The momentum toward universal mandatory reporting and disclosure on climate risk and sustainability has gained additional strength with recent developments at the international, domestic and state levels. These steps follow years of calls from investors for standardized and comparable climate-related disclosures.
International. In June, the G7 Finance Ministers and Central Bank Governors issued a statement calling for mandatory climate-related financial disclosures based on the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”) framework. The G7 also indicated support for the efforts of the International Financial Reporting Standards (“IFRS”) Foundation to develop baseline global sustainability reporting standards that draw on the TCFD framework and to establish an International Sustainability Standards Board (“ISSB”) in connection with COP26 later this year, with the first set of ISSB standards due in mid-2022.
In addition, the G7 endorsed the establishment of the Taskforce on Nature-related Financial Disclosures (“TNFD”), which seeks to build upon the TCFD framework to reach other nature-related risks, including plastics in the oceanic food chain and loss of soil fertility, with a view to releasing a disclosure framework by 2023. Emissions-related disclosures will likely become more important for compliance with cross-border trade regulations. EU leaders have proposed various iterations of carbon pricing, including a Carbon Border Adjustment Mechanism that would tax goods imported into the EU based on the greenhouse gasses emitted in their production. Congressional Democrats have included a conceptually similar “polluter import fee” in proposed budget legislation, but the likelihood of passage is unclear at best.
U.S. and State Regulators. In the United States, federal and state regulators have already increased focus on encouraging—or mandating—climate-related disclosures. Earlier this year, the U.S. Securities and Exchange Commission announced that it would undertake a review of its 2010 guidance on climate-related disclosures. In June, Insurance Commissioners Mike Kreidler of Washington and Ricardo Lara of California formally requested that all insurers currently required to report to them annually on climate change start reporting climate risks in alignment with TCFD.
The Federal Reserve has also turned its attention to climate risks, noting in a recent Financial Stability Report that climate change “increases the likelihood of dislocations and disruptions in the economy, [and] is likely to increase financial shocks and financial system vulnerabilities that could further amplify these shocks.” Governor Lael Brainard remarked in a recent speech that “[g]iven the importance of consistent, comparable, and reliable disclosures to financial stability and prudential objectives, mandatory disclosures are ultimately likely to be important.” The Fed has established the Supervision Climate Committee to identify and assess financial risks from climate change and to develop a framework to ensure the resilience of supervised financial institutions to climate risk. The Fed’s new Financial Stability Climate Committee also aims to address climate-related risks to financial stability from a macroprudential perspective.Global Climate and Sustainability Reporting Continues to Grow