As we head into 2022, a spate of fourth-quarter announcements have given us a good window in terms of what to expect in the new year and beyond for climate metrics and reporting requirements.
Three points in particular are important to highlight for third party risk management:
- Newly updated Task Force on Climate-related Financial Disclosures (TCFD) standards now come complete with the standard’s first scope 3 greenhouse gas emissions language.
- Accelerating efforts to consolidate a still bewildering set of climate standards have been welcomed by the ESG community, but the rationalization process is not complete.
- Climate-focused regulations are emerging more rapidly and 2022 will see significant new reporting requirements in some jurisdictions.
Updates To TCFD Standards
The fourth quarter saw several climate-related announcements, and one of the more significant announcements was an update to the TCFD Guidance on Metrics, Targets, and Transition Plans. Materiality thresholds for Scope 1 and 2 disclosures were eliminated, and for the first time, the TCFD recommended that all firms incorporate Scope 3 emissions into their reporting routine. The updated guidance identifies categories of industry-agnostic metrics that are especially important for assessing the financial impact of climate change.
Corporate Value Chain (Scope 3) Accounting and Reporting Standard
The inclusion of Scope 3 language in updated TCFD guidance marks an important milestone in climate reporting and presents significant verification challenges – that’s one reason scope 3 emissions reporting has been delayed for years. Scope 3 reporting requires analysis of an entity’s complete value chain, including its supply chain, obviously important for third party risk management practitioners. (See page 7 of the Corporate Value Chain (Scope 3) Accounting and Reporting Standard for a diagram and deeper understanding of Greenhouse Gas Protocol scopes and emissions across the value chain.)
Implementing TCFD Guidance
In July 2021, finance ministers from all G-20 member states voted to adopt TCFD guidance, and there has been substantial progress moving toward implementation. In the UK, for example, effective April 6 2022, a wide range of companies will be required to publicly report climate-related financial data using TCFD metrics.[i]
In the United States the New York State Department of Financial Services (NYSDFS) has published new insurance climate guidance encouraging reporting metrics aligned with TCFD standards. In these and in all other TCFD aligned regimes, Scope 3 emissions will now be a consideration.
Aligning ESG Standards
A significant milestone in the quest to rationalize the wide array of standards competing for attention on the ESG stage was reached last quarter. On November 3rd, the International Financial Reporting Standards Foundation (IFRS) announced the formation of the International Sustainability Standards Board (ISSB), purposed with developing a new sustainability standard to meet the needs of investors.
The IFRS brings together The Climate Disclosure Standards Board (CDSB) and the Value Reporting Foundation (VRF) and in November its Technical Readiness Working Group published draft prototypes for Climate-related Disclosures.
These draft recommendations were developed with input from a wide range of organizations, including Climate Disclosure Standards Board (CDSB), the International Accounting Standards Board (IASB), Task Force on Climate-related Financial Disclosures (TCFD), Value Reporting Foundation (VRF) and the World Economic Forum (WEF).
The effort was supported by the International Organization of Securities Commissions (IOSCO) and its Technical Expert Group of securities regulators as well as the International Public Sector Accounting Standards Board (IPSASB). The Technical Readiness Working Group also liaised with the Global Reporting Initiative (GRI) and Carbon Disclosure Project CDP as part of its effort to cast a very wide input net.
Shared Assessments and ESG
2022 will see additional efforts to align climate (and other ESG) reporting requirements. We will stay close to the process through the new Shared Assessments ESG TPRM Strategies Group.
The group will hold its first meeting on Thursday, February 17 at 10 AM ET, and participation is open to members of Shared Assessments and non-members (non-members may participate for one year before joining the program).
All third party risk management practitioners are encouraged to join; simply send an email expressing interest to email@example.com.
[i] all UK companies that are currently required to produce a non-financial information statement, being UK companies that have more than 500 employees are banking companies and have either transferable securities admitted to trading on a UK regulated market (such as the LSE’s main market), or insurance companies, or UK companies which are not included in the categories above and have more than 500 employees.