The brave new world of mandatory climate disclosure – Ensuring movement beyond box-ticking in North America

Mandatory climate disclosure is imminent across North America. US-listed companies anticipate the finalization of the Climate Disclosure regulations by the US Securities and Exchange Commission (SEC) as the top regulator on Wall Street is set to vote regarding rule adoption on March 6.  Meanwhile, entities doing business in California are now wondering what lies ahead for the implementation of Senate Bill (SB) 253 and SB261 given recent funding cuts in the new state budget. Simultaneously, Canadian businesses are eagerly awaiting the release of the first drafts of the Canadian Sustainability Disclosure Standards 1 and 2 from the Canadian Sustainability Standards Board scheduled to occur between March and June 2024.

This raft of legislation sets the stage for hundreds of thousands of companies to make their inaugural climate-disclosures within the next 3 years, and for thousands of other companies to revise their existing disclosures. Given the financial and reputational risks of non-compliance across these different jurisdictions, understanding this patchwork of regulation and mandatory disclosures may seem both novel and overwhelming. 

However, these regulations do not represent a whole new world of disclosure, rather they are part of an evolving regulatory landscape. The SEC, California and CSSB all share the same foundation as the EU’s Corporate Sustainability Reporting Directive (CSRD): The Taskforce for Climate-Related Disclosure (TCFD). Building on the focus of providing credible information for investors, these regulations propel companies towards providing reliable information for all stakeholders and present an opportunity to guide transition towards a low-carbon economy.

The Taskforce for Climate-Related Disclosure as a Foundation

Established in response to G20 leaders’ requests, the TCFD has undergone a transformative journey to enhance transparency in climate-related financial disclosures. It’s primary objective is to encourage consistent, reliable, and clear climate-related financial disclosures that enable investors to properly take account of climate-related risks. In 2018, CDP, a voluntary disclosure system that hosts disclosures from companies accounting for more than half of the global market value, redesigned its questionnaire to align with the TCFD. This revamp by CDP aimed to mainstream the availability of climate-related information, enhance transparency, and provide a roadmap to fulfil the commitments of the Paris Agreement, the global effort to hold warming to well below 2℃.

In 2024, the International Financial Reporting Standards (IFRS) Foundation took over monitoring the progress of companies’ climate-related disclosures, and the work of the TCFD was considered complete. The IFRS released the inaugural global sustainable disclosure standards in 2023 – IFRS Standard 1 (S1) and Standard 2 (S2). IFRS S1 focuses on disclosing sustainability-related risks and opportunities, while IFRS S2 outlines specific climate-related disclosures to be used in conjunction with IFRS S1. IFRS S2 is consistent with the TCFD, and companies that apply these standards will meet the TCFD recommendations. This development promoted another redesign of CDP’s 2024 questionnaire, so that it not only aligns with the TCFD, but also aligns with IFRS S2.

The TCFD recommendations are broken out into 4 pillars– Governance, Strategy, Risk Management and Metrics/Targets. These pillars assist companies in organizing emissions data, risk, and opportunity assessments, and disclosing financial impacts. This organizational framework not only informs investors about climate-related risks but also helps companies to identifies areas for evolving and developing risk-informed transition strategies.

Movement Towards Mandatory Climate Disclosure

In the years since its inception, the TCFD has become the best practice in voluntary reporting. Consequently, legislators were not starting from scratch when they began developing mandatory climate reporting regulations.

Certain jurisdictions have opted to mandate the TCFD. It became mandatory for large banks and insurers in Switzerland in 2021, and as of 2023 there is an ongoing phased approach for different industries in Singapore. Meanwhile, some countries have mandated the TCFD recommendations for companies meeting certain criteria whilst simultaneously developing national regulations that build on the baseline for climate disclosures set by the TCFD for a broader set of companies. The UK, New Zealand, Japan, Brazil, Canada and the USA fall  into this category. The Canadian Securities Administrators began a consultation on mandating  the TCFD for public companies and investment funds in 2021, and in 2022, the US Commodity Futures Trading Commission started a consultation on  mandating it for securities issuers.

The Canadian Sustainability Disclosure Standards, the SEC Climate Related Disclosures and California’s Climate Accountability Package

The Canadian Sustainability Standards Board (CSSB) is committed to aligning the Canadian Sustainability Disclosure Standards (CSDS) with the IFRS S1 and S2 standards. Notably, the IFRS S2 disclosure requires more information than the TCFD, particularly concerning governance body(s) and responsibilities for climate-related risks, and requires the identification of climate-related risks including specific quantitative and qualitative impacts of climate risks. The IFRS S2 disclosure also requires more detail around emissions calculation and target setting methods than TCFD. It thus stands that the CSDS will also meet TCFD recommendations and will require more comprehensive information than the TCFD itself.

Similarly, the proposed SEC Climate Related Disclosure explicitly references the TCFD, and requires further disclosures under certain the TCFD pillars. For example, the SEC would require greater detail and assurance in Scope 1 and 2 disclosures. Another key difference lies in the SEC’s definition of materiality – while the TCFD lacks a specific numeric threshold in its definition of materiality,  the SEC requires disclosure of financial impacts of any risk that is >1% of total financial line items of relevant fiscal year.

In California, the Climate Accountability Package consisting of SB-253 and SB-261, builds upon the foundation set by the TCFD. SB-261 describes the TCFD as the “international benchmark for climate risk disclosure,” and requires companies to evaluate the immediate and long-term financial outcomes of climate related risks in more detail than the TCFD requires. Bill SB-253 will require assurance of all Scope 1, 2 and eventually Scope 3 emissions – assurance is not required by the TCFD, and disclosure of Scope 3 emissions is only recommended “if appropriate”. 

Given the differences between the TCFD and these incoming climate-related disclosure regulations, there may be a tendency to dismiss the TCFD recommendations as obsolete. However, while the work of the taskforce is considered complete, and the incoming regulations across North America and CSRD in the EU require greater transparency and disclosure than the TCFD, the recommendations and original framework for organizing climate-related disclosures developed by the TCFD retain their value.

Navigating this Brave New World with EcoAct’s Help

Amidst the gradual development of regulations in North America, businesses have a unique chance to expedite company-wide decarbonization by proactively preparing for mandatory disclosures. Many U.S. companies have already committed to climate action independently of government endorsements, as seen with the “We Are Still In” declaration in 2017. A similar proactive approach is recommended for the impending regulations shaping the new era of mandatory climate disclosure in North America. Regardless of the specifics of finalized mandatory disclosures, preparing against current regulatory drafts contributes to the collective movement toward a climate-friendly economy.

At EcoAct, we offer support for developing disclosures and decarbonization journeys, providing expert reviews of carbon inventories, climate strategies, and disclosures. Our services extend to activities such as setting Science-Based Targets, conducting climate scenario analysis, and integrating climate risk into enterprise risk management processes.

Whether you’re starting your sustainability journey or well-established, contact us to discuss how we can help you transition to a low-carbon economy, ensuring compliance with regulations and working towards achieving net-zero. Let’s start this transformative conversation.