Next Steps Beyond 'Comply or Explain': Common Sustainability Standards Are Needed

Under daily dramatic November 2020 skies and in Covid-19 lockdown 2.0 earlier this week, the UK government announced its intention to lead the G20 in becoming its first member to demand mandatory climate disclosures by large companies and financial institutions across its economy. This would happen by 2025, it said, pointing out that it was going further than recommended by the Taskforce on Climate -related financial disclosures (TCFD) and importantly, beyond the traditional UK reliance on ‘comply or explain’ in matters of corporate governance.

The joint Government Regulator TCFD Taskforce also published a report and a roadmap for implementing this mandatory disclosure, many of which come into force as soon as 2023.

Rishi Sunak, Chancellor of the Exchequer, announced that the Government will issue its first Sovereign Green Bond in 2021 - subject to market conditions- to help the UK meet its 2050 net zero target and other environmental objectives. It intends to follow up with a series of further issuances to meet growing investor demand for these instruments. These bonds will help finance projects that will tackle climate change, finance much-needed infrastructure investment and create green jobs across the country. Both announcements were laid out in a government statement on its ambitions for financial services just as the country prepares for the Brexit transition.

While some businesses may be stunned, and a business media focusing overwhelmingly on the pandemic taken by surprise, the TCFD - and a large global network of climate action awareness and advocacy - have been working steadily towards this development for a long time. Alongside them are a growing number of CEOs and global leaders. The next steps are surely to work urgently towards common sustainability standards, already on the cards

For the UK, sustainability leadership ahead of engineering a pandemic economic recovery with COP26 almost exactly a year ahead on the horizon and with a Brexit transition en route is a mantle just asking to be donned. Not only are climate action and sustainability part of an ESG wave that has at last captured the public imagination and are therefore a potentially unifying force at a time when politics appears to be ripping the world apart, but they hold huge potential for economic recovery - and a chance, possibly, to build fairer societies in their implementation. A Conservative Party that has made “levelling up” its platform could not be expected to do anything other than embrace that synergy.

The global pandemic response is also critical for survival - not just for individuals and their country populations, but for every single human being. Just as the UK education campaign on the use of face masks to combat the galloping spread of coronavirus now stresses that each of us must act not only to protect ourselves but each other ie “we are all in it together”, that is a truth that holds true on the climate crisis. As I wrote on Forbes many years ago now when a contributor, "‘When it comes to climate change, we are all shareholders.”

Global leaders are clear on the urgency. Christiana Figueres, formerly executive secretary of UNFCCC and now partner at Global Optimism said this week “There is about 150 trillion dollars of capital on the demand side wanting to have the information of climate risk that is embedded in companies. That is unheard of. That is no longer marginal, that is total exponential growth.” She added: “[Making Financial] risk disclosure and pricing pollution are the highest impact measures that governments can take. ”

Image Credit Green Horizon Summit #GHS2020 - mentioned in the last post on Board Talk and with a wealth of resources on its site.

And Green Finance Institute @GFI_green and of course, Mark Carney.

Global sustainability leadership knows it and as governments get on board, savvy business looks increasingly to its stakeholders even as it struggles with its pandemic response and its future profits. The financial services industry has wrestled with its reputation hangover since the financial crisis - and spent millions in attempting to market and ease out of that hangover. Now it has a chance to be “one of the good guys,” as suggested previously on Board Talk.

Noel Quinn, Chief Executive of HSBC - which has had its share of criticism in its financing of fossil fuels but also recent good results - said last week: “The industry needs to build transparency into the disclosure of our activity. The worst thing we can be accused of greenwashing. So we need to build acceptable reporting standards that are verifiable and that everyone looking at can say I understand exactly where that institution is and how well they are progressing on those commitments.”

There is already momentum towards acceptable reporting standards, but what is needed are acceptable sustainability standards, which have taken a long time to brew. In Europe, the legislation for sustainability disclosures will be reformed in 2021, as part of a major overhaul of financial market regulation which include plans to create accompanying reporting standards.

“This is a turning point for European policymakers, who have a unique opportunity to address the gaps identified in the study and provide much-needed directions and certainty to companies operating in critical sectors” says Frank Bold, whose research, implemented as part of a project funded by the European Climate Initiative, established by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, is very useful.

It also points out that, following the obligations introduced by the EU Non-Financial Reporting Directive in 2018, large companies, banks and insurers are obliged to disclose relevant information on environmental matters, social and employee issues, human rights and anti-corruption. But, it says - as shown by previous research of the Alliance for Corporate Transparency on the disclosures of 1000 European companies - the quality and relevance of information is still “critically poor.“ The European Commission is to present a proposal for a reform in early 2021, and the EU Parliament will vote on the issue in Autumn.

As time marches on amid a pandemic that will not stop raging, it is clear that more willingness is needed to talk about common standards. It was apparent to this journalist that when credit rating agencies jumped at environmental, social and governance (ESG) concerns, the world of finance and capital had shifted significantly. “Banks would be better placed in their climate and ESG data collecting if common sustainability standards were in place” said Fitch Ratings.

Elsewhere, Fitch said: “The link between financial and non-financial reporting is often unclear, making it difficult to assess whether banks are allocating sufficient capital to absorb ESG losses.” Its report out late last month on standardising ESG disclosures - Banks Need Harmonised ESG Disclosures For Climate Stress Tests - may well be applicable across industry sectors for better corporate governance.

In the UK, the corporate governance watchdog the Financial Reporting Council (FRC) has already called out the appalling status quo on climate reporting in the wake of the Chancellor’s statement on UK government intent on mandatory corporate disclosure. Today it has also, in a letter to CEOs, CFOs and audit committee chairs, outlined its expectations of companies’ climate disclosures including the impact of climate change on their activities, their own environmental impact as well as explanations of how directors are discharging their section 172 duties.

Given that David Rule, FRC Executive Director of Supervision said this early this morning, businesses - and audit chairs - might want to pay attention. ‘Comply or explain’ in the UK post-pandemic just might have found a stronger spine.

Thank you for reading. Board Talk is looking for commercial affiliation and collaboration around all things #ESG #sustainability #sustainablebusiness #climateaction - get in touch if any interest.