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Cynthia E. Clark focuses on strategies for navigating the climate-related information-disclosure landscape.

Image courtesy of interviewee. April 30, 2024

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This video video discusses the complexities and challenges surrounding corporate disclosures of environmental impact and materiality standards. It articulates that materiality has traditionally been subjective and varies by jurisdiction. In the U.S., bodies like the Securities and Exchange Commission (SEC) and the Sustainability Accounting Standards Board (SASB) have adhered to a "single materiality" framework, focusing mainly on financial impacts. Conversely, in Europe, the International Accounting Standards Board (IASB) emphasizes a "double materiality" approach that also considers the impact of companies on stakeholders—incorporating sustainability-related financial information.

The emergence of sustainability-focused disclosure frameworks, exemplified by the establishment of the International Sustainability Standards Board (ISSB) in 2021, aims to create a standardized baseline for environmental reporting globally. Recent developments include the SEC's move to require climate-related disclosures and the application of environmental standards by companies in both the U.S. and Europe.

This video video highlights the market's growing demand for transparency around sustainability, with a notable shift in governance perspectives; 60% of board directors in a recent survey agreed that companies should prioritize stakeholders over shareholders. Additionally, there's an imperative for organizations to better understand and report their greenhouse gas emissions, capturing not just direct operations (scope one) and energy purchases (scope two) but also supply chain impacts (scope three).

As companies navigate these evolving regulatory landscapes and stakeholder expectations, they must carefully document their materiality assessments, integrate climate considerations into business strategies, and maintain oversight to ensure accurate disclosures. The discussion underscores that corporate sustainability reporting is no longer a question of whether to disclose but rather how to do so effectively.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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Although it sounds simple, the decision to buy companies

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to disclose information about their impact is anything, but,

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and that's what we're here to talk about today.

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It rests on the definition of materiality.

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Historically, this has been really confusing.

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For example, a manager must make a judgment based on

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information, both in the past and in the future,

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and making that determination of

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what information is material is subject by company,

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country, or both.

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So many materiality, standard setters used

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to prioritize only financial information to assess impact.

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So-called single materiality chief,

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among them were the Securities and Exchange Commission,

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and the Sustainability Accounting Standards Board,

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or SASB,

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both had stated an item is material if

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a substantial likelihood that the omitted fact

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would have been viewed by a reasonable investor

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as having significantly altered the total mix

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of information made available.

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Key to this is this word could, excuse me, would,

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so that is something we've been thinking about a lot lately,

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is how, how that changes

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when you look through a different lens such

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as a European lens or a different type of definition.

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So that generally involves the process of weighing

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all the known facts

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and circumstances to determine materiality in contrast.

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As I said, ER just a second ago, in Europe,

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other standard setters like the Multi-Country International

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Accounting Standards Board,

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or IASB, viewed the term more broadly.

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They said that information is material.

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If omitting, misstating,

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or obscuring, it could reasonably be expected

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to influence the decisions that the primary users

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of these financial statements need to make.

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So this started to include

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sustainable sustainability related financial information.

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So you can see how companies had difficulty depending on

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where they were and who they considered users

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of material information or users of these statements.

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So in an article I wrote a couple years ago,

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I outlined the ethical implications

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of using different standards for company stakeholders.

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Potential ethical implications exist

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because the wording in these definitions is different.

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So a could standard, such as with IASB,

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indicates something's possible,

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whereas a wood standard means that something is certain,

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even a guarantee.

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So if I was a

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Multinational company, I would have both

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of these standards pretty much knowing

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that the Woods Standard was harder, the could standard

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encompassed almost anything.

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Could it impact? Yes, it could.

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It's hard to mitigate away from a could standard.

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So the threshold

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for omitting information could be quite different in

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these different contexts.

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But what is clear is

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that the market really wants more than just

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financial information.

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They want sustainability related information.

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This has become necessary

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as companies we're being called upon to consider

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a wider set of stakeholders.

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And along with that, different types of information.

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According to a recent report by PWC, 60%

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of board directors agree

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that companies should prioritize stakeholders in making

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company decisions and not just shareholders.

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So how a company handles environmental concerns

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or crises are central to what a company stands for,

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and it's becoming increasingly divisive and complicated.

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Not surprisingly, it seems like every major country

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jurisdiction is focused on what

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and how to disclose environmental information

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to affirm stakeholders.

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Uh, so,

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we have a specific focus now on climate related information,

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and these disclosures are

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among the most prominent currently facing company

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boards and executives.

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In a preview of this year's proxy season, EY Center

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for Governance Matters said that found that 67%

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of respondents said that the climate related risks

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and opportunities are what investors will prioritize

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in their engagements with companies.

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The next most popular topic, topic only got about 38%.

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So 67% put climate risks

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and opportunities at the top of their list of

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how they're gonna engage with, with shareholders

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and invest investor companies.

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And so standard setters heard this call.

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So in 2021, to achieve a globally consistent baseline,

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which was sorely needed, the International Sustainability

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Standards Board or ISSB was created

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during COP 26.

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And so that was in concert

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with the International Financial Reporting Standards

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or IFRS.

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So you can start to see this consolidation happening in

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February of 2023, ISSB voted

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to release global guidelines in an attempt to help folks

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harmonize these environmental disclosures.

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They went into effect last month in February of 2024.

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Also at the same time, SASB

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in the United States Sustainability Accounting Standards

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Board decided

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To stand in unison with ISSB.

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So you can start to see, again, more consolidation.

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The consolidation started to happen around the wood,

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not the, not the wood standard, but the COULD standard.

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So again, more encompassing of more information

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and harmonization between Europe and the us.

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So the ISSB standards were built on

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existing standards that you may have heard of some

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of the listeners today.

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So the, task force

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for climate financial disclosures, the SASB, the CR

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CSRD, and the IASB kind of all came together.

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I'll talk about those in a second.

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It's a lot of, acronyms in this conversation.

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So ISSB fully incorporates the task force on climate

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related financial disclosures.

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That was sort of a US thing. Also.

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It includes SASB, which was a us

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standard setter that was relate, that was sort of congealing

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around industry-based requirements.

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Incomes, the Securities and Exchange Commission.

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As many listeners have heard, there

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has been a, a release that took about two years.

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It resulted in a final ruling last earlier this month,

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March, 2024.

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And what they're trying

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to do is put together climate related disclosure

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guidelines as well.

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The interesting thing about the SEC is

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they focus on the whole continuum.

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So for example, you have to report on people who's charged

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with this process.

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How are you doing this? What are your plans?

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And finally, what is your progress with those plans?

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So the four Ps people, process, plans

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and progress for your climate program.

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So things like cost of mitigation, goals, plans,

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and related effects on the financial statements

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must be included in your annual report.

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So this is a situation that is fluid, right,

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because just a week ago, mid-March 2024,

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a US Appeals Court granted a request

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for a temporary administrative stay on this rule.

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After two oil field services companies filed a lawsuit

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challenging the constitutionality of this,

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these required disclosures.

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So things are, as I said, pretty fluid.

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However, we'll find out soon

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what court is actually gonna take up this, case.

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It's unlikely though

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that the rule will be completely overturned.

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So companies will need to stay the course in order

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to be ready for fiscal year 2025 when these come into play.

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So if an aspect of the rule is altered,

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the SEC will likely issue guidance on these changes, right?

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And although we hear sometimes about this type

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of ESG pushback, it's actually pretty rare.

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So take for example, the recent report by KPMG.

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During the 2023 proxy season,

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shareholders submitted more than 800 proposals with the s

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and p 500 companies receiving 80% of those proposals.

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Of those proposals, nine in 10 were ESG proposals,

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and a quarter of those were climate related proposals.

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So a handful, only a handful were

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what we'd considered anti ESG.

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So as you might guess by now,

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using one standard for any given company is quite rare.

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So let's take, let's go back to Europe.

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So in Europe, companies use IFRS,

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but also CSRD,

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which is the Corporate Sustainability Reporting Directive,

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which has come into play in the last couple of years.

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That requires EU

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and non-EU companies with activities in the EU

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to file a sustainability report alongside

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their financial statements.

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This is what's called double materiality

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versus the SEC's single materiality.

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So double materiality requires financial

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materiality information,

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which is reporting on a company's economic impact in terms

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of its financial performance and things like that.

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It also includes what we call impact materiality,

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which is reporting on environmental

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and economic impact on employees, customers, and suppliers.

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So you have to do both,

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but luckily the I-S-I-S-S-B puts out a useful table

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of standards and those standards relationship

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to ISSB.

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So folks using some of these other existing standards can,

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can go on that site

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and, learn how to transfer

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what they've already been doing to this new ISSB standard.

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So what I think is also important to talk about is

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where we are now and what firms can do about it.

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So in terms of strategy, it's rarely a question these days

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of should companies report on climate change?

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It's really how, right?

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So boards and management first

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and together need to define their climate agenda.

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Thinking about questions like what areas are important

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to our business, our industry

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and our investors, employees customers, to be sure

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The reporting frameworks just discussed will dictate some

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of this, but there is room for firms

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to put their own stamp on it.

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Companies despite these unifying attempts,

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will likely struggle with what to report.

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And there is little doubt that this question is industry,

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country, and company specific.

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I suggest starting

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with understanding your company's environmental operations

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in terms of scope.

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Vital to this is risk assessments, right?

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So keep in mind that risks that are far into the future

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could affect investors today.

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That's the nature of climate change for after all.

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So here, reporting scope one

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and two serve as the minimum scope.

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One is G is greenhouse gas emissions,

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GHG, directly from your company's operations that are owned

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and controlled by the company.

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Scope two is indirect GHG emissions from the

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generation of purchased

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or acquired electricity steam heating cooling

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that is consumed by your company.

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So I do recommend starting with ISSB, no matter

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where your business is,

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ISSB standards require companies report on one

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and two scope, but it will soon require you

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to report on purchases along

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with information from your company's value chain,

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your whole value chain.

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And that includes suppliers.

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It is these value chain emissions that are scope three.

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So that will need, you'll need extra time due

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to the challenge of gathering data from suppliers in the us.

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The SEC's amended rules don't require companies

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to report on scope three yet.

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Um, because companies have generally opposed

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that requirement because it's burdensome and complex.

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Again, I, I don't, I think that will just postpone having

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to report on them, but not absolve companies

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of having to report on that.

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So this all loops back to materiality,

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which is where we started.

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So, much of the information, the SEC's

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document, which is some 600 pages long, this rule

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has a materiality qualifier.

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And so since the SEC oversees the two largest

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exchanges in the world, people are going

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to pay attention to it.

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Yet we know that ISSB is trying

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to harmonize and that's important.

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So it could be very challenging for companies to work

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with both a single materiality standard, the US

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and a double materiality standard Europe.

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So without question, you need

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to document your materiality assessments

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and judgments very carefully be clear about what

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threshold you used and how you arrived at a given decision.

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So since proper oversight flows from this

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sort of climate change

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Strategy, it's important to have a dedicated management

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team accountable for the reporting

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to ensure a greater likelihood

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of the accuracy of the information.

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After all, some of these regulatory agencies

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and quasi regulatory agencies are gonna be really

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scrutinizing what you disclose.

15:11.665 --> 15:15.335
Since 88% of institutional investors said

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that they look at ESG with the same scrutiny

15:19.675 --> 15:21.175
as financial considerations.

15:21.175 --> 15:23.935
According to a recent Edelman Trust barometer,

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it's a c-suite and board level responsibility

15:27.835 --> 15:29.695
and not want to be taken lightly.

15:30.125 --> 15:33.335
Therefore, make sure the board is aware of the goals

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and targets your climate plan states, because

15:37.465 --> 15:41.135
after all, they will be the ones who need

15:41.135 --> 15:42.535
to make resources available

15:43.435 --> 15:45.575
to achieve these goals and targets.

15:46.635 --> 15:48.895
So this is a lot to take in

15:50.305 --> 15:54.645
and I wish companies good luck in navigating this.

15:55.825 --> 16:00.765
And I have put a number of blogs on LinkedIn as well

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as on my personal website, Cynthia Clark phd.com,

16:06.115 --> 16:08.285
that outline some of these kinds of things

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because in my experience, it's something you need to go back

16:11.885 --> 16:12.965
to and review.

16:14.045 --> 16:16.905
Rarely do people get this right on the first pass through.

00:00 - Although it sounds simple, the decision to buy companies to disclose information about their impact is anything, but, and that's what we're here to talk about today. It rests on the definition of materiality. Historically, this has been really confusing. For example, a manager must make a judgment based on

00:18 - information, both in the past and in the future, and making that determination of what information is material is subject by company, country, or both. So many materiality, standard setters used to prioritize only financial information to assess impact. So-called single materiality chief, among them were the Securities and Exchange Commission, and the Sustainability Accounting Standards Board, or SASB,

00:47 - both had stated an item is material if a substantial likelihood that the omitted fact would have been viewed by a reasonable investor as having significantly altered the total mix of information made available. Key to this is this word could, excuse me, would, so that is something we've been thinking about a lot lately, is how, how that changes when you look through a different lens such as a European lens or a different type of definition.

01:28 - So that generally involves the process of weighing all the known facts and circumstances to determine materiality in contrast. As I said, just a second ago, in Europe, other standard setters like the Multi-Country International Accounting Standards Board, or IASB, viewed the term more broadly. They said that information is material. If omitting, misstating, or obscuring, it could reasonably be expected

02:01 - to influence the decisions that the primary users of these financial statements need to make. So this started to include sustainable sustainability related financial information. So you can see how companies had difficulty depending on where they were and who they considered users of material information or users of these statements. So in an article I wrote a couple years ago, I outlined the ethical implications of using different standards for company stakeholders.

02:36 - Potential ethical implications exist because the wording in these definitions is different. So a could standard, such as with IASB, indicates something's possible, whereas a wood standard means that something is certain, even a guarantee. So if I was a Multinational company, I would have both of these standards pretty much knowing that the Woods Standard was harder, the could standard

03:08 - encompassed almost anything. Could it impact? Yes, it could. It's hard to mitigate away from a could standard. So the threshold for omitting information could be quite different in these different contexts. But what is clear is that the market really wants more than just financial information. They want sustainability related information.

03:32 - This has become necessary as companies we're being called upon to consider a wider set of stakeholders. And along with that, different types of information. According to a recent report by PWC, 60% of board directors agree that companies should prioritize stakeholders in making company decisions and not just shareholders. So how a company handles environmental concerns or crises are central to what a company stands for,

04:02 - and it's becoming increasingly divisive and complicated. Not surprisingly, it seems like every major country jurisdiction is focused on what and how to disclose environmental information to affirm stakeholders. so, we have a specific focus now on climate related information, and these disclosures are among the most prominent currently facing company boards and executives.

04:29 - In a preview of this year's proxy season, EY Center for Governance Matters said that found that 67% of respondents said that the climate related risks and opportunities are what investors will prioritize in their engagements with companies. The next most popular topic, topic only got about 38%. So 67% put climate risks and opportunities at the top of their list of how they're gonna engage with, with shareholders and invest investor companies.

05:04 - And so standard setters heard this call. So in 2021, to achieve a globally consistent baseline, which was sorely needed, the International Sustainability Standards Board or ISSB was created during COP 26. And so that was in concert with the International Financial Reporting Standards or IFRS. So you can start to see this consolidation happening in February of 2023, ISSB voted

05:36 - to release global guidelines in an attempt to help folks harmonize these environmental disclosures. They went into effect last month in February of 2024. Also at the same time, SASB in the United States Sustainability Accounting Standards Board decided To stand in unison with ISSB. So you can start to see, again, more consolidation. The consolidation started to happen around the wood, not the, not the wood standard, but the COULD standard.

06:10 - So again, more encompassing of more information and harmonization between Europe and the us. So the ISSB standards were built on existing standards that you may have heard of some of the listeners today. So the, task force for climate financial disclosures, the SASB, the CR CSRD, and the IASB kind of all came together. I'll talk about those in a second. It's a lot of, acronyms in this conversation.

06:47 - So ISSB fully incorporates the task force on climate related financial disclosures. That was sort of a US thing. Also. It includes SASB, which was a us standard setter that was relate, that was sort of congealing around industry-based requirements. Incomes, the Securities and Exchange Commission. As many listeners have heard, there has been a, a release that took about two years. It resulted in a final ruling last earlier this month,

07:28 - March, 2024. And what they're trying to do is put together climate related disclosure guidelines as well. The interesting thing about the SEC is they focus on the whole continuum. So for example, you have to report on people who's charged with this process. How are you doing this? What are your plans? And finally, what is your progress with those plans?

07:58 - So the four Ps people, process, plans and progress for your climate program. So things like cost of mitigation, goals, plans, and related effects on the financial statements must be included in your annual report. So this is a situation that is fluid, right, because just a week ago, mid-March 2024, a US Appeals Court granted a request for a temporary administrative stay on this rule. After two oil field services companies filed a lawsuit

08:33 - challenging the constitutionality of this, these required disclosures. So things are, as I said, pretty fluid. However, we'll find out soon what court is actually gonna take up this, case. It's unlikely though that the rule will be completely overturned. So companies will need to stay the course in order to be ready for fiscal year 2025 when these come into play. So if an aspect of the rule is altered,

09:04 - the SEC will likely issue guidance on these changes, right? And although we hear sometimes about this type of ESG pushback, it's actually pretty rare. So take for example, the recent report by KPMG. During the 2023 proxy season, shareholders submitted more than 800 proposals with the s and p 500 companies receiving 80% of those proposals. Of those proposals, nine in 10 were ESG proposals, and a quarter of those were climate related proposals. So a handful, only a handful were

09:43 - what we'd considered anti ESG. So as you might guess by now, using one standard for any given company is quite rare. So let's take, let's go back to Europe. So in Europe, companies use IFRS, but also CSRD, which is the Corporate Sustainability Reporting Directive, which has come into play in the last couple of years. That requires EU and non-EU companies with activities in the EU

10:21 - to file a sustainability report alongside their financial statements. This is what's called double materiality versus the SEC's single materiality. So double materiality requires financial materiality information, which is reporting on a company's economic impact in terms of its financial performance and things like that. It also includes what we call impact materiality, which is reporting on environmental

10:50 - and economic impact on employees, customers, and suppliers. So you have to do both, but luckily the I-S-I-S-S-B puts out a useful table of standards and those standards relationship to ISSB. So folks using some of these other existing standards can, can go on that site and, learn how to transfer what they've already been doing to this new ISSB standard. So what I think is also important to talk about is

11:24 - where we are now and what firms can do about it. So in terms of strategy, it's rarely a question these days of should companies report on climate change? It's really how, right? So boards and management first and together need to define their climate agenda. Thinking about questions like what areas are important to our business, our industry and our investors, employees customers, to be sure The reporting frameworks just discussed will dictate some

11:56 - of this, but there is room for firms to put their own stamp on it. Companies despite these unifying attempts, will likely struggle with what to report. And there is little doubt that this question is industry, country, and company specific. I suggest starting with understanding your company's environmental operations in terms of scope. Vital to this is risk assessments, right?

12:19 - So keep in mind that risks that are far into the future could affect investors today. That's the nature of climate change for after all. So here, reporting scope one and two serve as the minimum scope. One is G is greenhouse gas emissions, GHG, directly from your company's operations that are owned and controlled by the company. Scope two is indirect GHG emissions from the generation of purchased

12:51 - or acquired electricity steam heating cooling that is consumed by your company. So I do recommend starting with ISSB, no matter where your business is, ISSB standards require companies report on one and two scope, but it will soon require you to report on purchases along with information from your company's value chain, your whole value chain. And that includes suppliers.

13:19 - It is these value chain emissions that are scope three. So that will need, you'll need extra time due to the challenge of gathering data from suppliers in the us. The SEC's amended rules don't require companies to report on scope three yet. because companies have generally opposed that requirement because it's burdensome and complex. Again, I, I don't, I think that will just postpone having to report on them, but not absolve companies of having to report on that.

13:55 - So this all loops back to materiality, which is where we started. So, much of the information, the SEC's document, which is some 600 pages long, this rule has a materiality qualifier. And so since the SEC oversees the two largest exchanges in the world, people are going to pay attention to it. Yet we know that ISSB is trying to harmonize and that's important.

14:23 - So it could be very challenging for companies to work with both a single materiality standard, the US and a double materiality standard Europe. So without question, you need to document your materiality assessments and judgments very carefully be clear about what threshold you used and how you arrived at a given decision. So since proper oversight flows from this sort of climate change Strategy, it's important to have a dedicated management

14:53 - team accountable for the reporting to ensure a greater likelihood of the accuracy of the information. After all, some of these regulatory agencies and quasi regulatory agencies are gonna be really scrutinizing what you disclose. Since 88% of institutional investors said that they look at ESG with the same scrutiny as financial considerations. According to a recent Edelman Trust barometer,

15:24 - it's a c-suite and board level responsibility and not want to be taken lightly. Therefore, make sure the board is aware of the goals and targets your climate plan states, because after all, they will be the ones who need to make resources available to achieve these goals and targets. So this is a lot to take in and I wish companies good luck in navigating this. And I have put a number of blogs on LinkedIn as well

16:00 - as on my personal website, Cynthia Clark phd.com, that outline some of these kinds of things because in my experience, it's something you need to go back to and review. Rarely do people get this right on the first pass through.

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