Entropy (Oxford English Dictionary)


A thermodynamic quantity representing the unavailability of a system's thermal energy for conversion into mechanical work, often interpreted as the degree of disorder or randomness in the system.

Lack of order or predictability; gradual decline into disorder.

One year ago, in May 2021, the Financial Times’ Moral Money provided an incisive take on the current state of play at the time, noting “support is growing for common ESG metrics, but their final form has yet to be thrashed out.” We are miles ahead of where we were then. The SEC, EU standard setter (EFRAG), and the International Sustainability Standards Board (ISSB) all have issued proposed sustainability standards that are in the public comment process (the SEC comment period runs until June 17, the ISSB’s until July 29, and EFRAG’s until August 8). The climate-related portions of the proposals (the EFRAG and ISSB proposals go beyond climate change) find common ground in measuring GHG emissions in accordance with the GHG Protocol and substantially following the reporting framework of the Task Force on Climate-Related Financial Disclosures (TCFD). 

Yet, even with these efforts toward harmonization, the law of entropy would predict a tendency toward disorder over time.  A coalition of business groups representing more than 7,000 companies is trying to prevent such a result. The We Mean Business Coalition published a letter on May 18 asking the heads of EFRAG, GRI, SEC, and ISSB to continue to work toward alignment as they set their standards and rules. 

Greater convergence between your initiatives is both possible and vital. Even small misalignments around terminology, definitions, and concepts in the draft versions of the standards and legislation risks undermining their collective impact. Our overall ambition should be to ensure companies and their investors get the most efficient solutions, without the need for additional reporting to cater to a multitude of standards.

Continued work to drive the harmonization of climate reporting standards will be critical to reducing costs for companies and making the information reported more useful for investors. As more companies report, network effects will come into play and reporting will become easier - particularly as to Scope 3 emissions (indirect emissions that frequently depend on information from third parties).  Those network effects, once they take hold, will help foster convergence on common reporting standards. In the meantime, efforts to avoid fragmentation are of paramount importance. 

Regulatory Developments of the Week:

ISSB’s Game Plan for Delivery of a Global Baseline for Sustainability Disclosures 

The ISSB has outlined the actions needed for establishing a comprehensive global baseline for sustainability disclosures. The ISSB plans to complete the standard-setting work that will form the core elements of the global baseline by the end of 2022. It is encouraging widespread adoption of the baseline to reduce the burden on issuers and enhance the usefulness of reported information to investors. The proposed standards will be informed by the public feedback received during the consultation period

The public consultation process enables the ISSB to incorporate the views of different stakeholders as it moves forward with the development of its standards. Feedback from regulators in different jurisdictions will be particularly important because the closer the ISSB can come to meeting jurisdictional needs, the more likely the standards will be broadly adopted and implemented around the world. The ISSB will draw on its working group for cross-jurisdictional collaboration with the aim of fostering consistent sustainability disclosures across markets. 

Greenwashers Beware: SEC Charges BNY Mellon Investment Advisor on ESG 

Yesterday, the SEC announced that it had charged BNY Mellon Investment Advisor, Inc. for “misstatements and omissions about ESG considerations in making investment decisions for mutual funds it managed.” Specifically, the SEC found that from 2018-2021, BNY failed to uniformly conduct ESG quality reviews during its investment selection process, as it had claimed to be doing. Ultimately, the charges have been settled, with the firm paying a $1.5 million penalty. 

This charge will surely reverberate around the market as a reminder that the SEC plans to hold ESG statements to account. Adam S. Aderton, Co-chief of the SEC Enforcement Division’s Asset Management Unit and member of the ESG Task Force, says “As this action illustrates, the Commission will hold investment advisers accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process.”

Canada Works to Mobilize Capital Toward Climate Transition

Canada is making progress in steering capital to achieve its net zero ambitions. This week, Canada held a roundtable on sustainable finance with a star-studded cast that included the Prince of Wales, Prime Minister Trudeau, and Mark Carney. The government also updated the terms of reference for its Sustainable Finance Action Council to focus the financial sector on the implementation of climate-related financial disclosures aligned with the TCFD, and the development of net-zero capital allocation strategies. Climate disclosures are at the top of the priority list for the Council, which includes 25 of the country's foremost financial institutions, insurers, and pension funds, accounting for a collective $10 trillion in assets. Launched a year ago this month, the Sustainable Finance Action Council works to lead Canada’s financial industry toward sustainable investment, best practices, and accelerating the reallocation of capital necessary to meet the country’s sustainability goals

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Wyatt joined Persefoni from the U.S. Securities & Exchange Commission (SEC), where she served as Senior Counsel for Climate & ESG to the Division of Corporate Finance, led the rulemaking team through drafting proposed climate disclosure regulations, and worked closely with the Office of International Affairs.

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