This chapter presents recent climate‑related regulatory initiatives and proposals advanced by OECD, G20 and FSB members for their corporate governance frameworks, with a particular focus on corporate disclosure. It first summarises the status of agreements among international groupings and organisations such as the G20, G7, the Financial Stability Board and IOSCO. The chapter then describes in detail some of the more significant recent national initiatives to strengthen climate‑related disclosure, undertaken notably by many G20 and FSB members, a number of large OECD economies and by the European Union.
Climate Change and Corporate Governance
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3. Recent regulatory developments
Abstract
Recent regulatory initiatives and proposals by OECD, G20 and FSB members suggest both a growing focus on and emerging consensus around many aspects of ESG and climate change, notably with respect to disclosure. This section focuses particularly on disclosure, as it is the area where most regulatory adjustments have been made recently. This consensus is also reflected in recent reports and statements of international groupings and organisations.
In their July 2021 Communiqué, G20 Finance Ministers and Central Bank Governors pledged “to promote implementation of disclosure requirements or guidance, building on the FSB’s Task Force on Climate‑related Financial Disclosures (TCFD) framework, in line with domestic regulatory frameworks, to pave the way for future global co‑ordination efforts, taking into account jurisdictions’ circumstances, aimed at developing a baseline global reporting standard. To that aim, [the G20] welcome[s] the work programme of the International Financial Reporting Standards Foundation to develop a baseline global reporting standard under robust governance and public oversight, building upon the TCFD framework and the work of sustainability standard-setters, involving them and consulting with a wide range of stakeholders to foster global best practices”.
In their October 2021 Communiqué, G20 Finance Ministers and Central Bank Governors endorsed the G20 Sustainable Finance Roadmap prepared by the G20 Sustainable Finance Working Group (SFWG). The Roadmap, initially focused on climate, is a multi-year action-oriented document that is voluntary and flexible in nature (G20, 2021[80]). The SFWG roadmap includes 19 actions on sustainable finance to be undertaken by different international organisations. Focus areas include market development and approaches to align investments to sustainability goals; consistent, comparable, and decision-useful information on sustainability; and assessment and management of climate and other sustainability risks.
The statement of the G7 Leaders meeting of 11‑13 June 2021 states that “We support moving towards mandatory climate‑related financial disclosures that provide consistent and decision-useful information for market participants and that are based on the Task Force on Climate‑related Financial Disclosures (TCFD) framework, in line with domestic regulatory frameworks.” Likewise, the Financial Stability Board, comprised of G20 Members plus Hong Kong (China), the Netherlands, Singapore, Spain, Switzerland has also endorsed the TCFD framework as a basis for promoting such comparable standards globally.
The FSB’s report on Promoting Climate‑Related Disclosure reveals that regulation and guidance related to this issue is evolving extremely rapidly (FSB, 2021[81]). The report indicates that 14 out of its 25 members already have requirements or guidance in place for climate‑related disclosures.1 While not providing an overall tally of the number of jurisdictions that make such reporting mandatory versus voluntary, the report does further indicate that 21 of the 25 FSB members have either already established or plan to establish requirements or guidance on climate‑related disclosure for both publicly listed corporations and financial institutions. Twelve of the 21 jurisdictions with such existing or planned provisions also intend to apply them to non-listed corporations. Another three jurisdictions indicated they have plans to develop such standards for financial institutions only, while only one reported having no such plans for either group.
The International Organization of Securities Commissions (IOSCO) established a Sustainable Finance Task Force (STF) in April 2020 which issued a Report on Sustainability-related Issuer Disclosures (2021[58]) calling for strengthened sustainability reporting with an initial focus on climate‑related issues. Following a survey focusing on investors’ needs and the current status of corporate disclosures on sustainability, the Task Force concluded “that investor demand for sustainability-related information is currently not being properly met [..]. Accordingly, in February 2021, the IOSCO Board concluded that there is an urgent need to work towards improving the completeness, consistency, comparability, reliability and auditability of sustainability reporting – including greater emphasis on industry-specific quantitative metrics and standardisation of narrative information.”
The findings of the IOSCO report are intended to serve as input to the IFRS Foundation’s work to establish the International Sustainability Standards Board (ISSB) to develop a baseline global sustainability reporting standard. The report also strongly encourages the ISSB “to leverage the content of existing sustainability‑related reporting principles, frameworks and guidance, including the TCFD’s recommendations, as it develops investor-oriented standards focused on enterprise value, beginning with climate change.” Moreover, IOSCO encouraged a “building blocks” approach, meaning that a global sustainability standard should provide flexibility for complementary standards serving stakeholders and applying definitions of materiality that are broader than what is financially material. From a practical point of view, in March 2021 IOSCO established a Technical Experts Group under its STF to undertake an assessment of the technical recommendations to be developed by the ISSB (IOSCO, 2021[82]).
The following paragraphs describe some of the more significant national regulatory initiatives to strengthen climate‑related disclosure across OECD, G20 and FSB jurisdictions. Among these, a number of jurisdictions have so far focused on prioritising climate‑related reporting based on traditionally applied concepts of materiality, the approach followed by the TCFD.
In 2010, the US SEC provided an interpretive release for issuers as to how existing disclosure requirements apply to climate change matters (SEC, 2010[83]). This 2010 guidance noted that, depending on the circumstances, information about climate‑related risks and opportunities might be required in a company’s disclosures related to its description of business, legal proceedings, risk factors, and management’s discussion and analysis of financial condition and results of operations.
In June 2021, the SEC announced that the “disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk” would be in its annual regulatory agenda (US SEC, 2021[84]). In September 2021 SEC staff published a sample letter to companies regarding climate change disclosures in line with the abovementioned 2010 guidance, presenting comments companies may need to consider (US SEC, 2021[85]). For instance, those sample comments include the following: “disclose any material litigation risks related to climate change and explain the potential impact to the company”, and “to the extent material, discuss the indirect consequences of climate‑related regulation or business trends”.
In March 2022, the SEC proposed “rule changes that would require registrants to include certain climate‑related disclosures in their registration statements and periodic reports, including information about climate‑related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate‑related financial statement metrics in a note to their audited financial statements. The required information about climate‑related risks also would include disclosure of a registrant’s greenhouse gas emissions” (SEC, 2022[86]).
In Japan, the Financial Services Agency (JFSA) issued, in June 2021, a revised Corporate Governance Code to include requirements for companies listed in Japan’s Prime Market to disclose climate‑related information based on the TCFD recommendations on a “comply or explain” basis (FSB, 2021[81]). In particular, the amended Corporate Governance Code suggests that companies “should collect and analyse the necessary data on the impact of climate change‑related risks and earnings opportunities on their business activities and profits, and enhance the quality and quantity of disclosure based on the TCFD recommendations, which are an internationally well-established disclosure framework, or an equivalent framework.”
During the JFSA’s public consultation on the revision of the code, the agency explained that the IFRS Foundation is in the process of developing a unified disclosure framework for sustainability, while taking into account the TCFD recommendations, and that “it is expected that the framework will be equivalent to the TCFD recommendations.”
To promote implementation, the JFSA together with the Ministry of Economy, Trade and Industry, and the Ministry of the Environment have supported the foundation of the TCFD Foundation Consortium of Japan, which comprises 350 companies and has provided a platform to support and develop more detailed supplemental guidance to help companies comply with TCFD recommendations (TCFD, 2021, p. 25[15]).
Japan’s Stewardship Code, amended in 2020, explicitly instructs institutional investors to consider, in the context of constructive engagement with investees, the medium to long-term sustainability aspects, including ESG factors, according to their investment strategies. While neither the Corporate Governance Code nor the Stewardship Code specifically recommend the establishment of a board or management sustainability committee, Japan’s revised “Guidelines for Investor and Company Engagement” raise a series of questions for investor and company consideration that ask whether the company has a structure in place to review and promote sustainability‑related initiatives on an enterprise‑wide basis.
In the United Kingdom, all listed companies must report – since the enactment of the 2006 Companies Act – the annual quantity of Scopes 1 and 2 CO2 emissions, as well as an expression of the company’s total annual emissions in relation to a proxy of the size of its activities (i.e. the energy intensity). More recently, under the Green Finance Strategy, the United Kingdom established a TCFD Task Force which convened relevant government and regulatory institutions to develop a 2020 interim report and “A roadmap towards mandatory climate‑related disclosures”. The interim report describes a phased and multi-pronged approach to delivering TCFD-aligned disclosures by 2025. The roadmap sets out indicative measures to be taken by government and regulators and an indicative implementation path across multiple types of organisations, including for listed commercial companies and financial institutions.
In the case of listed companies, the UK Financial Conduct Authority (FCA) introduced a Listing Rule for premium listed companies in January 2021 referencing the TCFD recommendations and associated guidance.2 Premium listed companies that have not made fully consistent TCFD-aligned disclosures should explain why they have not done so and set out any steps they are taking or plan to take to be able to make such disclosures in the future, as well as the timeframe within which they expect to be able to make consistent disclosures. The FCA also initiated a consultation in June 2021 on extending this requirement to a wider scope of listed companies beginning on 1 January 2022 (FSB, 2021, p. 10[81]).
Additionally, the UK FCA – which has six remuneration codes covering different kinds of regulated financial services firms3 – recently wrote to the remuneration committee chairs of companies covered by these codes, stating that the FCA expects them to include ESG factors within directors’ remuneration. Likewise, the latest remuneration code enacted by the FCA4 explicitly states that firms should consider ESG factors when setting remuneration policies and practices (UK FCA, 2022[87]).
The UK’s Department for Business, Energy and Industrial Strategy (BEIS) has also undertaken a consultation, and the government announced in October 2021 that the UK’s largest traded companies, banks, insurers and private companies with over 500 employees and GBP 500 million in turnover will have to disclose climate‑related information in line with the TCFD recommendations from April 2022 onwards, which will include over 1 300 businesses (UK Department for Business, Energy and Industrial Strategy, 2021[88]).
The European Union is taking a broad approach both to ESG and climate change‑focused reporting. The Non-Financial Reporting Directive (NFRD),5 which took effect in 2018, includes non‑binding guidelines that reference the TCFD recommendations for climate‑related disclosures. The NFRD includes ESG disclosure requirements for large companies to publish information related not only to environmental matters, but also to social matters such as the treatment of employees.
An analysis of current NFRD implementation reviewing 1 000 European companies’ sustainability reports undertaken by the Alliance for Corporate Transparency found “a marked gap between what companies say about climate change and support for the TCFD, and their actual reporting practice” (2019[89]). The report concluded that most companies fail to report on targets on climate change, even in the energy sector where climate‑related reporting is farthest advanced, while the vast majority of companies fail to have specific risk mitigation strategies. Although the TCFD recommends that companies provide clear information and metrics on climate risks and how they are being addressed, the report found that overall, less than 32% of all companies reported on such a strategy, while only 23% addressed specific climate risks.
With this implementation gap in mind, the European Commission published in 2021 a proposal for a Corporate Sustainability Reporting Directive (CSRD) (European Commission, 2021[90]) that would further extend such requirements both in relation to climate as well as information on intangibles such as intellectual capital and human capital.
The EU April 2021 CSRD proposal, among other provisions, would:
extend the scope of disclosure requirements from certain large public interest companies to all large companies and all companies listed on regulated markets except micro‑enterprises6
require the assurance of reported information based on a “limited” rather than a more demanding “reasonable” assurance requirement (currently, there is no requirement for a third-party review)
include more detailed due diligence reporting requirements, taking into account internationally recognised principles and frameworks on responsible business conduct including the OECD Guidelines for Multinational Enterprises
introduce more detailed reporting requirements according to mandatory EU sustainability reporting standards to be developed by the European Financial Reporting Advisory Group (EFRAG) in the form of technical advice. These requirements would encompass the need to disclose not just the risks to companies but also the impacts of companies on society and the environment, i.e. the “double materiality” principle.
In April 2019, the European Parliament adopted an EU Regulation for Sustainability-related Disclosures in the Financial Services Sector which took effect in March 2021. The Regulation calls on financial institutions to disclose sustainability risks and impacts and encourages financial institutions to take into account impacts to both society and the environment. Specifically, the regulation introduces transparency rules for financial institutions on the integration of sustainability risks and impacts in their processes and financial products, including reporting on adherence to internationally recognised standards for due diligence.7
In February 2022, the European Commission published a proposal for a Directive on Corporate Sustainability Due Diligence (European Commission, 2022[91]), which aims at:
improving corporate governance practices to better integrate risk management and mitigation processes of human rights and environmental risks and impacts, including those stemming from value chains, into corporate strategies
avoiding fragmentation of due diligence requirements in the single market and create legal certainty for businesses and stakeholders as regards expected behaviour and liability
increasing corporate accountability for adverse impacts, and ensuring coherence for companies regarding obligations under existing and proposed EU initiatives on responsible business conduct
improving access to remedies for those affected by adverse human rights and environmental impacts of corporate behaviour.
France is another early adopter of ESG disclosure requirements on the social and environmental consequences of corporate activities, established under the Grenelle II Law enacted in 2010. These requirements were further strengthened and became more climate‑focused in 2015 with the enactment of the French Energy Transition Law,8 which imposed new requirements for listed companies to disclose their financial risks related to the effects of climate change and the measures adopted by the company to reduce them. The Energy Transition Law also established requirements for banks and credit institutions to disclose the results of stress tests that take into consideration climate‑related risks, and instituted new requirements for institutional investors to disclose information on how ESG criteria are considered in their investment decisions and how their policies align with the national strategy for energy and ecological transition. France’s 2017 law on the Duty of Vigilance places a due diligence duty on large French companies and requires them to publish an annual “vigilance plan”. Plans must outline measures related to both human rights and environmental risks and adverse impacts.9
The German Sustainability Code provides a voluntary sustainability reporting standard for any type of company, including the recommendation for companies to disclose their GHG emissions in accordance with the GHG Protocol and to communicate their goals to reduce GHG emissions (German Council for Sustainable Development, 2018, p. 47[92]). In Germany, companies in which the national Government has a majority holding, which have more than 500 employees and which achieve an annual turnover of over EUR 500 million must disclose a sustainability report in line with either the German Sustainability Code or a comparable framework for sustainability reporting.
Between October 2021 and February 2022, Canada’s national body representing provincial and territorial securities administrators held a public consultation proposing to put in place requirements to improve the consistency and comparability of information issuers disclose to investors for them to make investment decisions. The disclosure requirements contemplated are largely consistent with TCFD recommendations. In December 2021, the Canadian Prime Minister directed the ministers of Environment and Climate Change and of Finance to work with Canada’s provinces and territories to move toward mandatory climate‑related financial disclosures based on TCFD’s framework and to require federally regulated institutions, including financial institutions and pension funds, to issue climate‑related financial disclosures and net zero plans.
Australia’s national corporate governance code requires listed companies to report in an annual corporate governance statement on whether they have any material exposure to environmental and social risks under the code’s recommendation 7.4,10 which must be followed on a “comply or explain” basis. The Australian Council of Superannuation Investors (ACSI) and the Financial Services Council (FSC) also issued a more detailed ESG Reporting Guide for Australian Companies in 2015.
In People’s Republic of China (hereafter ‘China’), the China Securities Regulatory Commission (CSRC) issued new rules in June 2021 amending environmental and social disclosure requirements for listed companies. Annual and semi‑annual reports will now need to consolidate environmental and social information under Section 5: Environmental and Social Responsibility. These will include mandatory disclosure for certain “key polluting companies” on pollutant emissions, while other non-key companies will follow a “comply or explain” regime for such disclosures.11 Companies will also be encouraged to voluntarily disclose relevant information related to other environmental measures, including the reduction of carbon emissions. Other voluntary provisions relate to company efforts in fulfilling their social responsibility including, but not limited to, the protection of the rights and interests of employees, suppliers, customers and consumers, poverty alleviation and rural revitalisation.
In Hong Kong (China), the various financial and supervisory authorities have established a target to develop TCFD-aligned disclosure standards across all relevant sectors by 2025. The Hong Kong Exchanges and Clearing Limited (HKEX) has already issued new ESG reporting requirements effective from July 2020 which incorporate certain elements of the TCFD recommendations, while “encouraging” issuers to adopt the TCFD recommendations more fully (FSB, 2021[81]).
In India, the Securities and Exchange Board (SEBI) issued a circular in May 2021 implementing new sustainability-related reporting requirements for the top 1 000 listed companies by market capitalisation (SEBI, 2021[93]). New disclosure will be made in the format of the Business Responsibility and Sustainability Report (BRSR), which builds upon SEBI’s existing Business Responsibility Report and is intended to bring sustainability reporting up to existing financial reporting standards.12 Disclosure will be voluntary in FY 2021‑22 and mandatory for the first time in FY 2022‑23.
The BRSR format is based on the nine principles of the Indian Government’s “National Guidelines on Responsible Business Conduct” (Government of India, 2018[94]), and sets out metrics under each principle, divided into mandatory essential indicators, and leadership indicators, which operate on a voluntary basis. In addition to an overall directive to provide an overview of the company’s material ESG risks and opportunities and approach to mitigate or adapt to the risks, together with relevant financial implications, the circular sets out five types of more specific indicators that companies should report on in connection with the principle to respect and make efforts to protect and restore the environment. These include:
Resource usage (energy and water) and intensity metrics
Air pollutant emissions
Greenhouse gas emissions (Scope 1, Scope 2 and Scope 3)
Waste generated and waste management practices
Impact on bio-diversity
The Singapore Exchange (SGX) has introduced a mandatory sustainability disclosure regime beginning from FY 2022, which covers climate‑related risks among other ESG issues. The climate‑related reporting rules mandated by the SGX requires issuers to follow a “phased approach” in accordance with the industries identified by TCFD as most affected by climate change and the transition to a lower-carbon economy. In 2022 all issuers are required to adopt the reporting rules on a “comply or explain” basis; in 2023 it will be mandatory for issuers in the (i) financial, (ii) agriculture, food and forest products, and (iii) energy industries; and in 2024 for issuers in the (i) materials and buildings, and (ii) transportation industries.
In Indonesia, the Financial Services Authority (OJK), as part of efforts to create a financial system that applies sustainable principles, introduced a rule in 2017 that requires financial services providers, issuers and public companies to implement sustainable finance in their business activities. In this context, sustainable finance is defined by OJK Rule 51 as comprehensive support from financial services sector to create sustainable economic growth by harmonising economic, social and environmental interests. Effective implementation date of the Rule differs by size and business classification of the entities (the earliest in 2019 for commercial banks and the latest by 2025 for pension funds). The Rule calls for the earliest possible implementation by issuers and publicly listed companies (OJK, 2021[95]).
In September 2021, the Central Bank of Brazil announced mandatory disclosure aligned with the TCFD recommendations for financial institutions (BCB, 2021[96]). In a first phase, the rule will require the disclosure of qualitative aspects related to governance, strategy and risk management, and, in a second phase, quantitative information will also be required. In December 2021, the Securities and Exchange Commission of Brazil (CVM) amended its main rule governing issuers’ disclosure, adding new requirements to increase transparency of ESG-related issues. The rule follows mostly a “comply or explain” approach with emphasis on climate‑related requirements, but it also introduces disclosure requirements related to other ESG aspects, such as workforce and board diversity. Disclosures will become mandatory from January 2023 onwards and apply to 2022 annual filings.
In Chile, the Financial Market Commission issued in November 2021 regulation that integrates sustainability and corporate governance issues into the annual report of issuers of publicly traded securities, banks, insurance companies, general fund managers and financial market infrastructures (CMF, 2021[97]). The regulation requires the disclosure of policies and indicators on some ESG factors, including climate change, based on international standards such as Integrated Reporting, GRI and TCFD. In addition, the regulation requires that issuers of publicly traded securities, banks and insurance companies report industry-specific material metrics in accordance with the SASB standards. The regulation will come into force gradually depending on the type of entity and its size in terms of consolidated assets, starting with the 2022 annual report up to 2024.
Notes
← 1. The 14 jurisdictions are Australia, the European Union, France, Germany, Hong Kong (China), Indonesia, India, Italy, Japan, the Netherlands, Singapore, Spain, Turkey and the United Kingdom.
← 2. See FCA (2020) Proposals to enhance climate-related disclosures by listed issuers and clarification of existing disclosure obligations.
← 4. The remuneration code for MIFIDPRU investment firms.
← 5. Directive 2014/95/EU.
← 6. The requirements would cover nearly 50 000 companies, defined as companies that meet two of the following three criteria: 1) a balance sheet of more than EUR 20 million; 2) turnover of more than EUR 40 million; 3) more than 250 employees.
← 7. European Parliament and Council of the European Union (2019), Regulation of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector, https://data.consilium.europa.eu/doc/document/ST-7571-2019-ADD-1/en/pdf.
← 9. France, Duty of Vigilance Law, https://www.legifrance.gouv.fr/eli/loi/2017/3/27/2017-399/jo/texte.