New global climate accounting standards take aim at greenwashing

New global accounting rules for measuring and reporting climate-related impact, due to go into force early next year, will give investors the tools to make better decisions and make it tougher for companies to exaggerate environmental righteousness, the head of the body in charge of developing them said.

The International Sustainability Standards Board (ISSB) is close to finalizing what it calls a global baseline of reporting practices, in response to widespread complaints that a hodgepodge of disclosure methods make comparing and analyzing corporate progress on such issues a confusing slog. The rules are set to be completed by midyear and will start being used in January, 2024.

The aim is to help investors, regulators and others accurately gauge how non-financial factors in the environmental, social and governance arena will affect corporate fortunes and asset values. Climate is the initial focus of the board, which was unveiled at the COP26 summit in Glasgow in 2021.

A major reason for the ISSB’s creation was to fight greenwashing – making false or exaggerated environmental claims, group chair Emmanuel Faber said on Friday. In the past year, regulators and law enforcement in North America and Europe dealt with a number of high-profile cases in which investment firms were punished for overstating their green bona fides.

“Greenwashing is paralyzing market decisions. You don’t know what’s true, what’s not true, so you don’t make decisions. At the same time we do not count everything that counts. Accounting is counting a lot of things, but we do not account for a number of very important things, and climate change is the first of them,” Mr. Faber said in an interview at the ISSB’s first major symposium in Montreal, where the group has its North American base.

“Climate change will redefine competitive advantages in supply chains, in value chains, in finance, for the foreseeable future. And there is a clear need by investors that is expressed by having a language that allows them to measure, to count, things like climate change.”

Canada continues relaxed regulation of ESG funds amid ‘greenwashing’ claims elsewhere

In Canada, the ISSB regulations will be studied by a new Canadian Sustainability Standards Board, which will be in charge of adapting them to suit an economy with a large number of resource-extraction companies, as well as small- and medium-sized enterprises that rely heavily on exports. It is nearing its selection of a chairperson.

Mr. Faber said he expects little pushback against adoption of the rules as the G20 and International Organization of Securities Commissions (IOSCO), the standard-setting body for securities regulators, including Canada’s, had called for the formation of a sustainability standards board.

IOSCO, which represents 130 national regulators as well as a number of related bodies, welcomed the ISSB’s decision to move ahead with the finalization phase, saying the standards answer an urgent need to do away with fragmented disclosure.

Mr. Faber, who was previously the chief executive of Paris-based food company Danone SA, also expects markets to embrace the standards voluntarily. “We are in a situation where there are hundreds of ESG metrics all over the place and market participants that are really eager to use one language, and one only, in a much more efficient manner to drive capital-allocation decisions,” he said.

A global baseline is also expected to influence corporate decisions. Mark Carney, who was governor of the Bank of Canada and then the Bank of England, told the symposium that companies will be able to better gauge how they will fare in a low-carbon economy, and invest in assets accordingly. A mining company, for instance, may exit coal extraction in favour of battery metals to remain competitive, said Mr. Carney, who is UN special envoy on climate action and finance.

The initial set of standards is based on the international Task Force on Climate-Related Financial Disclosures framework, which has become a gold standard for reporting on climate-related risks, and the Sustainability Accounting Standards Board. They mandate disclosure of material information about sustainability-related risks, in similar fashion as financial accounting. Sustainability disclosures and financial statements will be published at the same time.

The ISSB also calls for disclosure of important climate-related risks and opportunities, including risks tied to physical damage and the transition to lower-carbon energy, as well as opportunities from technological advances.

Disclosure of all three emission scopes is required for investors to understand transition risk, the ISSB says. Scope 1 includes carbon emissions from a company’s own operations. Scope 2 comprises emissions from the energy a company buys to power its plants. Scope 3 includes emissions along a company’s supply chain and from the end use of its products.

The latter is the most difficult to quantify. The ISSB will give companies a year before requiring Scope 3 reporting so they can improve measurement and disclosure practices.

In 2021, the Canadian Securities Administrators, the umbrella group for the country’s securities commissions, began a process to move to mandatory climate-related disclosure among public companies. It faced criticism from some quarters that its proposals did not go far enough on some fronts, such as giving companies the option of not disclosing all three emissions scopes.

That process was put on hold after the ISSB and the U.S. Securities and Exchange Commission proposed more stringent draft regulations.

Grant Vingoe, chief executive of the Ontario Securities Commission, said a date for Canadian adoption of the ISSB standards in 2024 has not been set. ”We definitely want to be part of the global baseline, but given that the CSSB isn’t operating yet, the IOSCO endorsement is still pending, I wouldn’t want to absolutely commit to a date,” he told The Globe and Mail.