By Austin Pierce
When Acting Chair of the Securities and Exchange Commission (“SEC”) Allisson Herren Lee issued a request for public input on climate change disclosures, she likely did not expect the bloc of wealthy democracies known as the G7 to respond. While the group did not, in fact, submit a formal comment in the SEC docket, they did recently convene and issue a joint commitment on climate change and other environmental matters. On June 5, 2021, the G7 published a communiqué endorsing mandatory disclosure regulations based on the Task Force on Climate-related Financial Disclosures framework (“TCFD”) and recognizing the need for movement on other areas such as natural capital and biodiversity. Once implemented, this would mark a significant hard law boost to an already influential climate disclosure framework and lend weight to as-of-yet crystallized guidance on natural capital and biodiversity considerations.
ESG Disclosures: The Current Board
ESG-related disclosure mandates have increased incrementally over the past decade. What started as linkages to existing standards (e.g., the SEC’s 2010 climate change disclosure guidance) or requirements on narrowly prescribed topics (e.g., the conflict minerals provisions of the Dodd-Frank Act) has grown steadily over the past decade to incorporate more robust requirements, such as the EU Non-Financial Reporting Directive and, more recently, the EU’s proposed Corporate Sustainability Reporting Directive. However, voluntary reporting in line with a variety of different frameworks has substantially shaped how many companies (particularly those in the United States) approach ESG disclosures.
As my colleagues and I have previously discussed, TCFD has enjoyed significant global success, garnering support and endorsement from a wide range of actors. Other prominent frameworks (such as CDP, SASB, and GRI)[1]have also received substantial support in the private sector. However, as more governments wade into the realm of regulating ESG (and especially climate) disclosures, there is an increasing risk of disrupting the ecosystem that has developed around TCFD and other voluntary disclosure frameworks.
TCFD has historically been welcomed by governments. For example, the EU’s supplemental guidance on climate disclosures under the Non-Financial Reporting Directive (“NFRD”) highlights integration of the TCFD requirements into the guidance. Similarly, both the United Kingdom and New Zealand have started a process of requiring at least certain companies to provide climate-related disclosures aligned with TCFD. In addition, though it has not passed, the Climate Risk Disclosure Act in the United States proposes using TCFD as a backstop for climate-related disclosures unless and until the SEC develops different requirements.
Nevertheless, the G7 commitment marks a significant step-up in the support for TCFD from government entities. It lends greater authority to what many have deemed the gold standard baseline for climate reporting and, if adopted into the G7’s national legal corpora, takes what has been influential soft law to binding hard law in some of the world’s preeminent global economies.
Implications
The G7 communiqué did not come with any fixed timeline, nor any binding compact between the parties. However, the topic of mandatory TCFD-aligned climate disclosure is also slated for discussion by the G20, and some entities have expressed the possibility of a consensus ahead of, or at, the COP26 climate negotiations in Glasgow this November.
Even if not formalized in a convention, current politics may favor such a disclosure mandate aligned with TCFD. As discussed above, the EU supplemental climate guidance for the NFRD already purports to integrate the TCFD recommendations, though the guidance is non-binding. However, the proposed Corporate Sustainability Reporting Directive provides an opportunity for the EU to more explicitly adopt TCFD via the standards to be promulgated by the European Financial Reporting Advisory Group. Additionally, I have noted how Japan has seen substantial support for the implementation of TCFD from both business and government. And, in the United States, the SEC’s request for input on climate change disclosures explicitly asked about “developing a single set of global standards” for climate disclosure. The G7’s announcement could serve as a launchpad for how to apply such an idea in SEC regulations by tying climate-related disclosure requirements to TCFD.
However, what may ultimate be an even more important development is what the G7 intimated on the Taskforce for Nature-Related Financial Disclosures and the OECD Policy Guide on Biodiversity. TCFD has already experienced relatively resounding success, even if incorporation is ongoing and iterative. Increasing public attention to the threat of climate change is likely responsible for that success. But climate is increasingly having to share the limelight with other environmental concerns, namely biodiversity and natural capital more broadly. The G7 communiqué directly referenced several important new initiatives on these topics: the Dasgupta Review on biodiversity; the OECD Policy Guide on biodiversity, natural capital, and the economy; and the upcoming Taskforce for Natural-related Financial Disclosures framework. While not directly incorporating these documents into the proposed mandatory disclosure framework, the G7’s choice to endorse them in the same announcement sends a clear message that biodiversity and natural capital are also receiving heightened attention.
What to Do
Companies should be considering whether their strategies and risk management systems are equipped to handle a broader range of environmental disclosures. While climate has been the clearest catalyst for action on sustainability, it is not the entire “E” in ESG. Actions like the recommendation of the G7 will help to accelerate the rising profile of other environmental topics of concern, such as biodiversity and natural capital, which will require the collection of more and different data, and the identification and management of another series of risks.
Many of the same steps that we have discussed to address climate-related risks can be adopted for other topics. Companies still need to start by collecting data, assessing their enterprise risk management function’s facility with identifying and assessing nonfinancial risk, and thinking through how data on biodiversity and natural capital intersects with their operations and risk profiles. Those that approach ESG in a holistic, integrated way will likely have an easier time incorporating these new “E”-risks into their considerations. However, doing so will still take time. Therefore, companies should take advantage of the signal from the G7, to start incorporating biodiversity and natural capital into their ESG considerations before investors or regulators subject them to the same level of scrutiny that companies are now experiencing with climate-related impacts.
The opinions expressed are those of the author and do not necessarily reflect the views of the firm or its clients. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
About the author:
Austin Pierce advises clients on all manner of issues regarding sustainability, ESG, and the impact economy. The first associate appointed to V&E’s ESG Taskforce, he regularly works with companies on disclosures (both required and voluntary), strategic projects, policy development and implementation, and the assessment and management of ESG risks and opportunities.
Austin’s approach to ESG includes an understanding not only of each of the “E,” “S,” and “G” pillars individually, but also how these pillars intersect and impact each other.
[1] For more information on CDP, see https://www.cdp.net/en. For more information on the Sustainability Accounting Standards Board (“SASB”), seehttps://www.sasb.org/. For more information on the Global Reporting Initiative (“GRI”), see https://www.globalreporting.org/.
