The global market shift to financing green and sustainable assets has accelerated in recent years. As a result, there has been increasing momentum to mainstream sustainability and climate-related reporting, as well as to streamline the reporting requirements across multiple frameworks and standards. The European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB) and Cambridge University’s Centre for International Sustainable Development Law (CISDL) jointly convened a panel of experts to discuss emerging trends in sustainability reporting, climate governance and transition planning across the EU, UK, and the US. The panel was chaired by Michael Strauss, EBRD General Counsel, and Thomas M. Clark, ADB General Counsel.
There are three key themes emerging from the panel discussion: (1) the landscape for climate and sustainability related requirements is evolving rapidly across jurisdictions; (2) businesses require support to understand and align with such requirements, and a significant element of this is the ability to identify not just sustainability-related risks and impacts but also opportunities; and (3) interoperability between requirements is crucial to ensure that different jurisdictions speak the same language.
Overview of developments in voluntary and mandatory disclosure regimes
The recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) are the preeminent market-driven initiative on information that entities should disclose to support investors, lenders and insurance underwriters in assessing and pricing climate-related risks. At the panel, Vesselina Haralampieva, Head of the Sustainable Finance Governance and Regulation Unit at the EBRD, shared that EBRD was the first Multilateral Development Bank (MDB) to sign up to the TCFD and has since published four annual TCFD reports.
The TCFD’s focus on climate-related disclosures, rather than broader sustainability-related considerations, points to the ‘climate-first’ approach in early disclosure trends. This perception has evolved considerably in recent years with disclosure regimes expanding to take into account broader sustainability themes, based on the recognition that climate change is inextricably linked with the challenges encountered with respect to nature and biodiversity loss, water resource management and pollution, among others.
In June 2023, the IFRS Foundation’s International Sustainability Standards Board (ISSB) released the first set of sustainability standards – IFRS S1 (General Sustainability Disclosures) and IFRS S2 (Climate-related disclosures). With these standards, the ISSB seeks to set a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. While the ISSB standards are voluntary, several jurisdictions, including the United Kingdom[1], have expressed strong support for reporting in line with the standards. At the panel, Mark Manning, Strategic Policy Advisor for Sustainable Finance at the UK Financial Conduct Authority (FCA), spoke extensively about the UK government’s initiative to formally adopt the ISSB standards.
The UK government’s ESG strategy, launched at COP26 in Glasgow, has two key themes – transparency and trust – which are seen as enablers for the sustainable finance market to scale with integrity. FCA co-chaired with the International Organisation of Securities Commissions (IOSCO) the detailed technical assessment of the ISSB standards which IOSCO endorsed as the basis for sustainability reporting expectations. The UK government has signaled a direction of travel to implement ISSB – the first step is to endorse the standards for use in the UK and the second step is for the FCA to implement it within its regulatory framework This process will be complemented with the disclosure expectations on transition planning, which is the remit of the Transition Plan Taskforce, therefore creating a complementary package of comprehensive sustainability disclosure standards.
Not long after the release of the ISSB standards, last year the EU adopted the European Sustainability Reporting Standards (ESRS) which sets out detailed mandatory requirements on a wide range of sustainability matters for in-scope EU and non-EU companies to report on. The ESRS are a key element of the EU Green Deal and complements the disclosure regime currently in place for financial market participants and financial advisors. Caroline May, Head of Sustainability at Norton Rose Fulbright, highlighted the impact of the EU Green Deal on the financial markets, lending practices and investment policies. She also noted that there is increasing interest and concern around the practical consequences of the Carbon Border Adjustment Mechanism (CBAM) for businesses, including on the marketability of overseas goods in the EU and creating a level playing field with goods produced in the EU. While large size companies are preparing to comply already, this will be challenging for SME companies. She shared that concerted efforts will be required in supporting SMEs, building knowledge and understanding and establishing uniform regulation across Europe and also in-scope entities in markets outside the EU which are relatively less mature and aware of the impacts of such regulation.
In a recent development since the panel, in March 2024, the U.S. Securities and Exchange Commission adopted final rules regarding climate-related disclosure by all SEC registrants (SEC Rules). At the panel, Lisa Sachs, Director at the Columbia Centre on Sustainable Investment, focused on developments in the U.S. market, and drew comparisons with the UK and EU in respect of climate commitments and transition planning requirements at the federal level in the US. While acknowledging the purposive value of disclosures, such as the SEC Rules, which were at the time of the panel under development, she raised an important concern that disclosure regimes in and of themselves must not be viewed as a standalone solution, and that it is critical that the findings of these disclosures serve as facilitative tools for regulatory agencies to set out transition requirements and climate finance. Given the lack of a coherent framework for transition in the U.S., it is important to have a purposive agenda for the use of such disclosure standards.
Perspectives of the Multilateral Development Banks
At the panel, Michael Strauss, General Counsel of the EBRD, emphasised on the social opportunities embedded in the low-carbon transition for countries, particularly those with hydrocarbon economies. EBRD’s Green Economy Transition Approach facilitates the Bank’s efforts towards enhancing policy engagement in its countries of operation for the development of long-term, low-carbon strategies and greening financial systems. Further, as of 1st January 2023, each of EBRD’s investment projects are screened to ensure Paris Agreement alignment. Therefore, there is a clear need for MDBs like EBRD to continue to identify barriers impeding investors from sustainable initiatives and leveraging their expertise and funding to overcome these obstacles.
Considering that the EBRD is a private sector focussed bank, Vesselina Haralampieva acknowledged the importance of EBRD clients aligning with leading sustainability reporting requirements. She highlighted that EBRD offers capacity building and technical assistance support to financial institution and corporate clients through its Corporate Climate Governance Facility to help bridge the readiness gap between the emerging and more advanced markets. Another areas of support offered under the Facility is to governments and regulators to develop ambitious yet realistic regulation and policies to create the enabling environment for investments. For example, most recently the legal department advised on the development of a legal framework for offshore wind in Greece, which is a milestone for Greece’s energy sector as it will help the country to capitalise on its unique offshore wind energy sources and become carbon neutral by 2050.
Reflecting on the role of the World Bank in the climate transition, Victor Mosotti, Chief Counsel of the Environmental and International Law Unit of the World Bank, noted that the last three years have marked a paradigm shift in the World Bank’s approach to climate change and sustainability with the endorsement of the Climate Change Action Plan (CCAP) in 2021. The CCAP set a number of commitments, including significantly increased commitments on climate finance for the World Bank. As of 1st July 2023, the World Bank is fully aligned with the goals of the Paris Agreement, i.e., each project must meet the goals of the Paris Agreement, support low carbon pathways and be in line with the relevant country’s climate commitments. Policy reforms support by the World Bank also aligns with the goals of the Paris Agreement. In 2022, the World Bank launched country climate and development reports which analyse and crystallise the pathways for development which countries have set for themselves to capture and link the objectives of development and objectives of climate.
Tom Clark, General Counsel of the ADB, highlighted the impact of climate change on businesses and assets, specifically the increased liability risk and climate litigation. ADB organised a judicial roundtable with commercial courts in the Asia Pacific region where participants noted that the judiciary is witnessing increased litigation on climate change related issues and, as a corollary of such jurisprudence, there is an interesting evolution of fiduciary duties of care, diligence, and climate risk disclosure of boards. Businesses are met with several challenges as they navigate and manage climate risks and, therefore, we are in a transitional period where business models and practices will need to evolve to align with the ambition of moving towards a low carbon transition. Businesses need tools on how they can best implement the net zero transition and at the same time ensure transparency and accountability. There are varying levels of progress across sectors and countries in this regard – subject to different capacities, regulatory standards and market maturity. Among ADB’s Developing Member Countries, Fiji is among the first Pacific Island member state which has adopted a climate change act that requires comprehensive disclosure of climate-related risks.
The full panel discussion is available on YouTube: https://www.youtube.com/watch?v=vW5aMT5B5iY
[1] Financial Conduct Authority, Policy Statement 21/23: Enhancing climate-related disclosures by standard listed companies, : https://www.fca.org.uk/publication/policy/ps21-23.pdf