standardise and improve transparency in capital markets. Furthermore, existing frameworks like CDP, SASB, and GRI showcase varying degrees of alignment with TCFD, underscoring its central role in guiding current and prospective climate reporting practices. Despite progress, challenges remain in enhancing the quality and extent of disclosures, and in aligning climate-related reporting across different frameworks to improve comparability and reliability of data for stakeholders.
The TCFD has now been disbanded. "Concurrent with the release of its 2023 status report on October 12, 2023, the TCFD has fulfilled its remit and disbanded. The FSB has asked the IFRS Foundation to take over the monitoring of the progress of companies' climate-related disclosures." - International Sustainability Standards Board (ISSB)
The International Sustainability Standards Board (ISSB) aims to set a global benchmark for climate and sustainability disclosure standards, fostering transparency and comparability in environmental reporting. As an extension of the IFRS Foundation, ISSB's inaugural climate disclosure standard leverages the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, demanding detailed disclosure from entities on how they address and plan to tackle climate-related risks and opportunities. This encompasses the disclosure of climate-related targets and strategies, including transition plans that provide details on emissions targets and the use of carbon credits to meet net-zero goals. The ISSB standards facilitate industry-specific insights by requiring references to industry-based metrics, thus tailoring disclosures to various economic activities and business models. Moreover, these standards enhance the connection between financial and sustainability information, pushing organizations to assess the financial implications of biodiversity loss and ecosystem dependencies not currently reflected in financial statements. They adopt a dynamic materiality approach that allows for the evolving inclusion of issues like biodiversity as they become increasingly pertinent over time.
The ISSB also incorporates frameworks from other standard-setting bodies to broaden sustainability reporting. This includes the Climate Disclosure Standards Board (CDSB) application guidance for biodiversity and the Value Reporting Foundation's (VRF) SASB Industry Standards, which address biodiversity-related concerns such as ecological impacts and pollution management. With these standards, ISSB aims to bridge the gap between financial reporting and sustainability disclosure, leading to more informed decision-making by capital providers and stakeholders. The ISSB's approach is supplemented by initiatives that standardize disclosure practices, such as the SBTi framework for financial institutions focusing on investment and lending activities, and the ISSB's climate-related proposals that require detailed reporting on entities' climate-related targets and transition plans, aligning with the SBTi's asset class-specific approach.
- Other major reporting frameworks - SASB, GRI, PRI
The Sustainability Accounting Standards Board (SASB), the Global Reporting Initiative (GRI), and the Principles for Responsible Investment (PRI) serve as key frameworks guiding companies in sustainability reporting and investor decision-making processes. These frameworks are evolving to incorporate broader environmental, social, and governance (ESG) concerns, including the increasingly critical area of biodiversity.
The Sustainability Accounting Standards Board (SASB), which is part of the Value Reporting Foundation (VRF), plays a crucial role in establishing sustainability standards that span across 77 industries, addressing ecological impacts, pollution through air quality, wastewater, and waste management among others. SASB's standards, along with those from other leading organizations, contribute to the global convergence towards comprehensive sustainability reporting. The SASB standards, alongside other frameworks, are increasingly being aligned and consolidated under the ISSB to streamline global sustainability disclosures. The ISSB exposure draft requires detailed disclosures about climate-related risks and opportunities, strategies, decision-making processes, as well as quantitative and qualitative information on progress against targets. This aligns with TCFD's recommendations and is further supported by the ISSB's recognition of industry-specific nuances, suggesting that entities consider industry-based metrics associated with their business models when developing transition plans. This emphasis on specific and granular information is set to improve the relevance and utility of sustainability data for investors and stakeholders, aiding them in scenario analysis and evaluation of potential future transition risks. This progress towards a singular, coherent global ESG disclosure standard dovetails with the overarching goal of achieving sustainable finance that genuinely integrates environmental considerations into financial decision-making processes.
The Principles for Responsible Investment (PRI), with the endorsement of more than 3,500 signatories and the backing of both the UNEP Finance Initiative and the UN Global Compact, launched a stewardship initiative focused on mitigating biodiversity loss, starting with actions against forest loss and land degradation. The initiative urges companies to disclose nature-related risks, manage their supply chains sustainably, and transparently engage in political advocacy that aligns with biodiversity conservation. Signatories can participate as "participants" who are directly involved with engagement activities, or as "endorsers," supporting the objectives without active engagement. PRI's initiative aligns with the Taskforce on Nature-related Disclosures (TNFD) and the Science-Based Targets initiative (SBTi), pushing for science-based targets and disclosures. It also collaborates with Nature Action 100, aiming to harmonize investor expectations regarding corporate disclosures and operations concerning nature conservation.
The Global Reporting Initiative (GRI) stands as a prominent framework within the landscape of sustainability reporting, providing standards for organizations to measure and communicate their environmental, social, and corporate governance (ESG) performance. The GRI facilitates more comprehensive sustainability disclosures, which the International Sustainability Standards Board (ISSB) is expected to build upon with a global baseline of reporting standards that include environmental impacts. These efforts are central to enhancing market transparency and aiding investors in making informed decisions that align with long-term value creation and ESG considerations. - Science Based Targets initiative (SBTi) framework
The Science Based Targets initiative (SBTi) framework is a comprehensive set of guidelines and criteria designed for organizations aiming to set science-based emissions reduction targets. These targets are aligned with the level of decarbonization required to keep global temperature increase well below 2°C compared to pre-industrial temperatures, with a more ambitious 1.5°C threshold. The SBTi framework specifies that near-term targets should span 5-10 years from the date of submission and include a minimum of 95% coverage of scopes 1 and 2 emissions, with varying requirements for scope 3 depending on its proportion of total emissions. For long-term and net-zero targets, the SBTi stipulates a 2050 or sooner timeframe and sets out minimum ambitions such as a 90% reduction in emissions for the cross-sector pathway. Methodologies for achieving these targets range from absolute reduction to sector-specific intensity convergence, renewable electricity commitments, supplier, or customer engagement, and others that meet the initiative's rigorous criteria.
The adoption of the SBTi framework by companies involves a systematic approach to engaging supply chains in the decarbonization journey. It includes tracking scope 1, 2, and 3 emissions, setting and reporting targets, and implementing emissions reduction measures. Performance tracking and managing supplier engagement are key features of the framework, with mechanisms such as supplier scorecards, incentives, and penalties designed to drive action and accountability. Additionally, the SBTi recommends that companies verify the validity of their projected targets annually and notify the initiative of any significant changes, ensuring transparency and ongoing alignment with the latest climate science time.
2. Regional Climate Reporting Approaches
- Europe
In Europe, climate reporting for companies is increasingly being standardized and regulated, with the European Union (EU) adopting new sustainability reporting standards. As per the rules set by the EU's Corporate Sustainability Reporting Directive, companies are required to provide detailed information on a range of environmental, social, and governance issues. These standards have been put in place to give investors and consumers a comprehensive view of a company's sustainability impact, with a focus on aspects such as climate change, biodiversity, and human rights. Large companies will begin reporting in their annual reports starting in the financial year 2024, with the first reports due in 2025, while smaller companies have an additional two years to comply. The European Commission has worked to align these standards with international frameworks to prevent duplicative reporting. However, the latitude given to companies to determine the materiality of information and the voluntary nature of certain reporting aspects has led to concerns about potential greenwashing.
Furthermore, all listed companies in the EU will be required to disclose their environmental impact and how climate change affects their operations, following new rules adopted by the European Commission. This move underscores a trend across Europe where companies are increasingly held accountable for their climate and environmental footprint. Despite the progress in standardization, industries such as sustainable transport fuels, green steel, cement, mining and metals, and the food and beverage sector still face a lack of international standards or insufficiently ambitious standards that adequately define and encourage sustainable practices. This has led to calls for more cohesive and science-based metrics that align with trade policies and incentivize the adoption of low-emission technologies and practices
- USA
Despite emissions falling since their peak in 2007, the U.S. has not achieved international targets to prevent disastrous climate outcomes. The administration under President Joe Biden has responded with over $5 billion in funding directed at upgrading the electric grid, enhancing disaster resilience, and combating environmental injustice, reinforcing the president's commitment to a net-zero economy by 2050. The push for climate-related financial disclosures is also driven by influential investors and businesses such as Blackrock and CalSTRS, and companies including CitiGroup, JetBlue, and PepsiCo, which have expressed official support for the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. Blackrock, in particular, has made climate risk disclosures a key engagement priority. Despite this support, the risk of climate litigation in the U.S. is notable, with an increase in cases pertaining to the content of financial reports. This has led to a dual effect: while encouraging some companies to provide more adequate climate-related information, it has also driven others to limit disclosure to reduce the risk of misrepresentation and potential litigation
In line with the Paris Agreement commitments, each US state is refining its approach to setting near-term and long-term emissions reduction targets, as part of the Inflation Reduction Act's Climate Pollution Reduction Grants (CPRG) program. States are encouraged to adopt actionable, ambitious, and achievable (AAA) targets that consider their unique emissions profiles and the varied potential for emissions reductions. For example, while some states like Vermont have already transitioned away from fossil fuels significantly, others such as West Virginia have a more substantial challenge due to their reliance on coal. The approach underscores the necessity for a tailored strategy that accounts for sector-specific decarbonization rates, thereby ensuring that targets are not only set but are also a true reflection of the action required at the state level
In California, the adoption of the Climate Corporate Data Accountability Act, also known as SB 253, marks a significant advancement in climate reporting regulations for companies. Signed into law by Governor Gavin Newsom on October 7, 2023, this pioneering climate legislation mandates that all companies operating within the state with an annual revenue exceeding $1 billion must comprehensively report their greenhouse gas (GHG) emissions. The law encompasses not only Scope 1 (direct emissions from owned or controlled sources) and Scope 2 (indirect emissions from the generation of purchased energy) but, starting from 2027, also extends to Scope 3 emissions, which include all other indirect emissions in a company's value chain, such as those from transportation, business travel, and waste disposal. This requirement aligns with the Greenhouse Gas Protocol standards, including both the Corporate Accounting and Reporting Standard and the Corporate Value Chain (Scope 3) Accounting and Reporting Standard. The regulations for implementing this law are to be established by the California Air Resources Board (CARB) by the end of 2024, with the reporting program slated to commence in 2026. The emissions disclosures will be subject to independent verification, evolving from a "limited assurance" to a "reasonable assurance" level by 2030, offering a phased approach to ensuring the accuracy of reporting.
Reflecting the legislative trend in California, the state lawmakers have also recently passed legislation requiring businesses to disclose both direct and indirect greenhouse gas emissions. These regulations are considered the most sweeping mandate of its kind in the nation. Public and private businesses that operate in California and earn more than $1 billion annually will need to report their emissions, including those from indirect activities such as employee business travel. The aim of these requirements is to elevate transparency and encourage companies to assess and reduce their carbon footprint. This legislation builds upon the already robust mandatory reporting of direct emissions by large polluters under the state's cap and trade program, which is one of the largest in the world. While some corporations and industry groups have expressed concerns about the feasibility of accurately accounting for all mandated emissions, proponents argue that it is a necessary step towards climate accountability and action
- South Africa
South Africa stands out as a developing country that is pioneering in climate change and sustainability reporting. The Johannesburg Stock Exchange (JSE) requires compliance with the non-legislated King Code on Corporate Governance, which integrates environmental and sustainability information into annual financial reports and encourages reporting based on international frameworks like GRI, IIRC, and ISO standards. The implementation of the King Code has significantly increased both the quantity and quality of ESG (Environmental, Social, and Governance) disclosures among South African companies, with some businesses outperforming even those in developed countries like Norway and Finland in terms of climate-related risks and opportunities coverage. This case study exemplifies the potential impact stock exchanges can have in enforcing climate reporting and underscores the importance of coordinated efforts between regulatory bodies and financial markets in advancing corporate transparency on climate-related issues.
- Rocky Mountain Institute: No More One-Size-Fits-All Approach to State Climate Targets
- The Guardian: The science is irrefutable: US warming faster than global average, says report
- World Economic Forum: Delivering a Climate Trade Agenda: Industry Insights
- Power Technology: EU adopts sustainability reporting standards to encourage sustainable finance
- Carbon Pulse: Listed companies to face new EU climate disclosure reporting rules from next year
- Carbon Pulse: Over half of leading corporates on climate action headquartered in Europe, report finds
- Shakti Foundation: Understanding the Bottlenecks in the Adoption of TCFD Recommendations by Indian Corporates
- Power Mag; California Climate Bill Targets Business, Utility Emissions
- California lawmakers approve the nation's most sweeping emissions disclosure rules for big business
3. Network for Central Banks and Supervisors for Greening the Financial System (NGFS)
The Network for Central Banks and Supervisors for Greening the Financial System (NGFS) was established in December 2017 by central banks and supervisors with the intention to enhance the role of the finance sector in managing environmental risks and to mobilize mainstream finance to support the transition toward a sustainable economy. As of November 24th 2023, the NGFS consists of 129 members and 21 observers. The coalition is committed to consensus-based collaboration, sharing best practices, and contributing to the development of climate-related and environmental risk management within the financial sector. Its non-binding recommendations aim to inspire measures that foster a greener financial system, and in November 2021, the NGFS published the NGFS Glasgow Declaration, an affirmation of their commitment beyond voluntary engagement.
The NGFS also addresses the financial risks associated with biodiversity loss and the stability of the financial system. Given that the protection of biodiversity has significant impacts on the global economy and the financial sector, central banks and financial supervisors have a direct interest in the outcomes of environmental talks, such as those in Kunming. As part of their supervisory role, they can integrate considerations of biodiversity and environmental risks into their assessment of financial stability and work in partnership with various stakeholders, including law enforcement and conservation experts, to support biodiversity-positive investments and policy coordination that aligns with their mandates.