As we’ve addressed many times, the International Sustainability Standards Board has issued its first two exposure drafts, General Sustainability-related Disclosures (S1) and Climate-related Disclosures (S2), which were both open for comment until July 29, 2022.

Last time we looked at some reaction to the following proposal in S2:

• An entity shall disclose information that enables users of general purpose financial reporting to understand the resilience of the entity’s strategy (including its business model) to climate-related changes, developments or uncertainties—taking into consideration an entity’s identified significant climate-related risks and opportunities and related uncertainties. The entity shall use climate-related scenario analysis to assess its climate resilience unless it is unable to do so. If an entity is unable to use climate-related scenario analysis, it shall use an alternative method or technique to assess its climate resilience. When providing quantitative information, an entity can disclose single amounts or a range.

Let’s continue with that today. Some respondents thought scenario analysis of some kind should be required in all situations. The following (rather fuzzily written) comments came from a Montreal Roundtable on Sustainability and Climate Disclosures:

• Scenario analysis should not be speculative. It requires judgment to make the right choices so that we are prepared for the future. “What if” scenario analysis enables business to make predictions and forecasts on the stock market, on equities, on revenue and capital cost, on production, and even on carbon emissions. It is not speculative if it is done in a scientific approach, using judgment to make choices for the future. On the climate front, companies can predict and prepare themselves by making capital commitments to ensure their transition to net zero. Scenario analysis is useful for companies in every sector, whether an extractive industry, a financial industry, or technology industry; scenario analysis should be a requirement and it is not speculative.

But as you’d probably expect, a greater number of respondents agreed with the general proposal, while proposing various tweaks and clarifications. This is Cenovus Energy Inc.:

• We support the use of scenario analysis in assessing potential effects of climate change on business models and currently disclose the results of our scenario analysis qualitatively. However, we do not believe it should be mandatory at this time. Without a common framework for creating such scenarios, there are limits to both the usefulness and comparability across issuing companies. We are supportive of requiring issuers to complete scenario analysis once there is greater scope to agree on common assumptions and a framework for scenario creation, as well as appropriate liability protections as it relates to disclosing forward-looking information.

And then there’s PricewaterhouseCoopers:

• We recommend eliminating the hierarchy which mandates climate-related scenario analysis over alternative methods or techniques. The focus should be on how management is actually assessing resilience, and it should provide flexibility in how the analysis of resilience is performed – whether qualitative or quantitative. As processes mature over time and investors are more experienced at evaluating the disclosures, more detailed quantitative approaches will emerge.

This is from the Brazilian Financial and Capital Markets Association (ANBIMA)

• Information on climate resilience strategies is essential in the process of analyzing companies, and the proposal to expand this information in the reports is very positive.
• As for the dissemination of alternative techniques used to assess the climate resilience of a company’s strategy, the flexibility of the proposal is also one of the positive highlights, since it does not determine scenario analysis as a single methodology. On this point, we reinforce the importance that the required information – including the methodologies that must be used and reported – be proportional (to size, sector, [….]).

The Financial Reporting Council of Nigeria commented:

• The inputs and assumptions used to perform the required analysis are likely to vary considerably between entities, potentially limiting the usefulness of the information disclosed. Additionally…we believe entities need to be given adequate time to transition and develop the ability to perform the analysis even if they consider such risks to be relatively insignificant compared to others.
• The exemptive position…to use alternative methods if an entity is “unable” to prepare scenario analysis is helpful, however, it may be a high hurdle to satisfy and demonstrate appropriateness of its use to auditors and regulators…the Board may wish to reconsider the conditions attached to an entity being permitted to using an alternative approach.

And, in broadly agreeing with the proposal, Coronation Fund Managers opined that “Not every company will have the data availability or the resources to employ a tool as complex as scenario analysis. This may unfairly disadvantage smaller companies in emerging markets, where country-level data may not be readily available at this stage.” They added “it would be useful for this requirement to have a later effective date so that the entity has time to develop the skills and capabilities to be able to properly employ this type of analysis. However this is tempered by the allowance for alternative methods.”

Anyway, in its January 2023 update, the ISSB “tentatively decided to require an entity to prepare these disclosures using a method of climate-related scenario analysis that requires it to consider all reasonable and supportable information available at the reporting date without undue cost or effort. Such information could include information about past events, current conditions and forecasts of future economic conditions.” It “emphasized that application guidance would build on materials published by the Task Force on Climate-related Financial Disclosures (TCFD), putting entities on a path to develop their capabilities and strengthen their disclosures over time.” Some respondents will have hoped for more, others for less. So it goes!

The opinions expressed are solely those of the author