CFOs and their finance teams will play a critical role in supporting the vital Sustainability/ESG agenda in the coming years. In this introductory blog Richard Marshall covers some of the basic concepts in bite-sized chunks.
Climate: relating to changes in the earth’s climate as a result of “Anthropogenic” (i.e. caused by human activity) atmospheric pollution. Includes direct matters such as extreme weather, global temperature rises etc. as well as related phenomena such as sea-level rise, changes to the distribution and behaviour of plants and animals etc.
Nature: encompasses everything on earth. Divided into Realms – Terrestrial, Marine, Freshwater, Subterranean – which are inhabited by Biodiversity – all the plants, animals etc., the combination making up “ecosystems”. A critically important point to note is that, whereas there is one global atmosphere, ecosystems are locationally specific, which will make reporting on them significantly more complex.
TCFD – Task force on Climate-related Financial Disclosures: Published (2017) what is becoming a standard for company disclosures of decision-useful, climate-related information. Structured around Governance, Strategy, Risk Management, and Targets and Metrics. Separates risks into Transition and Physical and between Acute (e.g. event driven risks such as hurricanes) and Chronic (longer-term shifts such as sea-level rise).
Transition risks: those arising from the transition to a climate-friendly economy e.g. Policy, Legal, Reputational, Technological, Market risks.
Physical risks: climate-change related risks which become more likely if transition actions are not implemented e.g. Temperature rise, Flooding, Shifts in climatic patterns.
TNFD – Task Force on Nature-related Financial Disclosures: A new body which is in the process of defining a complementary disclosure framework looking at the nature-related information. Currently in draft form and undergoing public consultation, but applying much of the structure and approach of the TNFD proposals.
Sustainability standards: a number of voluntary reporting standards have been developed over time, covering different aspects of sustainability. Commonly used include those of the: Greenhouse Gas (GHG) Protocol, Global Reporting Initiative (GRI), Climate Disclosure Standards Board (CDSB), Sustainability Accounting Standards Board (SASB), Carbon Disclosure Project (now just CDP), International Integrated Reporting Council (IIRC).
ISSB – International Sustainability Standards Board: recently formed as part of the IFRS Foundation, the ISSB has absorbed the CDSB, SASB and IIRC and is starting to produce draft sustainability reporting standards that will ultimately have the same standing as (and will integrate with) the IFRS financial reporting standards. ISSB 1 (general disclosure requirements) and ISSB 2 (climate related disclosures) are currently available as exposure drafts which link with the TCFD structure.
CSRD – Corporate Sustainability Reporting Directive: a European Union directive mandating compulsory reporting disclosures for listed European companies and other specified organsations, the standards to be devised by EFRAG (European Financial Reporting Advisory Group).
ESRS: the European Sustainability Reporting Standards being drafted by EFRAG. Numbers 1-13 are currently available as exposure drafts ranging from General Principles, to specific topics spread across Environment, Social and Governance.
SFDR – Sustainable Finance Disclosure Regulation: European regulation intended to improve transparency in the market for sustainable investment products and aimed at financial market participants (so related to, but different from the CSRD).
Taxonomies: Documents defining which industry/activity combinations can be classified as sustainable for reporting purposes. These classifications will form the basis for robust ESG reporting. Europe was quick out of the blocks with the EU Taxonomy, but others (c. 40) also exist or are being developed. Ironically, at the same time work is going on to try and consolidate these into a smaller number (you might question why there needs to be more than one!)
European Green Deal: a suite of legislation covering wide-ranging activities inc. energy, agriculture, industry, transport, climate and environment, aimed at making the EU carbon neutral by 2050. The EU Taxonomy forms an integral building block in defining what activities are deemed to be sustainable.
Science based targets: organisation specific targets for the reduction of climate impact, which have been confirmed (by the Science Based Target Initiative) as being consistent with the climate targets set by the 2015 Paris Accord. A process for agreeing science based targets for nature is under development.
Read Richard’s Previous blog post on this topic: SUSTAINABILITY-FINANCE: WHY CFOS AND THEIR TEAMS WILL BE CRITICAL TO ESG SUCCESS!
Richard Marshall has significant experience of leading the incorporation of ESG objectives into business strategy and processes. In addition to holding senior finance positions across a range of industries he has been a non-executive board and audit committee member for an Asia-Pacific property company (c.£1bn AUM), a member of ICI’s global operations & technology leadership board and an Executive Board member for ICI Unichema’s UK business.