Regulators should do more to incentivise climate disclosure reporting

The ongoing movement towards reducing greenhouse gas (GHG) emissions has fuelled a wave of global climate change disclosure regulations.

Across the European Union, the  Corporate Sustainability Reporting Directive (CSRD) aims to strengthen rules governing corporates’ reporting of  social and environmental information so that stakeholders can better assess risks from climate change.

The new European Sustainability Reporting Standards (ESRS) are expected to apply to corporates as of the 2024 financial year and companies will also have to conduct an audit of the sustainability information they report.

In the UK, the Task Force on Climate-related Financial Disclosures (TCFD) was set up to improve and increase disclosure of climate-related financial information in existing reporting processes for the largest companies. It came into effect for premium-listed companies in January 2021 and for standard-listed companies in January 2022.

Meanwhile, the US Securities and Exchange Commission’s (SEC’s) climate-related disclosure proposal  should be finalised later this year. The potential mandate of Scope 3 disclosures includes reporting of external suppliers’ carbon emissions.

However, despite regulators’ ambitions to improve transparency through mandatory reporting, there are ongoing concerns over greenwashing.

Recent research by the Columbia Centre for Sustainable Investment highlighted that some oil supermajors are selling off upstream fossil fuel assets, instead of retiring them, to support their claims of progress towards net zero.

It also revealed that it is not unusual for the assets’ buyers to be governed by less rigorous reporting requirements, making public scrutiny of emissions difficult. The research warned of significant gaps in new EU, UK and US disclosure requirements.

Investor demand transparency

Andromeda Wood, vice president of regulatory strategy at Workiva believes that most companies across all sectors are already either working to a “climate first” agenda or see it as a key part of their strategy because of demands by their stakeholders – particularly investors.

“This type of information is already broadly disclosed by companies on a voluntary basis, alongside climate change risks and opportunities,” she says, pointing out that, despite these efforts more details are needed.

“The regulatory disclosure requirements will help to provide investors with greater specificity they need and also enable better comparisons of companies against their peers; they will also provide assurance.”

Wood anticipates that any concerns over blind spots in regulatory disclosures, such as the transfer of climate-polluting fossil fuel assets to less efficient operators, will be addressed by regulators who will monitor the situation and look to plug any gaps in the future.

Investors too will have an interest and a big say in developments going forward. “They will have their eye on this type of activity if it is happening and this will be priced in by the market – it may affect the provision of sustainable finance to them,” she says.

“The use of detailed data on sustainability and providing greater transparency in good, verified reports plays an important role in access to sustainable finance. In this way, the whole system becomes more reliable.”

Wood adds that the sale of fossil fuel assets is “only one part of a bigger picture” when it comes to climate risk and GHG emissions reporting.

“There is a lot of regulatory activity in the markets, and we will continue to see this for some time,” she says, noting that new and further regulatory disclosure requirements will continue to be drawn up and introduced to help meet the ambitious GHG emissions targets set at country level.

“The targets are driving the regulators to call for more detailed disclosure – but stakeholders too, particularly investors, need this information too. Businesses too also need it to address stakeholder – investor and customer – needs. For many of them, regulators are not the first to ask for it.”

According to recent research by Standard Chartered, over 50% of mid and large-sized companies globally are actively seeking to reduce resource consumption and emissions and  30% have set themselves targets to improve the sustainability of their operations.

The report revealed that 46% were willing to prioritise positive environmental and social impacts over financial returns.

“They see tangible business and financial benefits from their sustainability efforts, including brand building, consumer alignment, and improved operational efficiency. In addition, an important use of sustainability and the Environmental, Social, and Governance (ESG) framework alignment is the ability to attract and retain investment and bank financing,” says the report.

Taking an industry lead

At transport and logistics company Kuehne+Nagel, CFO Markus Blanka-Graff also points out that it is important for companies to be proactive – and take major steps themselves – to reduce carbon emissions.

They should devise the strategies needed to achieve this, but regulators and governments also have a big role to play.

“As a logistics company, we have an elevated responsibility to avoid and reduce our footprint,” he says pointing out that the logistics industry is, by its very, nature a major originator of emissions.

“When we talk about companies’ CO² footprints, regulators should limit their involvement to reporting requirements and setting targets, – and not try to affect how quickly and deeply companies do conform. They should leave it to us how we get there,” he continues.

“However, regulators could have a bigger role to play in properly incentivising companies and customers to embark on this journey.”

He believes that both regulators and governments, which have been supportive of oil companies, do have a responsibility to deal with those companies whose practices fall short when it comes to reducing CO2 emissions.

However, Blanka-Graff also notes the market will “take care” of those companies that are not proactive enough in reducing emissions. “If they leave it too late – they will disappear. They must have a strategy going forward. Their investors and customers will expect this,” he says.

Blanka-Graff adds that regulators could also do more to help companies in their regulatory reporting by introducing greater standardisation into reporting requirements.

“As a global company, we face massive reporting requirements in areas like this, which are both financial and non-financial,” he says, pointing out that individual country governments are also setting their own requirements in relation to sustainability. “What is needed is global standards.”

He adds that as the CFO of Kuehne+Nagel, he plays a key role in the initiatives taken by the organisation’s head office to reduce the group’s carbon emissions, which involves, working with the board, to set its CO² emissions targets and strategy and then monitoring execution.

He adds that Kuehne+Nagel, which became a first mover in this space, wants to move faster in this space than other companies “to achieve a competitive advantage which will result in greater financial success.”

Workiva’s Wood also recognises that many CFOs are involved in driving forward their companies’ climate risk and GHG emissions strategy and points out that they are well placed to manage the disclosure and reporting process too.

“This is because they have the reporting skills, the know-how to work with data and are versed in the use of reporting platforms. CFOs are working on strategies to collect the disclosure data needed for use by internal teams (internal reporting) as well as to provide external transparency,” she says.

Comments are closed.