Navigating an evolving climate disclosure landscape 

Navigating an evolving climate disclosure landscape 

Fri 23 Jun 2023

As attention to climate change increases, cutting through regulations, protocols and initiatives inevitably becomes more difficult. From different approaches taken by international regulators to the proliferation of acronyms, sustainability departments are under a lot of pressure to understand the climate disclosure landscape and implement a relevant strategy.

The first step is to distinguish between legal and voluntary requirements. For large companies in the UK, the government introduced mandatory climate change reporting rules in April 2022 under the Task Force on Climate-Related Financial Disclosures (TCFD) framework. In comparison, companies based in the EU will be subject to the Corporate Sustainability Reporting Directive (CSRD) and report according to European Sustainability Reporting Standards (ESRS). Of course, large UK companies with operations in the EU will be within scope of the CSRD through any direct EU operations or the supply chain. Similarly, EU companies with operational links to the UK must also comply with TCFD.

Moving from voluntary to mandatory 

While voluntary standards form a reasonable basis for understanding environmental, social and governance (ESG) requirements, it’s clear that demands are becoming more stringent. This is particularly the case in Europe, where the ESRS calls for the external audit of data. However, the leap from voluntary to mandatory is often not as difficult as envisaged. In many cases, voluntary standards form the basis of current or planned mandatory climate disclosure requirements. The TCFD, for example, was originally a voluntary standard developed to improve investor communication. In addition, there is a high overlap between TCFD and CSRD ESRS standards that can help bridge more than one set of climate disclosure regulations. 

In terms of voluntary standards, it is widely accepted that the Greenhouse Gas (GHG) Protocol provides a solid reporting base. However, it’s important to cross-reference the protocol with ESRS requirements to ensure you stay on the right legal path. At the same time, the voluntary Science-Based Targets initiative (SBTi) has become the de facto standard for setting climate targets. This is unlikely to change in the near term as mandatory regulations also acknowledge SBTi standards and the need to set targets in accordance with climate science becomes clear. Equally, Boards are realising that standards set are not simply a reporting requirement anymore but are a crucial factor for future-proofing business.

Define your approach

While there is an overlap between voluntary and mandatory climate disclosure requirements, understanding how they apply specifically to current operations requires a gap analysis to determine how process changes can be integrated as smoothly and efficiently as possible. At this point, it’s vital that sustainability leaders and board members develop enough understanding of sustainability regulation to prioritise the company’s material climate impacts. A less defined approach can result in trying to do too much too quickly, resulting in a poorly defined strategy and even poorer performance. A clear understanding of leading legislation helps identify critical hotspots allowing you to become gradually more precise on climate disclosures. 

Use governance as a driver 

The ability to navigate an evolving climate disclosure landscape requires developing a clear understanding and ensuring proven processes are in place and responsibilities assigned. For example, GHG reduction target timeframes usually go beyond standard business planning periods. This means that while a target pathway can be mapped out based on the status quo of possible measures, companies need proper governance of climate-related issues to ensure they can react to changing circumstances. It requires the correct internal reporting and monitoring mechanisms as well as rolling forecasts for regular updates of planning data. 

A focus on governance ensures there is proper oversight to manage and evaluate strategies and responsibilities transparently, yet its power as a driver is often overlooked. However, when appropriately recognised, governance provides the solid foundations to manage and disclose climate impacts more rigorously and accurately as we move toward meeting net-zero targets.