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Freshfields Sustainability

| 8 minutes read

Hope for a new paradigm? Progress towards a global baseline of sustainability disclosure standards

The rise of ESG investment and associated greenwashing has driven regulators to step up their efforts to increase transparency of companies and reduce fragmentation in sustainability reporting. They are also looking to address investors’ demands for more consistency across reports, with more complete, comparable and verifiable sustainability-related financial information available.

This year, the IFRS Foundation’s International Sustainability Standards Board (ISSB), the US Securities and Exchange Commission (SEC) and the European Financial Reporting Advisory Group (EFRAG) published consultation papers with a mission to converge and harmonise international sustainability disclosure reporting standards.

A global webinar hosted by Freshfields on 22 June, “Hope for a new paradigm? Progress towards a global baseline of sustainability disclosure standards” discussed these three proposed sustainability disclosure standards, two of which are currently undergoing public consultation. Speakers included Freshfields partner Teresa Ko, vice chair of the IFRS Foundation, Hong Kong, Juliane Hilf, partner and head of dispute resolution regulatory, Continental Europe and Elizabeth Bieber, counsel and head of shareholder engagement and activism defense, US.

International Sustainability Standards Board 

The ISSB was established by the IFRS Foundation following a public consultation launched in September 2020, addressing the demand for global sustainability standards and what role the IFRS Foundation might play in the development of such standards.

The ISSB’s objective is to develop standards that allow the comparison of complete and verifiable sustainability-related financial information, enabling investors and other capital market participants to make an assessment of a company’s enterprise value. It is hoped that these standards will serve as a comprehensive global baseline of sustainability disclosure standards for the capital markets, which will be interoperable with jurisdiction specific requirements and applicable across stakeholder groups. This is crucial in both developed and developing markets, for example Asia-Pacific, which accounts for half of the world’s greenhouse gas emissions and includes many countries impacted by climate change.

The ISSB is endorsed by IOSCO as being the “most credible mechanism for creating a baseline for climate disclosure standards, based on practices and proven content, sourced from the most widely adopted frameworks and standards now in use.”

On 31 March 2022, the ISSB published its first two proposed IFRS Sustainability Disclosure Standards:

1) General Requirements Exposure Draft

2) Climate Exposure Draft

The consultation comment deadline for the proposed ISSB standards ends on 29 July 2022. The ISSB will then deliberate, refine, and finalise its future standard-setting priorities throughout the remainder of 2022.

European Financial Reporting Advisory Group 

From Non-Financial Reporting Directive (NFRD) to Corporate Sustainability Reporting Directive (CSRD).

Since 2014, the NFRD has established rules on disclosure of ESG matters, human rights, anti-corruption, and bribery issues for certain large public-interest companies in Europe. However, there is evidence to suggest that due to a lack of binding common reporting standards, the information being reported is not sufficient to meet the NFRD’s desired comparability reporting objectives.

Following the EU’s action plan for financing sustainable growth in 2018, and the EU Green Deal published in 2019, the European Commission published the CSRD proposal to replace the NFRD in April 2021.

Highlights of the CSRD:

  • The CSRD has significantly broadened the scope of reporting to include:
  • all large listed and non-listed companies (i.e., Companies with more than EUR 20 million on balance sheet, more than EUR 40 million turnover, or more than 250 employees)
  • all companies with securities listed on EU markets
  • listed SMEs (with a transition period up to 2028)
  • large non-European companies generating a net turnover of EUR 150 million in the EU with at least one subsidiary or branch in the EU.
  • The CSRD will introduce stricter binding reporting standards through the adoption of European Sustainability Reporting Standards (ESRS)
  • Reporting must be certified through audit and assurance, resulting in fines and penalties for non-compliance
  • The CSRD seeks to limit global warming to 1.5°C in line with the Paris Agreement
  • Mandatory disclosure of scope 1, 2 and 3 GHG emissions

Reporting will be expanded to focus on sustainable practices including reporting on strategy, targets, role of the board and management and the value chain. The updated reporting disclosures will allow for reliable, efficient, and comparable information whilst working towards a global baseline in a global economy for standard reporting.

The final text of CSRD was agreed on 21 June 2022 and formal adoption by Parliament and Council is expected this summer, allowing for transition into national laws by December 2023. Reporting requirements are to be phased in beginning in 2024.

European Sustainability Reporting Standards (ESRS)

On 29 April 2022, EFRAG published for consultation the ESRS, comprising of a comprehensive and extensive set of 13 draft standards covering the following areas of reporting:

  • Cross cutting standards – general principles of disclosure and reporting (ESRS 1) and strategies, governance, and materiality assessment (ESRS 2)
  • Topical standards – environment (ESRS E1 to E5), social (ESRS S1 to S4) and governance (ESRS G1 and G2)

These standards are currently under consultation ending on 8 August 2022, potentially leading to significant changes to the draft proposals. ESRS standards are potentially burdensome including 137 disclosure requirements, with even more requirements to follow. An expected 40+ sector specific standards and SME-proportionate standards are pending publication for 2023.

Securities Exchange Commission 

In March 2022, the SEC released a proposed standardized set of climate-related disclosure rules to improve an investor’s ability to compare climate-related information between companies that would both augment and supplement the climate-related disclosures already required in SEC filings. The proposals apply to both US domestic companies and non-US companies (so-called foreign private issuers or FPIs) who file periodic reports with the SEC. The proposed disclosure requirements are outlined below and can be split into three categories:

  • Narrative Disclosure Requirements. The SEC proposal would require a new section in a company’s registration statement or annual report entitled ‘Climate-related Disclosure’ requiring information on:
    • climate-related risks,
    • board oversight of climate-related risks,
    • descriptions of individual board members expertise in handling climate-related risks, and
    • how identified climate-related risks are likely to affect the company’s business strategy and operations over time.
    • If a company has previously released climate-related transition plans to the public, then the company must disclose targets or goals related to this transition.
  • Quantitative and Financial Statement Requirements. The SEC proposal would require a new note to the financial statements to provide climate-related financial metrics and impacts. The disclosure would require financial impact metrics, such as:
    • the aggregate financial impact over 1% per line item due to climate-related events and transition activities,
    • expenditures both positive and negative associated with climate-related events,
    • information concerning (GHG) emissions 
    • All companies would be required to provide Scope 1 (direct) and Scope 2 (indirect from purchased energy source) emissions for the most recent fiscal year.
    • If a company has released climate-related transition or reduction plans that include the reduction of GHG emission, or if the emission is material, then a company may be subject to reporting Scope 3 (upstream and downstream activities in the value chain) emissions. Given a company’s reliance on a third party for Scope 3 emissions reporting, the SEC has confirmed that there is a safe-harbour provision for companies reporting Scope 3 emissions.  
  • Attestation Report Requirements. The attestation report requirement only applies to larger public companies (accelerated filers or large accelerated filers), including FPIs, who must procure a Scope 1 and 2 GHG emissions report by an independent attestation provider.

The comment period for the proposed rules has now ended and opinions have been mixed. Many investors have praised the increased reliability and consistency that will result from standardized climate-related disclosure standards, however, with increased standards comes increased costs. The SEC estimates that the implementation costs associated with the proposed rules range from $490,000 to $640,000 for the first year and $420,000 to $530,000 for each subsequent year, although many companies think it will be substantially higher. Critics also challenge the constitutionality of the proposed rules and whether the SEC has authority to require climate-related reporting by companies.

The SEC’s timetable for new rule-making is looking to the end of 2022, with compliance requirements being phased in according to company size. Scope 3 emissions disclosures would be incorporated in 2023. Given the extensive response in the comment period, it is unclear to what extent the final rules may vary from the current proposal. However, it is prudent to be prepared for any outcome and we are already advising companies on the steps needed to enable them to comply when the time comes, such as reviewing board member experience concerning climate-related matters, and meeting with auditors or other relevant parties concerning financial statement notes and attestation reports. 

Alignment between the EFRAG, SEC proposal and the ISSB exposure draft

Whist the ISSB, SEC and EFRAG proposals deal with similar issues, they have differences and similarities in certain areas, some of which are highlighted below.

  1. TCFD  - Both the EFRAG and ISSB exposure drafts strongly align with TCFD recommendations based on pillars of Governance, Strategy, Risk Management, and Metrics & Targets. SEC’s climate disclosure proposal broadly aligns with the four pillars and 11 recommended disclosures, and in some circumstances requires additional disclosure on top of TCFD guidance.
  2. Scope 1, 2 and 3 greenhouse gas emissions - All proposals require disclosure of scopes 1 and 2 greenhouse gas emissions. Scope 3 emissions are required by the ISSB and EFRAG proposals and are required by the SEC if Scope 3 emissions are material or if the company has set reduction targets that include Scope 3 emissions.
  3. Assurance - Both the SEC and ESRS require assurances on varying timeframes, with the SEC phasing in assurance beginning with limited assurance and then moving up to reasonable assurance for Scope 1 and 2 Emissions. IOSCO, which will endorse the final ISBB standards is coordinating efforts with International Auditing and Assurance Standards Board (IAASB) and International Ethics Standards Board for Accountants (IESBA) to accelerate the development of assurance standards for sustainability.


  • As sustainability reporting will be integrated into financial reporting, a mindset change is needed to bring greater awareness of the connectivity between sustainability reporting and financial reporting. There will be a need for greater consistency in assumptions used in both sets of standards, and more thought is needed to consider how sustainability reporting may lead to new approaches to impairments, provisioning and expected credit losses. The overall aim is to bridge the divide between conventional financial disclosures and ISSB sustainability disclosures, so that they can in combination paint the full picture in relation to enterprise value.
  • It is no longer appropriate to treat ESG as a separate category from traditional business considerations in financial reports. ESG needs to be integrated into business operations. Investors and stakeholders are also demanding that ESG issues are integral to their evaluation of companies they invest in.
  • CFOs, boards and senior management will need to incorporate a sustainability lens into all dimensions of their roles. It is essential to have an understanding of their organisation’s transition risks, capabilities and opportunities, costs associated with climate risks, as well as potential value creation opportunities and climate commitments. There also needs to be an awareness of the liability issues attached to these commitments.

You can watch the recording of the session here.

With thanks to contributing author Mitchell Howell.


climate change, global financial investors