Overcoming Climate Disclosure Fatigue

It feels like only yesterday that the ESG reporting season ended and, inevitably, we reached the end of 2021, Now, into 2022, we have to start all over again. With the beginning of a new reporting cycle, different departments within organizations need to establish strict timetables and specific deadlines to contribute to the development of key pieces of information that will be transformed into one or more reports that are expected to represent all the achievements made by the organization, as well as all the challenges faced throughout the year. Moreover, there is not much time for hesitation as all these steps should occur in a matter of a few weeks, depending on the means the company uses to make its information public.

On top of that, almost like an annual ritual, the end of the old year and the beginning of the new one entail an exercise of reflection regarding the frameworks the company wants to use or has been asked to use. This unsurprisingly leads to finding that either the frameworks used before have changed, that some have been merged into a single framework as part of their natural evolution, or that there is a new set of rules or standards that may be utilized.

Equally importantly, as climate change is one of the biggest challenges facing humankind to date, if not the biggest, the need for more and better-quality information is only expected to increase, as will the number of queries from investors, customers, suppliers, collaborators, communities and other stakeholders. This is, of course, additional to new regulations being put in place to make climate and sustainability assessment, monitoring and reporting a mandatory activity. Also, low-quality reporting and a bad performance could prevent an organization from accessing financial resources under more favorable conditions.

All such situations produce some sort of wear in an organization, absorbing a great deal of attention and energy from many people, who could serve better in actioning high-impact projects that can allow the company to pick up the pace in the decarbonization of their value chains as well as promoting other initiatives that could produce positive impacts on their surrounding communities.

There are certain aspects that companies are advised to consider, not only to survive but, rather, to thrive in the ever-faster evolution of climate disclosure:

1. Engaging with stakeholders regularly
2. Assessing in detail what is material for the organization
3. Understanding the level of maturity of the organization to use a given framework and setting up a roadmap for closing gaps (quickly)
4. Identifying common denominators across frameworks
5. Embedding climate and, more broadly speaking, sustainability issues as part of the business strategy

First, it is paramount to understand the information needs, data and/or indicators required by different groups of people inside and outside the organization. Also, more likely than not, it may be the case that the sector has its own set of principles or standards for disclosing data that could be compulsory. Taking the interests of a broader set of counterparties can help to make better decisions regarding what standards to choose and, possibly, even to negotiate the right to avoid disclosing the same information twice.

Second, it is very important to assess carefully what is material for the organization due to a diverse variety of factors that include the location, main value creation drivers, portfolio of clients and, especially, the sector, which has a good level of knowledge of what must be observed due to its potential future materiality. Through a good comprehension of the material issues, the team in charge of reporting can focus on the right indicators.

Understanding the readiness of an organization to take part in a given framework can help in realizing what is attainable in a first attempt and also in the identification of what needs to be worked out between reporting cycles. It is clear that the lack of a sufficient level of maturity to provide high-quality information should never be used as an excuse for not reporting transparently and comprehensively; however, as it often happens under regulated jurisdictions, organizations are expected to disclose under a “comply or explain” basis, acknowledging what the company is doing to improve and report better next time.

Also, after many years of evolution, frameworks and standards have started to converge their common denominators of data that needs to be provided. Therefore, in many cases, the response to an indicator in one platform can help to answer a question in a different one. One of the clearest examples of this are the Climate Change program of CDP (previously known as the Carbon Disclosure Project) and the Task Force on Climate-Related Financial Disclosures (TCFD). In 2018, the CDP’s questionnaire on climate change was redesigned to align itself to the TCFD recommendations published by mid-2017, serving as an efficient tool for companies that have been disclosing their information through CDP for many years. Moreover, that same questionnaire has some intersections with the Global Reporting Initiative (GRI) standards.

Lastly, some companies are still assessing their climate impact as a matter that is isolated from their longer-term strategy and financial planning. Such an approach becomes a missed opportunity to make more informed decisions about the direction the organization should consider taking based on factual historical statistics but also an informed scenario analysis, not to mention that it becomes a sort of “blindfold” to understanding the effect the climate is already having on the value chain of the company. In other words, by embedding climate impact assessment and disclosure in the decision-making process of the organization, potential negative financial impacts can be reduced, avoided, or even transformed into opportunities for innovation and growth.

It is also important to note that the climate disclosure landscape is evolving, not only to keep frameworks up to date, but to attain a more comprehensive and efficient reporting system. For example, by mid-2021, the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB) decided to join efforts by merging into the Value Reporting Foundation (VRF). Furthermore, by the end of 2021, the International Financial Reporting Standards (IFRS) Foundation[1] announced that both the Climate Disclosure Standards Board (CDSB) and the VRF were to be consolidated into the newly created International Sustainability Standards Board (ISSB). Beyond the mere reduction of the number of acronyms to remember, the important contribution of the ISSB will lie in the delivery of the following level of disclosure standards on sustainability that meet the need for information for different stakeholders. The ultimate impact of this endeavor is that investors and regulators will have more data to understand the enterprise’s value and to ease the investment decision process. Furthermore, the ISSB will design the new standards building upon existing work from its integrating institutions.

With the increasing need and pressure from different stakeholders to understand the actions taken by organizations regarding climate change, as well as other environmental, social and governance matters, it becomes even more important for companies to anticipate proactively the information requirements and to interact with peer companies and other organizations and individuals to find ways to report efficiently and redirect efforts in the rapid decarbonization of its activities. In this decade of action, driving a substantive change in comparison to the way things have been done before becomes imperative.

[1] IFRS is a non-for-profit organisation whose objective is to develop high-quality accounting and sustainability disclosure standards.