As of this writing, the US Securities and Exchange Commission is putting the finishing touches on its climate disclosure rule. With a potential government shutdown looming in early March, it makes sense that the SEC wants to make a final push to get the climate rule over the goal line. Details about what is in the final rule are scarce. Chair Gary Gensler has previously spoken about the complexity of scope 3 emissions reporting — so it makes sense that provision of the climate rule could be removed.
No matter what the final rule says, it is almost certain to be challenged in court. The Supreme Court in 2022 ruled against the Environmental Protection Agency in a decision over regulations for greenhouse gas emissions, and that case had implications for SEC rules as well.
The SEC’s climate rule and other environmental disclosure regulations for companies put a spotlight on the subject of today’s newsletter: the International Sustainability Standards Board, set up in 2021 to develop global standards for this kind of reporting. How will the ISSB’s standards work together — or be in tension — with government regulations?
The alphabet soup’s new incarnation
It is not unusual to see protesters challenging banks to stop financing fossil fuels. These protesters have previously stormed banks’ annual shareholder meetings. Or they have attacked bank branches. Five climate activists were on trial this month for allegedly vandalising JPMorgan’s London office.
Last week, climate protesters opened a new front — by storming a room of polite accountants.
On Thursday, climate activists seized the stage at the IFRS Sustainability Symposium in New York. They struck just after Bank of America chief executive Brian Moynihan finished delivering a pre-taped message applauding the work of the International Sustainability Standards Board. (Moynihan had been scheduled to be there in person). The protesters assailed Bank of America, which recently walked back a commitment to end direct financing of Arctic drilling and coal projects.
The scene reflected the state of tensions between climate activists and global finance. People are angry with the glacial pace of slashing carbon emissions to save the climate. At the same time climate’s significance to finance has grown, as evidenced by the symposium itself, which highlighted the work of the International Sustainability Standards Board.
When the ISSB was unveiled by the accounting standards body IFRS at COP26 in Glasgow more than two years ago, it endeavoured to organise the “alphabet soup” of sustainability reporting programmes such as the Task Force on Climate-related Financial Disclosures (TCFD). Significant streamlining has already occurred. The ISSB has swallowed the TCFD and the Sustainability Accounting Standards Board (SASB) and forged a collaboration agreement with the Global Reporting Initiative.
But the alphabet soup debate is still heating up. Moynihan’s remarks before the protest warned about government-enforced sustainability rules.
“There is now concern that the ‘alphabet soup’ of voluntary, non-financial disclosures which we’ve done so much to consolidate and bring into the ISSB is being replaced by a range of non-standardised, regulated disclosures,” Moynihan said.
While Moynihan didn’t mention it specifically, Europe’s Corporate Sustainability Reporting Directive is kicking in and global companies like Bank of America will need to comply. Starting this year, the CSRD requires big companies to prepare environmental, social and governance information for reporting next year. One of the more disruptive portions of the rule is its “double materiality” obligation. Companies need to report on their impacts on the environment and society as well as financial materiality figures.
“The CSRD will significantly expand the scope of ESG disclosure required of us,” Goldman Sachs said in a February 23 regulatory filing.
After the protesters were cleared from the stage, ISSB chair Emmanuel Faber gave them a gracious response. “These kids could be my kids, they could be yours — maybe they are,” he said as the audience chuckled. “They have a message,” he said, “and that message needs to stay.”
The reason that the ISSB’s work is important “is also because of that”, he said, referring to the protesters. “The transition, the social unrest, the lack of a future that is desirable for a generation.”
In an interview, Faber acknowledged there was “a tension” with the CSRD and other government regulations, but added that there was a common interest in levelling the playing field. Several countries including Australia and the UK have proposed ISSB frameworks as a baseline for accounting rules.
“The train has left the station,” Faber told me.
And it is gaining steam, as shown by the growing number of software businesses developing sustainability compliance tools.
I talked with representatives from one of these companies, US-headquartered Persefoni, at the symposium. Persefoni last year said it had raised millions from TPG Rise, the impact fund of the private equity firm TPG.
I also met Dougal Watt, a former IBM technologist who started software start-up ClimateTracker in New Zealand. “The message I really heard today was that [sustainability] disclosures are going to become more important than people realise,” he said. “The heat is really on.”
Visiting from Montreal, Milla Craig, founder of sustainability advisory firm Millani, said it was “quite remarkable” how quickly companies had started committing to adopting ISSB standards.
“I think the ISSB and IFRS have been incredibly successful in [the ISSB’s] short life,” she said. Several companies on the Toronto Stock Exchange, especially mining companies, have already incorporated double materiality, she noted. “Having been around capital markets and the responsible investing space for 30 and 15 years, I have rarely seen anything happen so quickly.”
From COP26 more than two years ago, Gillian Tett wrote that “green battles are no longer only being waged with placards on the streets or on government podiums, but in corporate committee rooms too. Perhaps it is time for activists to retrain as auditors — this new front in the climate war could yet turn out to be a potent force for change.”
I was struck by Gillian’s words after seeing the protesters on the ISSB stage. The emphasis on sustainability standards puts accountants squarely in the thick of the climate wars. And this means the ISSB could come under further attacks from both right- and left-leaning politicians.
Smart read
I recommend this article from our colleagues Cristina Criddle and Kenza Bryan about the booming water consumption by big technology companies Microsoft, Google and Meta. Demand for servers running AI applications could drive up their water withdrawal — where water is removed from ground or surface sources — to between 4.2bn and 6.6bn cubic meters by 2027, or about half the amount consumed by the UK each year.
Read the full article here