4 Sustainability Disclosure Guidance Among Global Jurisdictions

Question 1

Since the Global Reporting Initiative (GRI) published its first disclosure framework in 2000, what two things have occurred as part of a surge of guidance on sustainability disclosure around the world?

Answer 1

1) a mix of private organizations and regulators have developed guidelines focused on increasing rates of disclosure, and/or
2) improving the quality of non-financial information

Question 2

Why can it be difficult to precisely identify a sustainability-related corporate disclosure?

Answer 2

It is part of the developments in corporate disclosure policy at large, for example, a generic corporate disclosure policy might reference sustainability information as a hypothetical example of the information included

Question 3

One analysis identified how many mandatory sustainability reporting provisions across 84 countries from governmental agencies other than financial market regulators?

Answer 3

300-400

Question 4

Do the majority or minority of governments in the world’s largest economies and many emerging markets issue corporate disclosure requirements that cover ESG issues?

Answer 4

Majority

Question 5

In the context of capital markets, requirements for disclosure by public companies are governed by what type of entity?

Answer 5

Securities commissions, although other regulatory bodies also play a role in corporate disclosure depending on the country and/or subject matter

Question 6

Name six voluntary sustainability reporting frameworks and standards published by third parties

Answer 6

-CDP
-Climate Disclosure Standards Board
-GRI
-International Integrated Reporting Council (IIRC)
-SASB
-Task Force on Climate-Related Financial Disclosures

Question 7

Name the pervasive sustainability reporting challenges that these voluntary sustainability reporting frameworks try to address

Answer 7

-lack of consistency
-lack of comparability
-lack of reliability
-lack of decision usefulness

Question 8

A 2018 study by the Sustainability Investing Institute analyzed the annual reports, 10-K filings and proxy statements of more than 500 U.S. companies, finding that ____ percent disclose sustainability information and that about ____________ percent voluntarily address sustainability in financial reports, though the methods and means for doing so varies widely

Answer 8

97 percent disclose sustainability information and about 40 percent voluntarily address sustainability in financial reports

Question 9

As sustainability disclosure guidance continues to be independently administered, the reporting landscape can be seen as more ________ than ______.

Answer 9

more fragmented than unified

Question 10

Why does the growth of disclosure guidance globally not necessarily translate into increased disclosure?

Answer 10

Jurisdictions must consider the means and mechanisms best suited for increasing levels of quality sustainability disclosure, and some regulators introduce non-mandatory recommendations first

Question 11

A look at global guidance initiatives demonstrates a common practice of prioritizing what type of disclosure?

Answer 11

related to climate change

Question 12

Name the Canadian securities regulations for sustainability information

Answer 12

The Canadian Securities Administration (CSA) published the 2010 Staff Notice 51-333 Environmental Reporting Guidance delineating a number of disclosure requirements

The CSA later published Staff Notice 51-358: Reporting of Climate Change-Related Risks (CSA 2019 Notice) which expands the 2010 Staff Notice to provide guidance to help issuers and boards identify and disclosure material climate change risks to investors

Question 13

What does the Canadian Securities Administration 2019 Notice also reference?

Answer 13

Acknowledges and references voluntary disclosure frameworks TCFD and SASB

Question 14

In 2014, the European Commission passed what disclosure requirement?

Answer 14

Directive 2014/95/EU more commonly known as the Non-Financial Reporting Directive (NFRD)

Question 15

What does the European NFRD do?

Answer 15

Compels public-interest companies which includes any private companies designated as public-interest entities by national governments with more than 500 employees to report information on a variety of sustainability topics. The NFRD provides broad flexibility to companies in determining information to report

Question 16

In 2015, France went beyond the NFRD and passed what requirement? What does that requirement do?

Answer 16

The Law on Energy Transition for Green Growth which includes a requirement for climate-change-related reporting commonly called Article 173, requires publicly listed companies as well as banks and asset managers to implement low-carbon strategies in every component of their activities

Question 17

As part of its action plan on financing sustainable growth, the European Commission triggered the development of the EU taxonomy which does what?

Answer 17

The EU taxonomy defines the criteria that economic activities (e.g. producing electricity) need to satisfy to qualify as environmentally sustainable; with extremely specific criteria of carbon dioxide equivalents, focuses solely on environmental performance

Question 18

Does the U.S. have a requirement for climate change disclosure?

Answer 18

No

Question 19

What is the U.S. SEC 2010 Guidance?

Answer 19

explains how companies should apply existing disclosure requirements to climate change information that might be appropriate to disclose

Question 20

The U.S. SEC 2010 Guidance explicitly acknowledges that what kind of requirements may create sustainability-related disclosure obligations for companies?

Answer 20

-impacts of legislation and regulation
-impacts of international agreements
-indirect consequences of regulation or business trends
-physical impacts of climate change

Question 21

What do market participants observe as ESG and financial regulation policy matures?

Answer 21

Governments move towards stronger requirements, from voluntary to mandatory, and from policy to implementation and reporting

Question 22

What does interpretive guidance focus on?

Answer 22

Clarifying or elaborating on the application of existing guidance to sustainability information, such as how to interpret existing disclosure guidance in the context of ESG information

Question 23

Rather than creating new disclosure requirements, ________
guidance relies on existing reporting rules and procedures.

Answer 23

Interpretive

Question 24

What is an example of interpretive guidance that has been released / published?

Answer 24

The U.S. SEC 2010 Guidance

Question 25

What are the four climate change issues that listed companies should consider for disclosure per the U.S. SEC 2010 Guidance?

Answer 25

1) Legislative and regulatory impacts (e.g. pending legislation related to climate change)
2) international accords (e.g. issuers should disclose material impacts of agreements or protocols)
3) Indirect consequences of regulation or business trends (e.g. risks as well as opportunities arising from developments in climate change law, politics or technology)
4) Physical impacts of climate change (e.g. severe weather events, changes in sea level that may affect companies’ performance)

Question 26

What is the benefit of interpreting sustainability disclosure within existing legal frameworks?

Answer 26

Regulators, reporters and investors alike can leverage existing processes and contextualize sustainability information within established, widely understood objectives that ensure the integrity of reported information and support informed decision-making by capital market participants

Question 27

Some regulators see benefits in allowing companies to choose what information would be most relevant for users, and would likely opt for ______________ guidance as a result

Answer 27

principles-based disclosure (guidance)

Question 28

In contrast to a _____________ approach, which details specific reporting format and standards with a relatively high degree of detail, ___________________ guidance provides a list of tenants that companies use to guide their reporting process

Answer 28

rules-based approach;
principles-based guidance

Question 29

MD&A requiring companies to report “known trends, events, and uncertainties” without detailing specific trends or events to report, allowing flexibility for companies to describe the financial matters that impact them is an example of what type of guidance?

Answer 29

Principles-based guidance

Question 30

What are two examples of principles-based disclosure guidance?

Answer 30

1) Australian Securities and Investments Commission (ASIC) 2019 Regulator Guide (RG) 228 and 247 - two regulatory guides that require climate change reporting in a company’s prospectus to retail clients or in its annual operating and financial review

2) Directive 2014/95/EU “The Non-Financial Reporting Directive”, the EU NFRD affords a high degree of flexibility to reporting companies and requests information ranging from corporate sustainability policies, narrative information, and KPIs

Question 31

What does the ASIC 2019 Regulatory Guides 228 and 247 explicitly state as it relates to impairment calculations?

Answer 31

The guidance lists climate risks as examples of common risks that may need to be disclosed in a prospectus and/or annual report and highlights climate change as a potential risk that might impact impairment calculations

Question 32

According to what example of principles-based guidance should the disclosure be material; fair, balanced and understandable; comprehensive but concise; strategic and forward-looking; stakeholder-oriented; and consistent and coherent?

Answer 32

EU NFRD

Question 33

What do the principles-based guidance and the comply-or-explain disclosure guidance both lack?

Answer 33

Both provide flexibility which hinders comparability

Question 34

What does “comply or explain” disclosure guidance require?

Answer 34

Requires reporting companies to either comply with required rules or explain why they have chosen not to.

Question 35

The use of comply-or-explain provisions within sustainability disclosure policy and accompanying guidance has [grown
or decreased]
significantly;

Answer 35

grown

Question 36

One global analysis found _____ comply-or-explain provisions issued by government agencies in 2016, and by 2020, the same analysis found ______ issued by government agencies.

Answer 36

17 in 2016 to 62 in 2020

Question 37

Which type of guidance can be a starting point to promote transparency from companies when companies are still relatively immature in developing processes to disclose reliable information and while the capital markets are still developing systems to integrate the information into decision-making processes?

Answer 37

Comply-or-explain disclosure guidance

Question 38

Which type of guidance offers companies a way to self-regulate, and adhere to the requirements best suited to their specific business and operating environment without risking legal penalization?

Answer 38

Comply-or-explain disclosure guidance

Question 39

What is an example of comply-or-explain guidance in practice?

Answer 39

2019 Philippines SEC Memorandum Circular No. 4 - which are guidelines that help publicly listed companies assess and manage non-financial performance across ESG topics relevant to each company, such as using the UN Sustainable Development Goals (UNSDGs)

Question 40

What is line-item disclosure guidance?

Answer 40

some sustainability disclosure guidance requires information to be disclosed using a specified methodology to produce specific line items.

Question 41

What are two examples of line-item disclosure guidance?

Answer 41

1) EU Taxonomy for Sustainable Economic Activities - which defines the economic activities that can be classified as environmentally sustainable, and enables measurement of sustainable flows of capital

2) Japan’s Mandatory Greenhouse Gas Accounting and Reporting System passed in 2006, which requires emissions disclosure from companies emitting certain greenhouse gases and/or that consume a certain amount of energy

Question 42

What is the tradeoff for mandated line-item disclosure?

Answer 42

Where companies are required to report specific metrics, they may forego the option to disclose data that more accurately reflects their unique business and circumstance

Question 43

What is not a form of disclosure guidance per se that sustainability disclosure has entered into around the world?

Answer 43

corporate governance codes, such as those that establish rules of conduct for board members within the context of primary duties of oversight to promote long-term value creation

Question 44

What are two examples where corporate governance codes identify sustainability considerations among the board’s responsibilities?

Answer 44

1) Japan’s Ministry of Economy, Trade and Industry (METI) Practical Guidelines for Corporate Governance Systems (CGS) - which explicitly call out the responsibilities to consider the impacts of ESG

2) King IV Report on Corporate Governance for South Africa, 2016 - The King IV Codes elaborate on the critical role of governance in overseeing reports - including sustainability reports - to promote the use of integrated reporting

Question 45

ESG-related corporate governance codes can provide guidance - either mandatory or voluntary - on the ______ and ______ of sustainability disclosures

Answer 45

content and format

Question 46

Flexible implementation makes it easier for companies to report information, thus increasing the level of disclosure, but risks proliferating disclosure that are not ________ or _______.

Answer 46

Comparable or decision-useful

Question 47

Specific and more stringent disclosure guidance supports comparability and decision-usefulness but risks ______________________.

Answer 47

risks creating pushback or frustration from thecorporate community, especially if the guidance is not well crafted.

Question 48

Do companies applying SASB standards to meet reporting requirements have to report all of the sustainability topics listed?

Answer 48

No, companies with unique operating circumstances or audiences may select the disclosure topics best suited for the company, and are encouraged to explain decisions when metrics are omitted or modified

Question 49

Are the various types of guidance mutually exclusive?

Answer 49

No, the various characteristics of sustainability disclosure do not constitute an either-or choice. Principles-based disclosure can also contain specific line-items; line-item disclosure can follow comply-or-explain rules, etc.

Question 50

[CHECK FOR UNDERSTANDING] What does “climate first” disclosure guidance tell us about regulators’ approach to sustainability disclosure globally?

Answer 50

Regulators and other institutions that issue new sustainability disclosure guidance often focus their guidance on climate information (rather than a more-comprehensive focus
on environmental, social, and governance information, which can include climate information). Globally speaking, a focus on non-mandatory climate disclosure can be a means to overcome political obstacles to increase quality sustainability disclosure while also providing companies with a focused topic with which to ease into new reporting expectations. Though there has not been a visible, globally-coordinated effort to follow this approach, this approach can be observed across jurisdictions including the Canadian Securities Administration’s Environmental Reporting Guidance, the European Commission’s Non-Financial Reporting Directive, and the US Securities Exchange Commission’s 2010 Guidance.

Question 51

[CHECK FOR UNDERSTANDING] What are the four main characteristics of sustainability disclosure guidance?

Answer 51

When looking closely at sustainability disclosure guidance published by regulators, there are several key characteristics that dictate what companies report and how they report it. These characteristics directly influence the utility of ESG information to investors. Interpretive guidance “interprets” or clarifies how sustainability disclosure applies to existing disclosure guidance. In other words, it requests or mandates sustainability disclosure without issuing a new rule or policy. Principles-based guidance provides a list of tenets that companies use to guide their reporting process. For example, principles-based guidance may require sustainability information to be “clear,” or that the disclosure include KPIs without stipulating precise requirements for what
clear information looks like or listing specific KPIs to include. Comply-or-explain guidance often applies to new mandatory disclosure requirements, where companies must comply with reporting guidance or explain why they have not. Line-item disclosure guidance refers to the disclosure of sustainability information using specified metrics and methodologies to produce specific line items. These types of guidance vary in how flexibly they can be implemented (with interpretive guidance being the most flexible and line-item disclosure being the least).

Question 52

[CHECK FOR UNDERSTANDING] What two considerations must sustainability disclosure guidance balance, and how do disclosure standards help achieve that balance?

Answer 52

As the spectrum of types of sustainability disclosure guidance illustrates, there are clear tradeoffs between flexible disclosure (which increases levels of sustainability disclosure and enables business-specific nuances in reporting) and disclosure that is useful to investors for its comparability, reliability, and decision-usefulness. Well-crafted sustainability disclosure standards may offer the most viable long-term solution to navigating this tradeoff to the benefit of companies, investors, and markets at large, as they can enable comparability without prohibiting companies from making useful adjustments or additions to their disclosure. They enable comparability where metrics are reported in
the same way by different companies, but they can also enable disclosures tailored to
a specific industry context and regulatory environment.