ESG Weekly Update – April 5, 2022

5 April 2022

UK: Mandatory TCFD Reporting to Take Effect This Week

Under the Financial Conduct Authority’s current Listing Rules, premium listed companies for financial years from January 1, 2021 are required to make disclosures in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations on a “comply or explain” basis. From April 6, this obligation will be extended to:
  • all UK companies that are currently required to produce a non-financial information statement, i.e., UK companies that have more than 500 employees and that (i) have transferable securities admitted to trading on a UK regulated market (such as the LSE's main market), (ii) are banking companies or (iii) are insurance companies;
  • UK registered companies that have 500 employees and securities admitted to the Alternative Investment Market (AIM);
  • UK companies that have more than 500 employees and a turnover of more than £500m; and
  • Limited Liability Partnerships (LLPs) that have more than 500 employees and a turnover of more than £500m.

The term “employees” in this context is not limited to UK employees. Where the company is a parent company, the threshold refers to the aggregate number of employees in the group.

Companies and LLPs within scope will be required to include disclosures on climate change-related risks and opportunities where these are material. The disclosures should cover how climate change is addressed in the organization’s corporate governance; how it impacts strategy; how climate-related risks and opportunities are managed; and the performance measures and targets applied in managing these issues.

In-scope companies are required to include these disclosures in their Non-Financial and Sustainability Information Statement in their Strategic Report. In-scope LLPs must include them in either the Energy and Carbon Report of their Directors’ Report or, if they prepare one, in their Strategic Report.

The Department for Business, Energy and Industrial Strategy (BEIS) has published guidance for businesses regarding their disclosures; a link to the BEIS guidance can be found below.

BEIS – Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs

Global: ISSB Opens Consultation on Climate-Related Disclosure Standards

On March 31, the International Sustainability Standards Board (ISSB) launched a consultation on its first two proposed standards on sustainability disclosures for the capital markets, which relate to (i) general sustainability-related disclosures and (ii) climate-related disclosures. The proposed standards for reporting entities include, but are not limited to, the following:

General sustainability-related disclosures:

  • Governance processes controls and procedures used to monitor sustainability-related risks and opportunities;
  • Strategy over the short, medium and long term on sustainability-related risks that could affect the entity’s business model;
  • Risk management; and
  • Metrics and targets used to assess entity performance.

Climate-related disclosures:

  • Governance disclosures, including the identity of a body or individual responsible for oversight of climate-related risks and opportunities;
  • Strategy disclosures, including significant climate-related risks and opportunities that the entity reasonably expects to affect its business model, strategy and cash flows;
  • Financial positions, performance and cash flows related to climate; and
  • Climate resilience.

The proposals build on TCFD recommendations and incorporate industry-based standards set out by the Sustainability Accounting Standards Board (SASB). When the ISSB issues the final requirements based on these drafts, they are intended to form a global baseline of sustainability standards to meet investor information needs. This continues a global trend of regulation and standard-setting supporting increased ESG disclosure.

The two proposals will be presented live during a webinar on April 28. Registration information will be announced on the International Financial Reporting Standards (IFRS) website. Comments on the proposals are due by July 29.

IFRS Announcement
Exposure Draft – IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
Exposure Draft – IFRS S2 Climate-Related Disclosures

U.S.: SEC Will Prioritize Greenwashing in 2022

One week after the Securities and Exchange Commission (SEC) announced a sweeping environmental disclosure rule proposal, the Commission released its 2022 Examination Priorities report, which highlighted ESG issues among its top examination priorities for the year. The Commission intends to focus on corporate “greenwashing,” a practice in which a company’s claims about its environmental practices and performance may exceed its actual performance. While this is not the first time the Commission has addressed ESG in its annual examinations report—the term first appeared in 2020—it is the first time ESG has received a standalone section in the report, providing yet another signal that the Commission will make scrutiny of and enforcement related to companies’ ESG disclosures an area of focus in the coming years.

Securities and Exchange Commission – 2022 Examination Priorities

Singapore: Monetary Authority and the CDP Sign a Memorandum of Understanding Related to ESG

The Monetary Authority of Singapore (MAS), the country’s central bank and financial regulator, and climate researcher and environmental disclosure platform the Carbon Disclosure Project (CDP), have signed a Memorandum of Understanding to promote sustainability disclosures and improve access to ESG data. The goal is to assist financial institutions and corporations to better measure and monitor their ESG performance and impact. The initiative is being conducted under the MAS’s Project Greenprint, launched last year to mobilize capital for green and sustainable finance by harnessing technology and data and to create a more transparent and efficient ESG environment.

Project Greenprint is an example of public institutions leveraging private sector infrastructure and expertise to obtain high-quality data to advance the goal of enhanced sustainability disclosures, thereby assisting asset owners and managers to improve their investment stewardship.

CDP Announcement
MAS Announcement

U.S.: FDIC Publishes Draft Statement of Principles for Climate-related Financial Risk Management

On March 30, the Federal Deposit Insurance Corporation (FDIC) published a draft statement of principles that will inform the creation of a framework for how large financial institutions should manage climate-related financial risks. The draft principles are aimed at financial institutions with more than US$100 billion in total consolidated assets. The principles are substantively similar to the Office of the Comptroller of the Currency’s “Principles for Climate-Related Financial Risk Management for Large Banks,” released on December 16, 2021, with only a few minor differences in the introduction and requests for comment.

The principles identified by the FDIC for its climate-related financial risks framework include:

  • Governance: A financial institution’s board and management should demonstrate an appropriate understanding of climate-related financial risk exposures and their impact on risk appetite to facilitate oversight and integrate responsibility and accountability within existing organizational structures or in new structures for climate-related financial risks.
  • Policies, procedures and limits: Policies, procedures and limits to provide detailed guidance on the institution’s approach to climate-related financial risks in line with the strategy and risk appetite set by the board.
  • Strategic planning: The board and management should consider material climate-related financial risk exposures when setting the institution’s overall business strategy, risk appetite and financial, capital and operational plans.
  • Risk management: Management should oversee the development and implementation of processes to identify, measure, monitor and control climate-related financial risk exposures within the institution’s existing risk management framework.
  • Data, risk measurement and reporting: Management should incorporate climate-related financial risk information into the institution’s internal reporting, monitoring and escalation processes to facilitate timely and sound decision-making across the institution.
  • Scenario analysis: Management should develop and implement climate-related scenario analysis frameworks in a manner commensurate to the institution’s size, complexity, business activity and risk profile.

The FDIC guidance suggests that large banks create climate “dashboards” that include exposure analysis to both physical and credit risks related to climate change, as well as other risk measurements such as exposure analysis, heat maps and scenario analysis.

The FDIC has requested that comments be submitted by June 3, 2022.

FDIC press release
Draft principles