This week, Marc Zenner, CFO at Persefoni, explores the evolving role of Chief Financial Officers as climate disclosure champions; discusses the increasing importance of climate-related information, new regulatory standards, risks, and opportunities; and provides guidance on establishing effective climate disclosure programs.
CFOs as Climate Disclosure Champions
The role of the Chief Financial Officer is undergoing a profound transformation. Core CFO responsibilities like capital allocation, investor communication, and financial disclosure are all experiencing significant shifts driven by climate change-incited pressures and regulations. Due to this changing environment, businesses that manage teams face novel uncertainties that must inform capital allocation and should be reported to key stakeholders through robust, standardized disclosures. In order to effectively integrate new climate-related risks and opportunities into decision-making and disclosure processes, CFOs will need to apply the same rigor and diligence in tracking climate-related information that they do to financial information. This feature focuses on guiding CFOs in establishing a top-tier climate disclosure program.
While climate disclosure is not a new concept for most large companies, it has historically been driven by sustainability teams. However, global regulations and a concerted drive to mitigate climate risks are now placing the onus on the shoulders of CFOs. Regulatory bodies are championing this cause with proposals for new standards companies will need to adhere to. For example, take the SEC (Enhancement and Standardization of Climate-Related Disclosures), European Union (CSRD), or the State of California (SB 253). Under these new standards, CFOs will assume liability for errors and personally certify the accuracy of their climate disclosures in annual reports. This sets the stage for CFOs to take on an outsized role in driving climate disclosure.
Raising the Bar
In the past, climate disclosure was a voluntary activity with no standardized methodologies or metrics necessary to disclose. New proposed standards establish a level of rigor, depth, and consistency unfamiliar to most companies. As experts in financial disclosure, CFOs are uniquely positioned to help companies raise the bar in climate disclosure.
Climate disclosure follows the same essential principles that underpin successful and low-risk financial disclosure: accuracy, transparency, and consistency. As such, CFOs should replicate already-established best practices in their climate reporting. Additionally, CFOs excel in data acquisition. With connectivity across the enterprise, CFOs are well positioned and best able to acquire the data necessary to complete granular carbon emissions estimates and identify climate-related risks across the organization.
Mitigating Risk
In a world where climate change is ever present, CFOs face new and uncertain risks. They may face financial penalties for reporting inaccurate climate data in regulated reports. They could run the risk of miscommunicating to investors, leading to potential share price impacts. Poor disclosure can even damage a company’s reputation, as they may be accused by customers or the media of greenwashing. To mitigate these risks, CFOs should seize the current opportunity to proactively invest in and develop robust, transparent, and accurate climate disclosure processes.
Creating Value
While climate disclosure presents potential risks to CFOs, it also creates opportunities. The processes of carbon accounting and climate-related risk management are initiatives that, when executed appropriately, should involve stakeholders from across an entire enterprise. By engaging every department on climate disclosure, CFOs will unlock a trove of enterprise data and make the process iteratively more manageable. Concealed risks may reveal themselves, inefficient operations become easier to identify, and opportunities to drive revenue growth will become clearer. Persefoni experiences this firsthand through daily collaboration with clients.
In conclusion, the role of the modern CFO is evolving to incorporate changes brought forth by climate change. All types of stakeholders are demanding increasing levels of climate-related information from companies – including customers, employees, investors, and regulators. This presents new risks to CFOs. They should prudently manage these risks by applying financial disclosure best practices to the growing complexities of climate disclosure. By doing so, CFOs can reduce risk within their enterprises, unlock new avenues for value creation, and contribute to building a more sustainable future.
Climate & ESG News Roundup
IAASB publishes proposed assurance standards for sustainability disclosures
On August 2nd, the International Auditing and Assurance Standards Board (IAASB) issued proposed assurance standards for assurance engagements over sustainability reporting. The proposed standards, which are captioned the International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements, provide a principles-based set of standards for the assurance of engagements on sustainability topics broadly. They would cover assurance of disclosures pursuant to “any suitable reporting framework,” including those issued by the European Union, the International Sustainability Standards Board, the Global Reporting Initiative, and others. They would provide standards for limited and reasonable assurance of sustainability information, and would accommodate reporting using a single or double materiality lens. The consultation is open until December 1, 2023, and the IAASB welcomes comments through the IAASB website.
The proposed standards clarify that the ISSA applies to all assurance engagements on sustainability information except where the practitioner is providing a separate conclusion on a GHG emission statement. In those instances, the International Standard on Assurance Engagements (ISAE) 3410 would apply. ISAE 3410, Assurance Engagements on Greenhouse Gas Statements provides guidance on the provision of limited and reasonable assurance of GHG emissions statements. It recognizes that assurance practitioners will use different procedures, which may include inspection, observation, confirmation, recalculation, analytical procedures, and inquiry, all based on the provider’s professional judgment in the engagement. The standard addresses the necessary skills, knowledge, and experience for GHG assurance providers, conditions for assurance engagements, planning, understanding of the entity and its internal controls, and other considerations relevant to the assurance process.
The proposed ISSA 5000 outlines and solicits comments on a set of processes similar to those already established and used for GHG assurance pursuant to ISAE 3410. The IAASB will consider the comments received as of December 1 and develop standards that should serve as a common baseline for sustainability assurance in many parts of the world. We will continue to watch this space.
UK government confirms plans to implement ISSB-based sustainability disclosure standards by 2024
Last week, the UK government announced its plans to create UK Sustainability Disclosure Standards based on the IFRS Sustainability Disclosure Standards issued by the ISSB. Following the IOSCO endorsement of the ISSB standards, the UK government has now formally announced its timeline for incorporating the ISSB standards into the UK regulatory framework as "UK Sustainability Disclosure Standards." This announcement builds on the UK Financial Reporting Council’s recent call for evidence, seeking feedback on the ISSB Standard for use in the UK. UK regulators have been signaling support for the ISSB Standards, but this announcement makes it official – the new UK Sustainability Disclosure Standards will form the basis of any future requirements in UK legislation or regulation for companies reporting on sustainability and climate-related risks and opportunities. The UK government clearly stated that the Sustainability Disclosure Standards will divert from the ISSB's global baseline standards only "if absolutely necessary for UK-specific matters." This message is very important for the robust implementation of the ISSB Standards as a tool to drive global comparability for investors as they assess sustainability performance across companies around the world.
The UK government has committed to issuing its endorsement decision of the ISSB standards by July 2024. The UK FCA will likely move to update its listing standards as soon as these UK incorporation processes are complete. The UK government will then also take steps to use the UK Sustainability Disclosure Standards for disclosures by UK-registered companies and limited liability partnerships.
This process may seem complicated, but it is standard. It is modeled after the processes countries have followed for over 20 years when they incorporate IFRS accounting standards into their domestic rules. Japan, Canada, and Australia have similar processes underway. We are expecting even more jurisdictions to create disclosure rules based on the ISSB standards moving forward. We also expect companies to voluntarily start moving from TCFD-aligned reporting to ISSB-aligned reporting as the ISSB becomes the new global framework.
European Commission adopts the final European Sustainability Reporting Standards
The European Commission has taken a significant step towards implementing the Corporate Sustainability Reporting Directive (CSRD) by adopting the European Sustainability Reporting Standards (ESRS). While sustainability-focused investor groups have welcomed the announcement, they expressed concerns about the removal of certain mandatory sustainability disclosures, like the ESRS E1 climate change disclosures, from the final ESRS. The European Commission attempted to address these concerns by highlighting that disclosure requirements subject to materiality assessments are not voluntary and that companies must disclose material information. Companies should know that the materiality assessment process itself is subject to external assurance and that “if a company concludes that climate change is not a material topic and therefore does not report in accordance with that standard, it has to provide a detailed explanation of the conclusions of its materiality assessment with regard to climate change.”
Once implemented, companies subject to the previous Non-Financial Reporting Directive (NFRD) and large non-EU listed companies with more than 500 employees will be required to start reporting under ESRS for the 2024 financial year. The first reports will be issued in 2025, while other large companies will start a year later. Listed small and medium-sized enterprises (SMEs) will begin issuing their first ESRS sustainability statements in 2027, with an option to opt-out for up to two years. Non-EU companies with significant revenue in the EU will start reporting in 2029.
Events You Can't Miss
- Discover the significant impact of climate change on the insurance sector during our upcoming webinar on September 7th, 2023, at 2 PM EST. Join experts from Ceres, ERM, and Persefoni as they delve into research findings on the industry's exposure to fossil fuel-related assets and discuss the urgent need for resilience-building actions and transitioning to a low-carbon economy. Register now and save your spot.
- Save the date for Climate Week NYC, set to take place from September 17-24th, 2023. This annual event is a collaboration between the United Nations General Assembly, the United Nations, and the City of New York. By uniting global leaders, changemakers, and concerned citizens, Climate Week NYC strives to tackle the urgent climate challenges we face today. Expect a week filled with impactful discussions, innovative solutions, and collective efforts towards a more sustainable and resilient future. Find more information at www.climateweeknyc.org.
- Join us for the Workiva Amplify North America conference in Nashville from September 19–22nd, 2023. This event brings together accounting, finance, ESG, audit, and risk professionals, offering thought-provoking sessions, peer networking, and an exclusive look at the latest developments from Workiva and partners. Gain insights into ESG reporting trends, learn from world-class organizations, and earn CPE credits. Register now.
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