Climate-related disclosures – sufficiently on target?

As we’ve addressed many times before, the International Sustainability Standards Board has issued its first two exposure drafts, General Sustainability-related Disclosures and Climate-related Disclosures, which were both open for comment until July 29, 2022.

Here’s an extract from the document on climate-related disclosures:

  • the Exposure Draft proposes that an entity be required to disclose information about its emission-reduction targets, including the objective of the target (for example, mitigation, adaptation or conformance with sector or science-based initiatives), as well as information about how the entity’s targets compare with those prescribed in the latest international agreement on climate change.
  • The ‘latest international agreement on climate change’ is defined as the latest agreement between members of the United Nations Framework Convention on Climate Change (UNFCCC). The agreements made under the UNFCCC set norms and targets for a reduction in greenhouse gases. At the time of publication of the Exposure Draft, the latest such agreement is the Paris Agreement (April 2016); its signatories agreed to limit global warming to well below 2 degrees Celsius above pre-industrial levels, and to pursue efforts to limit warming to 1.5 degrees Celsius above pre-industrial levels. Until the Paris Agreement is replaced, the effect of the proposals in the Exposure Draft is that an entity is required to reference the targets set out in the Paris Agreement when disclosing whether or to what degree its own targets compare to the targets in the Paris Agreement.

The disclosure would include, for each climate-related target, metrics used to assess progress towards reaching the target and achieving the entity’s strategic goals, among other things.

These comments are from the Voluntary Carbon Markets Integrity Initiative:

  • … the terminology used can lead to confusion. The term ‘climate-related target’ is not defined clearly, and seems to encompass a whole range of different objectives, including GHG emissions reductions targets, GHG neutrality targets, climate adaptation targets, etc. While reporting on all of these elements would contribute to increased transparency on the market, we suggest differentiating at least between GHG mitigation targets and the others, and adapting the disclosure requirements appropriately.
  • We suggest including a definition of “GHG mitigation targets” that refers to targets in absolute value (rather than allowing for intensity targets) and implementing a common reference timeframe to achieve these targets to enable users of general-purpose financial reporting to compare the GHG mitigation targets set by different disclosing entities. Carbon credits cannot be used to offset emissions (i.e., carbon credits cannot be counted as internal emission reductions) as part of GHG mitigation targets.
  • Carbon credits may be relevant, however, when considering other type of climate-related targets, such as GHG neutrality targets. For those types of targets the VCMI therefore suggests including additional requirements. GHG neutrality targets can relate to specific products and services in the context of GHG mitigation targets. Information should be disclosed regarding the nature, quality of credibility of carbon credits used on the context of carbon neutrality targets

Moody’s Corporation commented concisely: We agree, and we see particular significance in the consistency with the financial statements…In addition to the proposed disclosure items, we would also welcome a discussion of the entity’s ability to meet its targets and the extent of reliance on third parties to meet such targets.” BMO Global Asset Management thought the disclosure should include “disclosure of trade-offs between sustainability-related risks and opportunities and disclosure requirements on whether and how executive compensation is linked to reaching sustainability targets.” The International Accreditation Forum “recommends a general requirement to disclose the methodology upon which the targets have been based. Science based targets evenly distribute the requirement to reduce emissions rather than focusing on industries with the most emissions and emission reduction potential. There are some industries where it will be difficult to reduce emissions because of their high efficiencies. Net-Zero definitions are evolving and in practice, there are many industries that will not meet this standard without offsets.”

These comments are from the Rainforest Action Network:

  • The proposed disclosure should be supplemented with a requirement to disclose any steps and procedure the company plans in case it misses its targets and/or milestones…
  • The proposed definition for ‘latest international agreement on climate change’ is insufficient. While referring to international agreements is relevant, the agreements themselves do not provide clear targets that can be easily compared to company targets. They set broad general goals, but these goals often need to be translated in concrete milestones. Therefore, the standard should require companies to compare targets to the latest scientific evidence on limiting global warming to 1.5C….

The commentators cited above all raise good points. There’s ample evidence, from both private and public spheres, of how announcing a “target,” no matter with how much fanfare, doesn’t amount to much in the absence of accompanying plans, methodologies and structures for ongoing accountability. Although that aspect of things isn’t absent from the exposure draft, it should likely be made tougher…

The opinions expressed are solely those of the author.

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