Increased alignment will improve quality of sustainability reporting, says IOSCO Chair.
Governments must introduce policies which provide comprehensive guidance to help investors and companies across all sectors transition in line with their net zero targets, according to Satoshi Ikeda, Chief Sustainable Finance Officer for Japan’s Financial Services Agency (FSA).
Speaking yesterday at the UN-convened Principles for Responsible Investment’s (PRI) 2021 Digital Conference, Ikeda said that such guidance will play “a fundamentally important part in mobilising capital flows towards sustainability-related solutions”.
“What is really needed from governments is forward-looking and tangible guidance that helps institutional investors and other financial institutions make educated and sustainability-focused decisions,” Ikeda added.
Although several G7 countries have updated their nationally determined contributions to the Paris Agreement and announced ambitious interim targets on the way to achieving carbon neutrality by 2050, most have struggled to implement the necessary underlying policy frameworks.
In the US, President Joe Biden is facing delays to his US$1 billion bipartisan Infrastructure Bill, with House speaker Nancy Pelosi setting a new voting deadline of 31 October. The delay is in response to disagreements over Biden’s additional US$3.5 trillion budget overhaul plan, which would significantly increase spending on action against climate change.
The UK government has faced criticism from a number of quarters for insufficient details and delays in announcing key planks of its net-zero plans, notably on the transition of domestic heating away from gas. However, it is expected to make key announcements this week.
The Japanese government has published guidance on climate transition finance, and is further developing roadmaps for transitioning to net-zero greenhouse gas (GHG) emissions for hard-to-abate sectors such as steel, chemicals and cement using science-based information.
These roadmaps will identify the low- or zero-carbon technologies that can be adopted by companies within these sectors, as well as the specified timeframes of such adoption in order to achieve net-zero, Ikeda said.
“The FSA is eagerly pushing for these measures as they will enable more dynamic investing in low-carbon and zero-carbon technologies,” Ikeda added.
Earlier this month, the FSA also announced its plans to introduce mandatory Task Force on Climate-related Financial Disclosure-aligned (TCFD) reporting for large companies from April 2022. From 2023, disclosure requirements will be expanded to cover all companies that submit annual securities reports.
The agency has already introduced climate disclosures into Japan’s corporate governance code on a ‘comply or explain’ basis, although the code itself is not legally binding.
As they prepare to meet in Glasgow for COP26 to outline their climate-related ambitions and align their goals, governments were told to increase their efforts to implement domestic policies to accelerate climate-related investment by almost 600 institutional investors, under the aegis of the Investor Agenda.
While acknowledging the importance of also developing green taxonomies that will categorise sustainable activities for companies and investors, Ikeda warned too much focus on their granularity could serve as a “red herring”, distracting from practical action.
Europe’s current debate on whether or not to include natural gas and nuclear energy in its green taxonomy has led to delays to its first delegated act, with consequences for its broader timetable of sustainable finance legislation.
Interoperability and comparability
Greater leadership and coordination from policymakers is also needed to facilitate the investment decisions needed to drive the transition to a low-carbon economy, other speakers at the PRI event noted.
Existing sustainability reporting frameworks and standards will be more useful to investors if there is increased alignment between countries on corporate disclosures as they introduce climate-related policies, said Ashley Alder, Chair of the Board for the International Organisation of Securities Commissions (IOSCO).
“Reporting standards are inconsistent, with a number of different standards being put forward by a number of different standard-setters,” he said. “We need interoperability and comparability on a global level, otherwise investors will not have the decision-useful information they need.”
Europe is leading the way on implementing climate and sustainability reporting, but its timeline is subject to change. The UK has mandated Task Force on Climate-related Financial Disclosure-aligned (TCFD) reporting by 2025 and already plans to toughen requirements under its new Sustainability Disclosures Requirements. The US is set to announce its finalised climate-related reporting framework for publicly-listed companies later this month.
There are also differences in approach between voluntary frameworks. The Global Reporting Initiative (GRI) asks for disclosures in line with a double materiality lens, meaning that companies must report both the impact the environment and social factors have on the business as well as how the business is having an impact on the environmental and wider society. In comparison, companies reporting to the Sustainability Accounting Standards Board (SASB) are asked to disclose how climate-related risks impact enterprise value.
Collaboration between policymakers and standards-setters will be key going forward, Alder said.
Alignment is expected to improve following the planned launch of the International Sustainable Standards Board (ISSB) at COP26. Monitored and enforced under the new board, the new global climate reporting standard being developed by the International Financial Reporting Standards (IFRS) Foundation will provide a baseline of standardised reporting standards for both voluntary frameworks and different jurisdictions to adopt.
“We need transparency and comparability as we transition to a low-carbon world. As a result, the international investment community wants to see that alignment is at the foundation of national policy reforms,” said Nathan Fabian, the PRI’s Chief Responsible Investment Officer. Fabian is also Chair of the EU’s Platform on Sustainable Finance, which is advising the European Commission on its Taxonomy Regulation, taxonomy extensions and social taxonomy.