Climate, nature and sustainability – Q3 2023 - Forvis Mazars

This article focuses on three of them: two with global coverage (the International Sustainability Standards Board’s first Sustainability Disclosure Standards and the Taskforce on Nature-related Financial Disclosures final recommendations); the third of significance to the many firms impacted by the SFDR where the European Commission has launched a consultation on the SFDR’s implementation.

Looking ahead, we are expecting further sustainable finance policy announcements shortly. In October the UK’s Transition Plan Taskforce is publishing its final recommendations for Transition Plans disclosures. In November we are expecting the FCA to publish their final rules on Sustainability Disclosure Requirements and Investment Labels. More on these in the following edition of the newsletter.

ISSB publishes first two Sustainability Disclosure Standards

The International Sustainability Standards Board (ISSB) has published its first two Sustainability Disclosure Standards – IFRS S1 on General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 on Climate-related Disclosures.

These Standards lay out a global baseline for sustainability disclosures with the aim of addressing the needs of investors and other users for high-quality and comparable sustainability information that is decision-useful.

The reporting structure of the ISSB’s Standards is aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). They therefore cover the following four reporting areas: Governance, Strategy, Management of risks and opportunities, Metrics and Targets.

UK plan for ISSB standards

The UK Government has been a strong supporter of the ISSB and in March 2023 set out its plans for adopting the ISSB’s Standards as part of its revised Green Finance Strategy. Since the publication of the IFRS Sustainability Disclosure Standards, the Government has begun to put in place a framework to assess the suitability of the two standards for endorsement in the UK. This includes a call for evidence on whether application of these standards will result in appropriate disclosures for investors. An endorsement decision is expected to take place by July 2024.

FCA announcement on application of ISSB Sustainability Disclosure Standards for listed companies

The FCA published a statement in August where they announced that they expect to consult in the first half of 2024 on proposals to implement disclosure rules referencing UK-endorsed IFRS S1 and IFRS S2 for listed companies. Assuming the Government’s endorsement process is completed in the timeframe envisaged (see prior paragraph), the FCA aims to finalise their policy position by the end of 2024, with a view to bringing new requirements into force for accounting periods beginning on or after 1 January 2025. The first reporting would begin in 2026.

Interoperability between the ISSB’s Sustainability Disclosure Standards and the EU’sEuropean Sustainability Reporting Standards

In January 2023, the EU’s Corporate Sustainability Reporting Directive (CSRD) entered into force. This was a landmark step forward for sustainability reporting within the EU. Reporting will be based on European Sustainability Reporting Standards (ESRS).

The ISSB and ESRS standards differ. The ISSB, the European Commission (EC) and the European Financial Reporting Advisory Group (EFRAG) – the EC’s technical advisor – are working to ensure, to the greatest extent possible, the interoperability of IFRS S1 and IFRS S2 with the ESRS as regards disclosures to be provided to address sustainability-related risks and opportunities. The ESRS also consider sustainability-related impacts, which the IFRS Sustainability Disclosure Standards don’t.

High on the agenda is to work together to produce interoperability guidance material that could assist firms (who will apply both sets of standards) to navigate between them and to understand where there are incremental disclosures required by only one set of standards. Equally important is putting in place mechanisms to enable successful implementation of each set of standards. With that in mind, the ISSB will be creating a Knowledge Hub containing among other things case studies and good practice guidance to assist firms in implementing the new Sustainability Standards. An access point will be established shortly by EFRAG so that stakeholders can put forward ESRS application questions.

What management should consider

The publication of the ISSB’s first Sustainability Disclosure Standards is an important step in developing a much-called for global framework for sustainability disclosure standards. This will provide investors with the ability to have comparable sustainability information.

The intended implementation of such standards across many jurisdictions will also make it more efficient for firms to prepare sustainability reporting at group and subsidiary level.

Beyond the initial application to listed firms, we expect the ISSB’s standards to become commonplace in the UK for listed and non-listed firms albeit with some proportionality applied (quite possibly in the form of later implementation dates as opposed to carving out certain requirements for smaller entities).

Taskforce on Nature-related Financial Disclosures – publication of final recommendations for nature-related financial disclosures

The Taskforce on Nature-related Financial Disclosures (TNFD) has published its final Recommendations for nature-related risk management and disclosure. A suite of additional guidance documents has also been released to help firms get started with integrating nature-related risks and opportunities into their business. This includes a specific guide for financial institutions.

The TNFD framework is a global, market-led initiative highlighting that nature is a core and strategic risk management issue alongside climate change. It is intended for use by financial institutions and corporate entities of all sizes and follows on from the work of the Task Force on Climate-related Financial Disclosures (TCFD) which covered disclosure of climate-related risks and opportunities.

The TNFD framework is voluntary. However, it’s worth noting that the TCFD also began as a voluntary framework and is now mandatory in the UK.

The TNFD framework can add value to financial institutions in several ways:

Business resilience: Recognising the nature-related ecosystem that firms you are lending to and investing in is critical to understanding the sustainability and continuity of their operations.
Reputation: There is growing public concern over the fragile state of our natural environment. Financial institutions are perceived to be avoiding their responsibilities when considering the nature-related impacts of their lending and investments risk damage to their own reputation.
Opportunities: Understanding the interactions that your investments have with nature can help to improve efficiency and unlock opportunities to lower operating costs and facilitate access to new markets.

What management should consider

Although the TNFD recommendations are voluntary, with the publication of the framework, nature-related disclosures are expected to rise rapidly in the firm’s ESG priorities. We anticipate that the ISSB is likely to include nature-related issues in its next work plan from 2024 onwards and it is foreseeable how the TNFD’s recommendations may be the cornerstone for a nature-related sustainability standard in due course.

We have published a guide to coincide with the TNFD publication. This assists firms with understanding what the TNFD recommendations require firms to do.

European Commission consultation on the implementation of the Sustainable Finance Disclosures Regime

In September, the European Commission launched two consultations on the review of the Sustainable Finance Disclosure Regulation (SFDR): a public consultation and a targeted consultation.

The SFDR started applying in March 2021 and requires financial market participants and financial advisers to disclose how they integrate sustainability risks and principal adverse impacts in their processes at both entity and product levels. It also introduces additional product disclosures for financial products making sustainability claims.

The Commission is interested in understanding how the SFDR has been implemented and any potential shortcomings including in its interaction with the other parts of the European framework for sustainable finance, and in exploring possible options to improve the framework.

The targeted consultation seeks feedback on:

Current requirements of the SFDR.
Interaction with other sustainable finance legislation.
Potential changes to the disclosure requirements for financial market participants.
Potential establishment of a categorisation system for financial products.

The consultations are in the form of an online questionnaire (available via the aforementioned links) which makes it easy to complete. The consultations close on 15 December 2023.

What management should consider

Firms are encouraged to respond to the consultation via the questionnaire.

Given the wide coverage of the consultation, including options to improve the framework (such as the possible introduction of sustainability product labels), it is not inconceivable that the outcome of the consultation may result in some notable changes to the SFDR.