These developments accelerate a trend towards mandatory and comparable disclosures relating to climate risk and other sustainability issues.
These are occurring in a context where we are seeing increasingly successful litigation that seeks to force corporations and governments to disclose how they will be impacted by climate change.
In more detail
The third day of this year's international climate negotiations — COP26 — focused on finance. Parties and other attendees made many announcements relating to finance, including the expansion of groups committed to ending financing for new unabated coal projects, and a very large group of investors with a collective USD 130 trillion committed to financing the transition to net zero by aligning their investment portfolios with that goal.
From a legal perspective, two recent developments are especially worthwhile:
- The continued trend to mandatory (as distinct from voluntary) disclosure of climate-related financial risks
- The continued crackdown on low-quality or incomparable sustainability claims and greenwashing
Climate risk disclosures
The United Kingdom has recently announced that from 6 April 2022, more that 1,300 of the largest UK-registered companies and financial institutions will have to disclose climate-related financial information on a mandatory basis. These disclosures will be in line with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD), which has become the gold standard for disclosing climate risks.
The measure will apply to many of the UK’s largest traded companies, banks and insurers, as well as private companies with over 500 employees and GBP 500 million in turnover.
This announcement brings the UK in line with a small but growing group of jurisdictions that require such disclosures from various entities. These include New Zealand and France (via legislation), along with numerous other jurisdictions where regulators have made clear their view that climate risks should be manage as financial risks within existing management and disclosure frameworks.
Disclosure in accordance with TCFD is an iterative process, with entities expected to grow more sophisticated in their approach to identifying and assessing climate risks with each reporting season. The method strongly encourages the use of scenario analysis to assist in identifying risks and opportunities arising from climate change in all areas of an entity's operations.
Baker McKenzie views the shift from voluntary to mandatory reporting of such risks as a key trend to monitor in many jurisdictions over the short and medium term.
Standards for sustainability disclosures
The IFRS Foundation announced the creation of a new entity to create a new set of "standards", or norms, that companies must follow as they make climate-related disclosures. The new body — the International Sustainability Standards Board (ISSB) — is part of a response from global securities regulators to the concern that it is difficult for investors and the public to understand and usefully compare the disclosures as they are currently made. This is because of the existence of various standards and methods, which can produce confusing information that is hard to use. The new body was established with support from the International Organization of Securities Commissions (IOSCO).
The new standards will seek to regularize disclosures globally. This should be seen in the context of existing efforts to synchronize standards for disclosing a wide range of sustainability disclosures, most notably in the European Union, with efforts underway by China to harmonize its disclosures with the EU measures.
Another significant goal of the ISSB is to reduce "greenwashing", where entities make claims about their climate or sustainability credentials that are either misleading or even false.
Regulators are increasingly focused on the problem of greenwashing because it can undermine efforts on climate mitigation, particularly where investors and consumers are misled as to the true climate impacts of a particular product or service.
These new standards come as we are seeing an increase in litigation relating to greenwashing. These suits can arise under consumer protection laws as well as laws prohibiting misleading and deceptive conduct.
While the measures are currently intended to be voluntary (that is, it will be up to each country to decide whether to implement the ISSB standards), there is also the possibility that IOSCO could formally endorse the new standards, meaning its members, who account for 95% of the world's securities markets, would then be obliged to implement and enforce them.
This alert was prepared with the assistance of Sharona Coutts.