Overview of Climate Disclosures: Current Frameworks and Regulations

This report from the IFoA Climate Change Disclosures Working Party offers an overview of current climate disclosure requirements and practices, focusing solely on climate disclosures within the broader ESG context. It covers general disclosure considerations, greenwashing, global non-governmental organizations like TCFD, ISSB, and CDP, and country-specific regulations including green taxonomies. The report emphasizes the increasing importance of climate disclosures for understanding and mitigating financial risks, aiding stakeholder decision-making, and aligning businesses with net-zero objectives. It also warns against the practice of greenwashing, which is expected to face formal legislation soon.

Climate disclosure guidelines originate from non-governmental bodies (TCFD, ISSB, CDP), regional/local legislation (EU, UK), local stock exchanges (SEBI, SGX), and green taxonomies. There's a global trend from voluntary to mandatory disclosures, with organizations like ISSB consolidating standards to create a comprehensive global baseline. Despite TCFD's monitoring responsibilities transferring to ISSB from 2024, its recommendations remain highly influential. Companies face challenges in adopting these disclosures, including integrating them into existing processes, covering additional costs, and managing reputational risks. Data quality and comprehensive scenario analysis remain significant hurdles for compliance.

Specific disclosure guidance exists for sectors like banking, insurance, and asset management, with TCFD and CDP incorporating sector-specific questions. ISSB's IFRS S2 standard also mandates industry-based metrics. Actuaries are well-positioned to contribute to both qualitative and quantitative aspects of climate reporting, including scenario analysis, narrative development, and metrics. Their specialist knowledge in underwriting and investments supports calculations for insurance and investment-linked emissions. Regulatory bodies, such as the FRC, are updating actuarial standards to include climate change, and actuaries are increasingly involved as climate-related requirements filter into local legislation.

The report anticipates continued growth in disclosure requirements from non-governmental organizations, local governments, and stock exchanges globally. Formalization of US SEC requirements, progress on the South African Climate Change Bill, and Australian disclosure consultations are expected. Green taxonomies are also projected to formalize in several countries. The multitude of guidance poses a challenge for companies, especially multi-nationals, due to varying requirements. The trend from voluntary to mandatory disclosures will continue, with ISSB playing a central role. A gradual consolidation of disclosure practices is expected, with ISSB publishing broader sustainability standards beyond climate change.

Disclosures are crucial for businesses, enabling stakeholders to understand risks, opportunities, and hold organizations accountable. They should be relevant, transparent, easy to understand, and meet diverse stakeholder needs. A key question is whether disclosures serve passive reporting or actively drive future decisions. Companies must consider industry practices, stakeholder-specific information, and the costs of compliance versus reputational damage from non-disclosure. Greenwashing, the practice of misleading stakeholders about environmental alignment, poses significant risks, including reputational damage and fines. Legislation to combat greenwashing, like the UK FCA's anti-greenwashing rule and the EU's Green Claims Directive, is emerging, with provisional requirements expected to apply by 2026.

The climate disclosure landscape is complex, influenced by global organizations, local governments, and stock exchanges. Companies often navigate multiple separate guidance documents. However, there is ongoing alignment of separate standards and frameworks, exemplified by the ISSB's consolidation efforts and the increasing reference to TCFD recommendations in local legislation. The report structures its detailed discussion into sections on non-governmental organizations (TCFD, ISSB, CDP) and country-specific requirements (local legislation, stock exchanges, green taxonomies).

Key influential global non-governmental organizations setting climate disclosure standards and frameworks include TCFD, ISSB, and CDP. TCFD, formed after the 2015 Paris Agreement, issued voluntary recommendations grouped into four pillars: Governance, Strategy, Risk Management, and Metrics and Targets, significantly influencing local legislation. ISSB, launched in 2021, aims to establish a comprehensive global baseline for sustainability standards, publishing IFRS S1 and S2 in June 2023, effective from 2024. CDP, a non-profit, runs a global disclosure system through questionnaires on climate, forest, and water security, scoring companies to promote sustainable actions. These organizations ensure material information is included and presented consistently, often with overlaps between standards and frameworks.

The International Sustainability Standards Board (ISSB) was established in 2021, announcing its formation at COP26, with the goal of developing a comprehensive global baseline of high-quality sustainability standards. This involved consolidating various disclosure-related organizations. The ISSB collaborated with GRI and is set to take over TCFD's monitoring responsibilities from 2024, demonstrating its growing influence and role in harmonizing global sustainability reporting. The ISSB’s IFRS S1 and S2 standards, published in June 2023, are significant as they are expected to become mandatory or be transposed into local requirements in several countries, including the UK and Canada, driving a global shift towards more unified reporting.

Climate disclosure uptake is growing globally, with a trend towards mandatory requirements through local legislation or stock exchange rules, sometimes on a 'comply or explain' basis. TCFD significantly influences local regulations, with its recommendations being directly backed by regulators and legislation in various countries. Examples of TCFD's influence include its adoption in the EU, Switzerland, and the UK. While regulatory landscapes vary, there's a clear movement towards greater standardization and the integration of climate-related financial disclosures into mainstream reporting.

Green taxonomies are classification systems that identify sustainable or 'green' investments, guiding businesses and stakeholders in investment strategies. These are typically set by local governments or regional bodies like the EU. While not as developed as other climate disclosure requirements, their formalization is anticipated globally in the coming years. Challenges include potential for inadvertent promotion of non-sustainable practices (e.g., EU categorizing nuclear power as green) and the risk of overcomplication and conflicts for multinational companies if regimes are not aligned across countries.