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IFRS Sustainability Symposium highlights importance of quality climate disclosures.

Dougal Watt shares insights from the February 2024 IFRS Sustainability Symposium in New York.

The global IFRS accounting standards body is now the maintainer of the older TCFD disclosure system, and last year released the IFRS S1 and S2 sustainability standards. The S2 standards is likely being of most interest due to its focus on the specific topic of Climate Disclosure, and its increasing global uptake by regulators. With this background in mind, I flew to New York to attend this years IFRS Sustainability Symposium.

The overwhelming message from speakers and attendees was that climate disclosures are becoming more crucial to participation in the financial system, receive a good rating and better lending rates, and to being included in asset portfolios, but that more data is needed, it needs to be high quality, and needs to come from high quality transparent climate disclosures.

The Symposium was a superbly run conference full of highly accomplished speakers, with deep experience across the corporate and climate disclosure ecosystem from standards setters, stock exchanges, asset managers, government and former governmental regulators, ethics and assurance, to accounting, audit and risk. The attendees were likewise accomplished and I had many stimulating conversations around how different countries and companies were working in this space.

During the introduction, Richard Barker from the ISSB highlighted the different between IFRS S1 and S2 – a frequent source of confusion. S1 is the common language, or framework, for all sustainability related disclosures. This framework was used to create the S2 standard, which is specifically for making Climate-Related Financial Disclosures. He also mentioned that the ISSB will introduce other standards built on the S1 framework, with one example likely being a specific standard for nature based sustainability disclosures. My view is TFND is a significant benefit for sustainability, that will help drive change from a different but highly critical direction.

After introductory remarks, we heard from Jingdong Hua, Vice-Chair of the ISSB, who provided scene-setting on how the disclosure landscape is changing. The introduction of the IFRS S1 and S2 standards is a significant evolution in corporate sustainability reporting by bringing different strands of climate disclosure and reporting together under a single comprehensive framework and standard, that will help to reduce costs and complexities in disclosure reporting.

Next up was a panel discussion about the corporate disclosure eco-system from the country, regulator and ethics perspectives. We heard how the IFRS ISSB body is now working with country exchanges as more governments regulate for mandatory climate disclosures around the world. There were interesting insights into how determining country-level Nationally Determined Contributions (emission reductions) under the Paris Agreement will benefit from the uptake of the S2 standard for climate disclosures, and how exchanges see data interoperability as crucial but currently lacking. A further focus was on businesses treating climate disclosures as an opportunity for value creation, which is catered in the S2 standard through Opportunities, changes in Business Model, and targets.

We also heard from the Chair of the Board and CEO of Bank of America, on how the bank was pushing climate issues throughout their business and portfolio, and how critical climate disclosures are for companies wishing to access sustainable capital. This trend is something we are also seeing accelerate here in New Zealand, impacting lending through the corporate value chain and down into SME level business lending, where lending rates can now be contingent on measurable climate related metrics.

The issue of global standards adoption was also covered in a panel discussion. It has become clear that a large number of countries are adopting IFRS S1 and IFRS S2 for climate related disclosures, but with inevitable country-specific variations. Interestingly, from looking at how this is evolving, trade exposed countries are early in mandating climate disclosure standards: New Zealand has already mandated compliance with the Aotearoa New Zealand Climate Standard 1-3, Australia and Hong Kong are bringing in mandatory climate disclosures this year, Singapore and Malaysia in 2025, and others likely to do the same. This staggered adoption in turn is leading to standards-alignment discussions in these countries, especially with the European Union and their proposals for carbon tariffs. Presenters pointed out that all countries and business that are trade exposed are now on notice that high quality climate disclosures have become a key part of international trade, and a must have to access large markets such as the EU.

One of the most interesting set of presentations and discussions came from various financial sector presenters. We heard from a panel of investment advisors, asset managers, and sustainable capital investment advisors about the climate disclosure information investors need. Currently data gaps from poor or missing corporate climate disclosures is holding back capital allocation that companies could use to grow their businesses. While everyone acknowledges that having Scope 3 data is useful, even current Scope 1 and 2 data is often poor quality. Perhaps more importantly, risk-related and business model change data is critical to company ratings and access to capital. All these disclosure data elements are now critical in assessing risk and allocating capital, and need to be a key focus in climate disclosures. I had an interesting conversation along these lines with actuaries, who highlighted that they can’t accurately measure asset risk exposure because climate disclosure risk data is often missing or obscured, and they needed clean consistent disclosure risk data.

Throughout the rest of the symposium, speakers repeated how fundamental this data problem is to the investment lifecycle. Fiona Bassett, CEO of FTSE Russell spoke at length about how quality climate disclosures are critical in determining where a company will be rated relative to its peers. Similarly, various other speakers in investment and asset management described how investment portfolios are changing their weightings to favour companies with good quality climate disclosures that are transparent about risks, opportunities and transition planning. Conversely, they were down-weighting companies in their portfolios with poor quality climate disclosures that obscured vital information.

Key takeaways

– as the financial system is ramping up its response to climate change, companies ability to participate will come down to their ability to produce quality climate disclosures.

– ratings agencies and lenders will rate companies higher if they produce quality disclosures, and down-rate companies with poor disclosures – this will have a direct impact on funding/cost of capital.

– funds will actively manage their asset portfolios towards companies with better quality disclosures – this will directly impact company share prices.

– rating agencies, lenders, asset/fund managers, and actuaries are crying out for cleaner, consistent data as currently more than one third of their data is interpolated from poor quality data.

– particular attention will be paid to companies with climate disclosures with a strong focus on risks, opportunities and transition planning – the key elements that show a business is responding to market signals and aligning its business model with where change is heading, which again will affect ratings, share price and access to more affordable lending.

– data analysis is an urgent issue – current disclosures are not easily able to be interpreted by analysts, especially when disclosures contain unnecessary emotive information not grounded in hard data.

– trade exposed businesses are now on notice that high quality climate disclosures are becoming a key part of international trade.