Sustainability disclosure: roundtable on standardised international reporting

While the pandemic was an unexpected addition to GC workloads over 2020/21, how to deal with environmental, social, and corporate governance (ESG) concerns is an issue that has only grown in prominence and complexity for corporate entities.

This was discussed in more detailed at a roundtable last month hosted by Freshfields Bruckhaus Deringer, as part of The Lawyer’s General Counsel Strategy Summit. Freshfields’ China Chair Teresa Ko spoke in her capacity as a trustee for the International Financial Reporting Standards Foundation, which has been debating the need for global sustainability rules and what the IFRS Foundation should play a role. At present, there are several voluntary frameworks for companies to follow, such as the Carbon Disclosure Project that scores organisations on what they report, as well as investor-focused requirements published by Sustainability Accounting Standards Board. Ko has previously published a piece to explain the chaotic state of sustainability reporting, and how a sustainability standards board could harmonise, standardise and/or consolidate today’s proliferation of metrics, frameworks and disclosure requirements.

Fellow Freshfields Partner Vanessa Jakovich co-led the discussion and highlighted the difficulties for companies as they choose which voluntary regime to follow. An over-arching theme of the debate was the pressure put on companies by investors, as they drive companies towards different reporting standards. “A trend we’ve seen over the last 18 months has been that people want more standardised international reporting,” says Jakovich. That’s where the IFRS comes in, as it becomes clear there is an urgent need for globally agreed set of principles. There are also moves afoot from the EU, World Economic Forum and Department for Business, Energy & Industrial Strategy to simplify reporting procedures.

Transitioning to new rules

Simplicity is a key consideration for businesses and especially for their legal teams, who are often jostling with different departments for oversight on the ESG issue. The pressures on smaller, private companies were highlighted, as they lack dedicated ESG teams or an allocated budget for mandatory reporting. “Are there better ways to invest rather than disclosure?” queried one GC, citing rising tensions between following the principles and ensuring financial stability. Highlighting the rigidity of disclosure, another GC pondered whether companies should instead be led by their customers and employees when it comes to setting out ESG priorities. Here lies a catch-22 of course: “We do need rules obviously too,” they add.

Many generals counsel participants said they were caught between a rock and a hard place when it came to operating as a private company, but with public debt. Legal heads said there were challenges relating to ownership, with all interested departments (such as finance, co-secretarial and legal) needing to come together to move the issue forward. Furthermore, public investors want to have their say when it comes to which framework would work best. One GC remarks: “Once you start transitioning to a new set of rules, it is difficult and we’re bombarded. By accepting one framework, you’re rejecting the others and that’s not great from an investor point of view.”

The conversation also steered towards one of the biggest developments in climate news this year; namely President Biden’s decision for the US to re-join the Paris Agreement that aims to limit global warming to well below 2 degrees Celsius. The move was viewed as a positive one, but also highlights the continuing ebb and flow of the ESG debate and how companies can remain apprised of the latest developments. The US change shows how the climate crisis has been prioritised over the social and corporate governance aspects of ESG. Driving climate change as the top priority is largely due to the ease in which it can be measured via a variety of metrics, such as energy use and a company’s carbon footprint. Other social and governance goals will require a clearer articulation of how to measure success.  

Respond to consultations on global standards

For legal heads struggling to deal with the mounting pressures of ESG reporting, Teresa Ko urged parties to respond to consultations currently being carried out on global standards, such as the IFRS Foundation. If all goes well, the plan is for the IFRS to set out climate requirements by as early as 2022.

Vanessa Jakovich also had recommendations for in-house legal departments, such as encouraging groups to plan out priority areas of governance and stakeholder mapping. With the majority of the discussion revolving around external pressures, a key part of ESG reporting is working out which groups in the business have the final say. Lastly, keeping up to speed on litigation trends can help GCs identify the key risks in their ESG strategy.

Unlike COVID-19, which corporations and legal departments hope to be a temporary priority, ESG issues are here to stay. As one GC aptly put it, ESG is “becoming a behemoth on its own” and in-house legal teams are often at the front line.