A step forward on sustainability- and climate-related disclosure standards

• The ISSB has released draft sustainability- and climate-related disclosure guidelines that will provide a global ‘baseline’ for future requirements
• Industry-specific requirements largely follow SASB, although the financial sector has seen expectations rise for its financed and facilitated emissions reporting, which is reflected in the draft standard going beyond the SASB standard last updated in 2018
• Improving disclosures, particularly relating to financial institution financed emissions, need to be concise and contextualized, and be able to scale up collection and assurance of the data.

Newly released draft standards from the International Sustainability Standards Board (ISSB) for sustainability and climate disclosures aim to provide a global baseline for sustainability reporting. The drafts show the complexity of the task at hand, but also highlight how far responsible finance has developed in a very short period of time, particularly in what is expected of banks, insurers and asset managers.

One element of the disclosures — relating to financial institutions’ financed and facilitated emissions — is entirely new and wasn’t included in the relevant SASB industry standards that were adopted nearly wholesale as a reference point for the ISSB standards. However, taking the SASB standard for commercial banks, its most recently updated version from 2018 includes no reference to emissions at all.

By contrast, the Basis for Conclusions on the Climate-related Disclosures includes an extensive discussion about the increased accessibility of data and agreement around methodologies for evaluating financed and facilitated emissions. These methods are based on underlying guidance from the GHG Protocol under Scope 3 emissions (Category 15: Investments), which itself was released more than a decade ago.

However, during the past 2–3 years, climate-related financial risks have become increasingly accepted as material for individual financial institutions as well as relevant for financial stability. This has coincided with a variety of industry efforts to identify how banks and regulators should track financed emissions risk, including by the Network for Greening the Financial System (NGFS) and recent draft principles for management and supervision of climate-related financial risks released by the Basel Committee on Banking Supervision.

There have been efforts from the Partnership for Climate Accounting Financials to improve processes on the methodology side, and central banks are increasingly translating all of these concepts into practice through stress testing. These stress testing exercises have advanced acceptance of the recommendations of the Task Force on Climate-related Financial Disclosures in guiding mandatory disclosure requirements, which has been incorporated into the ISSB’s standards as well.

Discussions have followed about how the results could impact Pillar 2 supervisory reviews and through these reviews possibly impact capital levels, which were outside of consensus thinking until recent years. Although progress on the use of sustainability- and climate-related risk disclosures has advanced significantly, data are still much less accessible and comparable than would be needed for financial institutions to build full bottoms-up assessments of their Scope 3 emissions. As noted in a recent survey of practices by Asian banks, even those that report Scopes 1, 2 and 3 aren’t reporting as comprehensively as envisaged by the new standards, in that their reported Scope 3 emissions don’t include financed emissions.

The ISSB sustainability standard goes a long way towards bridging the gap from a framework perspective by requiring companies to report Scope 1 and Scope 2 emissions (and, with some gaps, Scope 3 emissions), which are the primary inputs in the GHG protocol for different types of Scope 3 financed / facilitated emissions by financial services institutions.

However, financial institutions — like all companies — are provided the option of whether to disclose Scope 3 emissions relating to their value chain. As a ‘baseline’ standard, it provides two options relating to Scope 3 value chain emissions, allowing either reporting of these emissions with the basis for measurement, or exclusion of Scope 3 value chain emissions with explanation for omitting them “for example, because it is unable to obtain a faithful measure”.

One of the most challenging implementation elements of the sustainability- and climate-related risk data process will be to provide suitable incentive for companies to report good quality, assured data that is put in the right context. One of the core principles behind the draft standards is providing concise disclosures that “include only material information [and where any] immaterial information included [is] provided in a way that avoids obscuring material information”.

In current ESG data frameworks, many ESG elements are measured in a binary way by the presence or absence of a particular quality. This creates an incentive against concise and contextualized data, while the current approach to data collection and assurance is challenging to scale up. When it comes to financed and facilitated emissions data collection for financial institutions to report their own Scope 3 emissions, it will be exceptionally challenging to scale up current systems without increasing reliance on technology.

The importance of technology for the future of climate-related disclosures was one of the motivations behind the RFI Foundation developing the Net Zero Challenge with HSBC Middle East. Financial institutions working to collect their Scope 3 data will need three things from their customers:

(1) collection and reporting of Scope 1 and Scope 2 emissions;

(2) a way to account for different assumptions built into the data collection; and

(3) assurance about the accuracy of the disclosed data.

Some of these data will be important to have for risk management relating to those customers, while other data will inform the financial institution’s ability to track connections between direct emissions of some customers that are also indirect emissions for other customers. This will help improve the efficacy of their efforts to influence customers’ behavior and address their overall financed emissions risks, as the RFI Foundation has explored in our financed emissions risk reports.

The issuance of exposure drafts by the ISSB is a big step towards improving sustainability- and climate-related reporting. For financial institutions, the picture is complicated by their reliance on customers’ data for a significant share of their overall sustainability- and climate-related risks. The framework of the ISSB standards — as a global baseline — represents a step in the right direction, but will need financial institutions to view the process as more than just ‘compliance’ with regulators’ requirements.

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