One of us (Alex Friedman) once worked in the Pentagon as a Special Assistant to the Secretary of Defense and recalls well the first bewildering days of being overwhelmed in a sea of military-specific acronyms: CO, JCS, NCO, XO, OPSEC, CONUS, FOB, TDY, OER, OPR, to name but a few.
In time, they made sense. But more importantly, as with all topics of complexity, the key was to boil down the technical terms to their essence, make things simple and emerge with a clearer vision.
Decades later, in the most unexpected place, we have encountered an equally robust alphabet soup of acronyms. The place resides in the field of environmental, social and governance issues, better known by its moniker of ESG. Here, the abbreviations include ISSB, SASB, VRF, NFRD, CSRD, SFDR, TCFD, TNFD, CDP, GFANZ, GRI, IIRC, PAIs, SBTi and a host of others.
But just as at the Pentagon, the ESG alphabet soup can also be reduced to clarity, for behind these acronyms exist an overlapping group of regulators and non-governmental organizations (NGOs) that are all driving towards a similar destination – enabling companies and investors to track not just financial results, but also material information about sustainability.
Recently, the International Sustainability Standards Board (ISSB) released two key reporting standards. It requires companies to disclose material information about sustainability-related risks and opportunities including governance, strategy, risk management and performance, alongside industry-specific information. The second standard, forthcoming soon, will determine the specific requirements for climate-related physical risks, transition risks and opportunities.
This was big news in the admittedly esoteric world of ESG regulations—for three reasons.
- First, it matters because the ISSB is both the surviving entity of several leading reporting groups that merged (e.g., the Sustainability Accounting Standards Board and the Value Reporting Foundation) as well as part of the International Financial Reporting Standards (IFRS) organization that largely sets accounting standards globally.
- Second, because just weeks ago, it was announced that the category-defining Task Force on Climate Related Disclosures (TCFD) framework will be administered by the ISSB in 2024.
- And third, because the ISSB got a lot of buy-in for its new sustainability standards from a range of important groups, including the International Organization of Securities Commissions, which has around 160 jurisdictions globally that follow its rules.
Still, it is too early to know if the ISSB standards will become the core baseline for company reporting. Partly, that is because the US Securities and Exchange Commission’s proposed climate rules are still waiting to be finalized and will likely have a lighter burden than ISSB. Meanwhile forthcoming EU rules under the Corporate Sustainability Reporting Directive (CSRD) will probably be tougher.
More broadly, the execution of new reporting regulations in the ESG field has encountered some hiccups. This was evident in Q4 2022’s sweeping downgrades related to Europe’s Sustainable Finance Disclosure Regulation, introduced to improve transparency in the market for sustainable investment products, in which numerous fund managers rebranded their Article 9 funds (funds that have sustainable investment as their objective ) to lower-burden Article 8 funds (fund that promotes environmental or social characteristics).
Finally, extended public consultations and drafting of SFDR, CSRD, and the SEC’s proposed climate rules, and the ambiguity surrounding the timing, manner, and substance of the reporting requirements across these regulations remains to be worked out.
In real-time, however, we are now witnessing the unfolding of the SEC, SDR, SFDR, CSRD, and IFRS’s ISSB rollouts. The grand visions of these regulatory bodies and frameworks are currently being tested against the harsh practicalities of execution – ESG objectives and carbon emissions, in particular, can be difficult to measure. As a result, the mechanisms for reporting can often be seen as overly complex.
Seen in this light, the crux of the resistance that has emerged is less about the substance of what organizations need to report, and more about whether the pace and the volume of the disclosure requirements are excessive. The notable exception is the corporate pushback in the US on Scope 3 reporting requirements within the SEC’s proposed climate rule, where the resistance has focused on difficulties in getting good data on a company’s supply chain emissions contributions.
Still, it is possible to identify the connective tissue that runs through the many regulations and voluntary frameworks. All mandate, in some form, the reporting of greenhouse gas emissions, usually across Scope 1 and 2 emissions, with either required or phased-in requirements around Scope 3 reporting. Regulations and frameworks also ask firms to align with the TCFD (now subsumed into the ISSB) to identify climate-related risks and opportunities, and whether firms have set emissions reduction targets that are in line with the Paris Agreement, via the Science Based Targets initiative (SBTi) or another decarbonization strategy.
This means that companies should not become overly fixated on the inevitable complications of these regulatory rollouts, nor on the divergence in language and scope. Remember, these would-be regulations and frameworks are groundbreaking, and perfecting them will take time.
Instead, businesses should concentrate on the universal aspects of reporting present across all these standards. They will need to find new ways to more accurately measure green-house gas emissions, to identify climate-related risks and opportunities (TCFD), and to set emissions reduction targets aligned with the Paris Agreement (SBTi). By doing so, the swirl of acronyms will give way to more clarity about key regulatory requirements coming into effect soon.