Report

The origins of climate reporting

You are probably already familiar with the need to regularly update your investors, customers, and regulators on the financial performance of your company. For many decades, it has been a standard requirement for businesses to produce annual financial reports detailing income, cash flow, profitability, financial risks, and overall viability over the long term. Investors and other stakeholders use the information in these reports to establish the financial health of your business and take decisions that reflect this evidence base.

Financial reporting for businesses is highly standardized and regulated, largely due to the work of the International Financial Reporting Standards Foundation (IFRS) in developing global accounting standards. Over 140 countries now require businesses to report using the IFRS accounting standards, which helps ensure transparency and comparability of corporate information. Independent accountants and auditors help businesses comply with these regulatory and investor requirements and avoid legal or financial penalties for publishing low-quality or inaccurate information that could mislead investors.

By contrast, businesses have not historically been required to report on climate-related risks and impacts. However, as a result of the growing awareness among decision-makers of the economic impacts of climate change, there is increasing demand from regulators, investors, and consumers for similar levels of transparency on businesses’ exposure to climate change and action to reduce GHG emissions.

In 2015, the Taskforce on Climate-Related Financial Disclosure (TCFD) was created to establish a clear set of recommendations for voluntary disclosure from businesses. Many governments have now made climate reporting mandatory for businesses, but businesses are often also required by investors, shareholders, or other stakeholders to undertake climate reporting. In some cases, this reporting is part of broader requirements to report on ESG risks and actions. In other cases, this is limited specifically to climate-related disclosure – the focus of this chapter.

About the global baseline ISSB Sustainability Disclosure Standards

In 2021, the International Sustainability Standards Board (ISSB) was set up under the IFRS foundation. The ISSB has a mandate to develop global standards and disclosure requirements to facilitate consistent and comparable reporting by companies across jurisdictions to help to direct capital to long-term, resilient business in the transition to a low-carbon economy. Following an extensive market consultation process, in June 2023 the ISSB published its inaugural global sustainability disclosure standards IFRS S1 and IFRS S2.

IFRS S1: a set of disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term.

IFRS S2: sets out specific climate-related disclosures and is designed to be used with IFRS S1. The standard requires disclosure of:

• the governance processes, controls and procedures your business uses to monitor, manage and oversee climate-related risks and opportunities

• your business’s strategy for managing climate-related risks and opportunities

• the processes your business uses to identify, assess, prioritize and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform your business’s overall risk management process and

• your business’s performance in relation to climate-related risks and opportunities, including progress towards any climate-related targets you have set, and any targets you are required to meet by law or regulation

The two standards are intended to consolidate many other reporting mechanisms into a single global baseline. Two significant reporting bodies have already been consolidated into the ISSB: the Climate Disclosure Standards Board and the Value Reporting Foundation. From 2024 onwards, TCFD monitoring responsibilities will be transferred to the ISSB. The ISSB is committed to maintaining interoperability with other reporting mechanism and accordingly has signed a memorandum of understanding with Global Reporting Initiative (GRI).

The climate reporting landscape is not as mature as the traditional financial reporting landscape, and it is therefore more complex and subject to change. However, in recent years there have been significant interventions to attempt to standardize climate reporting and align it with financial reporting to ensure disclosure becomes ‘business-as-usual’. The introduction of the International Sustainability Standards Board (ISSB) Sustainability Disclosure Standards is a critical milestone in advancing the goal of aligned reporting and the climate reporting landscape has also significantly matured with the introduction of the EU’s Corporate Sustainability Reporting Directive (see box).

About the European Sustainability Reporting Standards

In 2022, the European Union adopted the Corporate Sustainability Reporting Directive (CSRD), which replaced and expanded the Non-Financial Reporting Directive (NFRD). CSRD introduced an obligation for large businesses to report more detailed information on how sustainability issues impact the organization as well as how the organization impacts people and the planet. CSRD also requires eligible companies to obtain independent assurance that their disclosures align with new European Sustainability Reporting Standards (ESRS). One of these new ESG standards – ESRS E1 – relates specifically to climate reporting. In essence, it consolidates almost all existing frameworks and puts a specific emphasis on transition planning. Through ESRS E1, CSRD mandates robust climate mitigation plans, in which companies are pushed to consider their future performance as well as the risks that the Net Zero transition will pose to their business within the next 5-10 years and beyond. Where CSRD’s core focus is transparency, the introduction of the accompanying Corporate Sustainability Due Diligence Directive, will shift the focus towards tangible efforts to mitigate environmental impacts and risks.

Governments, investors, regulators, and consumers agree on the importance of corporate climate reporting to increase transparency and accountability, and improve investor, regulator, and consumer decision-making. The UN High Level Expert Group's report Integrity Matters outlines the multiple benefits of clear, accessible, and comparable climate reporting:

• Leading businesses can credibly demonstrate their progress toward Net Zero, and signpost to regulators that they support more ambitious climate policy measures

• Citizens, consumers, and investors can reward these leaders

• Barriers to faster progress will be identified more quickly, creating a shared understanding of what solutions are needed, and an "ambition loop" with regulators

• Entities may not be making progress due to capacity constraints or lack of access to finance. Increased transparency can help pinpoint and overcome such hurdles (e.g., through government policy targeting investment and incentives)

• The ability to track progress through publicly available documents helps build trust, showcase successful strategies, and encourage other businesses to make ambitious commitments

In essence, good climate reporting is about providing your stakeholders (investors, shareholders, and regulators) with all the relevant information they need to understand the climate-related risks and opportunities affecting your company and the actions you are taking to manage these. Disclosing this information helps demonstrate that your climate action plans are credible and informed by a rigorous assessment of how exposed your company is to climate change, and how you intend to mitigate risks, unlock opportunities, and reduce environmental impact.

Good climate reporting will enable different stakeholders to make better informed decisions about your company’s future trajectory. Just as financial reports make your company’s strategy more transparent, climate disclosure helps investors, regulators and customers understand how your company will ensure resilience and maintain enterprise value by addressing climate-related risks and opportunities and driving progress toward your emissions reduction targets. This allows stakeholders to make more informed decisions about your company based on its future exposure to climate change.

Key reporting mechanisms

Although ISSB has set a global baseline for climate reporting, there are still many other climate reporting mechanisms your business should be familiar with. The climate reporting landscape is made up of three main types of reporting mechanisms:

• Regulations: If a reporting mechanism is set out in regulation, this means it is required by law in that jurisdiction. Regulations vary by country, with each regulator defining the information that must be disclosed and the standard or framework that must be used. An example is the incoming Corporate Social Responsibility Directive (CSRD) in the EU, which requires companies to report against the European Sustainability Reporting Standards (ESRS) or IFRS S1 & S2-aligned reporting. As of July 2024, over 20 jurisdictions have taken steps to adopt or use the ISSB standards in legal or regulatory frameworks, including Canada, Brazil, Nigeria, Turkey, China, Australia, the UK, Singapore and Singapore, Hong Kong and Japan.

• Standards: Standards set out detailed criteria, indicators and metrics against which your company must report. Standards are set to provide decision-useful information for particular users. Climate reporting is an element of several global standards, including the International Sustainability Standards Board (ISSB) IFRS S1 and IFRS S2, which aim to provide a global baseline for sustainability-related financial disclosure intended for use by investors. The Global Reporting Initiative (GRI) also presents specific standards for climate reporting intended to serve the needs of a wider group of stakeholders

• Frameworks: Frameworks provide a strategic, high-level structure or approach around which your company’s report can be made. The aim of reporting frameworks is to define best practice for reporting. Reporting through a framework is often voluntary, but regulators or investors may require businesses to use specific frameworks, so they receive comparable information. An example of a framework is the Taskforce on Climate Related Financial Disclosure (TCFD), which includes 11 recommendations for climate risk and opportunity reporting. The TCFD framework and responsibility for monitoring disclosures against it have been transferred to ISSB – IFRS S1 and S2.

It is important to understand the distinction between regulations, standards, and frameworks so you can identify which reporting requirements your company must report against. There may also be additional mechanisms your business chooses to report against, to meet the needs of the different users of your reporting. Increasingly, many of the reporting mechanisms require the same information to be reported, but there are also differences that will mean your business has to collect different information or report it differently to comply with the requirements.

In addition to reporting regulations, standards, and frameworks, there are several methodological standards that help ensure that businesses use comparable methodologies when preparing the information they report. This improves the consistency and comparability of information on corporate climate action. The two key methodologies to be aware of are:

• For calculating and measuring emissions, the Greenhouse Gas Protocol Standards and Guidelines provide the key methodologies. For more on calculating and measuring emissions, read Chapter 2

• For setting science-aligned emissions reduction targets, the Science Based Targets initiative’s (SBTi) Net Zero Standard sets international best practice. For more on setting a target, read Chapter 3

Figure 1 provides an overview of the main reporting mechanisms.

Figure 1: An overview of the main reporting mechanisms and methodological standards.