ESG and sustainability disclosure and reporting requirements for listed and non-listed companies are rapidly taking shape. As announced at COP26, there is now an International Sustainability Standards Board (“ISSB”) tasked with encouraging global uptake of ESG reporting standards. In the EU, the European Financial Reporting Advisory Group (“EFRAG”) is the body tasked with developing mandatory sustainability and ESG reporting standards under the EU’s Corporate Sustainability Reporting Directive (“CSRD”). Both the ISSB and EFRAG have each recently published ESG and sustainability disclosure and reporting “prototypes”. These prototypes are important pieces to an emergent reporting regime that is very likely to become critical commercially—if not mandatory—for many companies. There are also encouraging signs that what has until recently been a relatively disjointed set of standards, is beginning to come together under a more harmonized agenda and institutions.

This blog presents an overview of some of the detailed climate-related disclosure and reporting metrics covered by the ISSB and EFRAG climate prototypes, and highlights critical considerations for companies as more detailed and mandatory ESG and sustainability reporting frameworks begin to take shape.

Global Context & COP26 Pledges

Major developments that emerged from the November 2021 COP26 summit included the announcement of the new Glasgow Climate Pact, a renewed emphasis on the role of the private sector in addressing climate change risks and opportunities, and the launch of the Glasgow Financial Alliance for Net Zero, a coalition of existing and new net zero finance initiatives dedicated to assisting companies realign their business models for net zero.

In addition, a critical adjunct to COP26 was the announcement of the launch of the ISSB and its work towards the development of uniform global environmental, social, and governance (“ESG”) reporting standards. The ISSB represents an effort to encourage global uptake and to merge into one the existing ESG reporting standards (including frameworks such as the Task Force on Climate-Related Financial Disclosures (“TCFD”), and Climate Disclosures Standards Board Initiative). This global baseline of ESG reporting standards aims to provide investors, capital market participants, and a wide range of other stakeholders with information about companies’ sustainability-related risks and opportunities. Similar to its sister organization the International Accounting Standards Board, the ISSB will be managed by the International Financial Reporting Standards Foundation.

Climate and Sustainability Disclosure “Prototypes”

1. The ISSB’s Climate and Reporting Prototypes

In November 2021, a group formed to undertake preparatory work for the ISSB published two disclosure prototypes for companies’ climate and general sustainability reporting that are intended to help investors understand how companies are responding to ESG issues:

(i)  the Climate Prototype sets out the requirements for the identification, measurement, and reporting of climate-related financial information; and

(ii) the General Requirements Prototype establishes principles for the reporting of sustainability-related financial information, for example, concerning the definition of materiality in the ESG context or a company’s integration of sustainability reporting into its governance (e.g., committees and management’s role in assessing risks and opportunities).

The ISSB’s Climate Prototype is structured around the four thematic areas used by the TCFD for its recommendations. According to the Climate Prototype, a reporting entity would be required to provide information that enables users of general purpose financial reporting to assess a company’s:

  • Governance—the governance processes, controls, and procedures the entity uses to monitor and manage climate-related risks and opportunities;
  • Strategy—the climate-related risks and opportunities that could enhance, threaten, or change the entity’s business model and strategy (including the impact of climate-related risks and opportunities on its financial position, performance, and cash flows, as well as on the entity’s resilience);
  • Risk management—how climate-related risks are identified, assessed, managed, and mitigated by the entity; and
  • Metrics and targets—the metrics and targets used to manage and monitor the entity’s performance in relation to climate-related risks and opportunities over time.

The scope of the Climate Prototype encompasses physical climate-related risks, risks associated with the transition to a lower-carbon economy, as well as climate-related opportunities for the entity.

Pursuant to ISSB’s Climate Prototype, an entity shall disclose the following cross-industry climate metrics:

Greenhouse gas emissions Scope 1, 2 and 3 in metric tonnes of CO2 equivalent.
Transition risks Amount and percentage of assets and business activities vulnerable to transition risk.
Physical risks Amount and percentage of assets and business activities vulnerable to physical risks.
Climate-related opportunities Proportion of revenue, assets or business activities aligned with climate-related opportunities (in amount or percentage).
Capital deployment Amount of capital expenditure, financing or investment deployed toward climate-related risks and opportunities (in reporting currency).
Internal carbon prices Entity’s internal price for each metric tonne of GHG emissions.
Remuneration Proportion of executive management remuneration affected by climate-related considerations in current period.

Importantly, the Climate Prototype foresees additional industry-specific climate metrics for companies to report on. Appendix B of the ISSB’s Climate Prototype provides a summary of the industry-based reporting requirements. It includes multiple requirements specifically identified for each industry, for example water withdrawn and consumed in water stress regions for software service companies, or palm oil supply chain reporting for companies selling household and personal products. In light of the growing interdependence between the many ongoing ESG regulatory initiatives (especially those originating in the EU), this reporting requirement should, for example, be considered in the context of recently announced national and international deforestation due diligence requirements for specified products being placed on the UK and EU markets.

2.  EFRAG’s Climate Standard Prototype: Towards Harmonization?

The ISSB’s Climate and General Requirements Prototypes are particularly interesting because EFRAG released a similar framework under the Climate Standard Prototype Working Paper in September 2021. EFRAG’s framework responds to the European Commission’s legislative proposal for the CSRD, and EFRAG’s related mandate to develop draft European Sustainability Reporting Standards (“ESRS”) that would become mandatory for many listed and non-listed companies.

EFRAG is currently re-validating the compatibility of its Working Paper with the ISSB Prototypes, and is scheduled to publicly consult on its Climate Standard Prototype in December 2021, with an anticipated official proposal of a first set of standards by EFRAG to the European Commission in summer 2022. The ISSB’s Climate Prototype may therefore directly influence upcoming EU rules.

Companies may also note with interest that both EFRAG’s Working Paper and the Climate Prototype cover similar levels of reporting, focusing on sector-agnostic, sector-specific, and entity-specific reporting. The EFRAG Working Paper captures about two thirds of the ISSB’s Climate Prototype, with the remaining third likely to be supplemented with EFRAG sector-specific standards in the upcoming months.

In addition, the EU Taxonomy Regulation’s climate-oriented screening criteria are used—primarily by regulated financial institutions—to determine which economic activities count as mitigating or adapting to climate change. This Taxonomy is another sign of increasing European focus on improved transparency around climate-related activities, but it is also yet another set of criteria and metrics in an already complex picture.

In a change from the lack of consensus on sustainability reporting in recent years, we may now see the beginnings of coalescence around a regime for sustainability reporting. At a COP26 side event, for example, EFRAG’s work was examined in the context of the ISSB and the work of the TCFD.

Key Takeaways

Two main recommendations flow out of the current landscape on sustainability reporting developments.

  1. Companies should consider which aspects of their current voluntary sustainability reporting could be integrated into mandatory financial and non-financial sustainability reporting requirements in the future. As new standards emerge, companies have an opportunity to actively monitor developments and “best practices” within their industry and to proactively prepare for future mandatory reporting requirements. US. reporting companies should also consider how aspects of the ISSB and EFRAG disclosure prototypes might influence climate-related disclosure rules that are being considered by the U.S. Securities and Exchange Commission (“SEC”).  Companies should begin to identify the relevant metrics for their sector, establish a strategy and process for identifying material risks and opportunities for their particular business operations, and develop the requisite reporting controls and procedures to ensure timely and accurate information collection and reporting.
  2. Companies can contribute to the sustainability standard setting debate. By engaging with ESG issues and sustainability reporting whilst the process unfolds, companies can send strong messages to regulators on these issues. Companies can also share valuable experience with policy makers before standards are finalized. Multiple public consultations from EFRAG on the European Sustainability Reporting Standards will be one venue for such participation.  Companies may also consider contributing their perspectives on forthcoming SEC proposed rules on climate-related disclosure.

If you have any questions concerning the material discussed in this blog post, please contact the following members of our ESG, Capital Markets and Securities, and Business and Human Rights teams: Mellissa Campbell Duru, Sinéad Oryszczuk, Paul Mertenskötter, and Ivy-Victoria Otradovec.

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Mellissa Campbell Duru

Mellissa Campbell Duru advises clients on U.S. securities regulation, capital markets transactions, and strategic corporate governance planning. She develops advisory guidance for public companies and asset managers on environmental, social, and corporate governance (“ESG”) matters, cybersecurity incident response and preparedness, and public company…

Mellissa Campbell Duru advises clients on U.S. securities regulation, capital markets transactions, and strategic corporate governance planning. She develops advisory guidance for public companies and asset managers on environmental, social, and corporate governance (“ESG”) matters, cybersecurity incident response and preparedness, and public company disclosure and reporting obligations.
Mellissa joined the firm after over 15 years at the U.S. Securities and Exchange Commission (“SEC”) where she served as Counsel to SEC Commissioner Kara Stein and in a range of transactional and policy advisory roles in the Division of Corporation Finance and Division of Examinations.

As Special Counsel in the Division of Corporation Finance’s Office of Mergers & Acquisitions (“OMA”), Mellissa led OMA reviews of shareholder activist campaigns, registered business combination transactions, proxy contests, and negotiated and hostile domestic and cross-border tender offers. Her work in OMA also involved advice on beneficial ownership reporting obligations by stakeholders, rulemaking petitions, no-action and exemptive relief requests, going private transactions, and proxy and consent solicitations.

As Counsel to SEC Commissioner Kara Stein, Mellissa was the lead advisor on ESG U.S. and international framework developments, including sustainable finance reporting and investment matters, cybersecurity, data privacy and governance issues, initial token offerings, distributed ledger and financial technology developments, capital formation and exempt offering rulemakings, and SEC advisory committee matters. She also advised Commissioner Stein on implementation of the disclosure mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act, implementation of the Jumpstart Our Business Startups Act, and implementation of the Fixing America’s Surface Transportation Act.

Most recently, in the Division of Examinations’ Technology Controls Program, Mellissa served as a cybersecurity legal policy advisor to the SEC Chairman’s office and the Office of International Affairs on U.S. and international financial sector cybersecurity incidents, incident response, preparedness and coordination, and data privacy laws applicable to SEC-registered entities and financial market infrastructure firms.

Photo of Sinéad Oryszczuk Sinéad Oryszczuk

Sinéad Oryszczuk is special counsel and solicitor advocate in Covington’s London Life sciences and Environment regulatory team. Ms. Oryszczuk’s UK and EU law practice is diverse, spanning energy, environment, life sciences, consumer products, and technology sectors. She supports a variety of internal and…

Sinéad Oryszczuk is special counsel and solicitor advocate in Covington’s London Life sciences and Environment regulatory team. Ms. Oryszczuk’s UK and EU law practice is diverse, spanning energy, environment, life sciences, consumer products, and technology sectors. She supports a variety of internal and in-house teams including corporate, real estate, projects, construction, planning, health and safety, IP, insurance, and banking. She is experienced in contentious matters, assisting clients before criminal, civil, administrative and specialist tribunals, and non-contentious (regulatory, transactional/M&A) matters. She has advised in relation to some of the UK’s most high profile recent environment cases up to Court of Appeal level, as well as large group actions, and has brought cases before the European Court in life sciences matters. Prior to joining the firm, Ms. Oryszczuk spent 5 years in the UK’s leading specialist energy, environment, and regulatory team.

Ms. Oryszczuk has broad experience in traditional environment areas such as contaminated land and allocation of environment liabilities in transactions, permitting, waste, climate change, species-specific requirements, emissions, and contentious work including prosecutions relating to large scale pollution incidents, environmental damage, and general regulatory and subject specific ad-hoc advice. Ms. Oryszczuk also provides advice on specialist scientific and technical regulatory aspects spanning a variety of sectors. She has built up particular expertise in chemicals law and hazardous/regulated substances (e.g. REACH, CLP, RoHS, biocides, nuclear/radiological), novel technologies and agri-tech (e.g. advanced genetic engineering, GMOs, nano), and corporate/accounting and regulatory energy and environment reporting and efficiency (e.g. EU ETS, CRC, mandatory energy audits (ESOS) and non-financial reporting).

Ms. Oryszczuk advises day-to-day on transactional matters and liability (including director/officer and parent company), land contamination and hazardous substances, and in multinational competitive bids. She has a broad experience including in relation to manufacturing and waste facilities, energy storage projects, wind farms, grid projects, redevelopments and remediation projects, landfills, mines and minerals operations, and nuclear and radioactive materials facilities. She has acted for a variety of parties including buyers/sellers, tenants/landlords, bidders, lenders, insurers, developers, authorities/regulators, trustees, insolvency practitioners, and private equity/funders. Ms. Oryszczuk provides specialist corporate due diligence (including vendor due diligence). She often acts as specialist outside counsel and has drafted bespoke instruments including transfer of liability deeds, contractor T&Cs, site remediation/investigation/access agreements, as well as environment indemnities and warranties. Ms. Oryszczuk often coordinates multinational projects and advice and regularly liaises and negotiates with regulators on behalf of her clients. On corporate work in particular, Ms. Oryszczuk assists very large multinationals (including global asset funds) with complex organisational structures through national and international compliance scenarios, including on corporate reporting and carbon .trading.

On contentious work, Ms. Oryszczuk has taken leading roles in some of the UK’s largest and most high profile environment cases, often building on her science background in respect of issues concerning hazardous substances. She regularly defends in relation to large domestic civil group actions relating to environment issues. More recently she has acted in contentious life sciences cases relating to medicinal products including before the European Court and national regulators, e.g. the UK’s NICE.

Photo of Paul Mertenskötter Paul Mertenskötter

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new…

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new technologies. Mr. Mertenskötter’s practice encompasses advising clients on the European Commission’s Digital Single Market strategy, including on the Payment Services Directive (PSD 2).

Prior to joining the firm, Mr. Mertenskötter clerked at the International Court of Justice in The Hague, and was a Fellow at the Institute for International Law and Justice at NYU Law School. His work has been published with Oxford University Press and the Cornell Law Review.