Key watchdog acknowledges difficulties of ESG disclosure

The global markets watchdog that sets guidelines for the world's regulators has suggested it would be unreasonable to penalize companies that aren't immediately able to get the data they need to report their complete carbon footprints.

Jean-Paul Servais, the newly appointed chair of the International Organization of Securities Commissions, said companies unable to collate so-called Scope 3 data, which incorporates the emissions of their customers and supply chains, should be offered a temporary safe harbor, both within the International Sustainability Standards Board's framework, "but also in the SEC's proposed climate rule."

"The mistake would be that we expect everybody to be on board from day one," Servais said in an interview.

The comments follow months of tensions around the U.S. Securities and Exchange Commission, which has proposed that big emitters should be required to disclose Scope 3, as part of a sweeping plan to get corporations to report their climate impact.

Larry Fink, the chief executive officer of BlackRock Inc., is among critics of the plan, arguing that companies can't be expected to get data from supply chains that are dominated by private firms.

"This is the structural problem we're facing in society today," Fink said last week.

Stefan Wermuth/Bloomberg

Companies face increasing regulatory pressure to accurately and comprehensively report their carbon footprints. In a Feb. 20 letter to the G20 finance ministers and central bank governors, the Financial Stability Board said disclosures "will provide a unique opportunity to avoid harmful fragmentation and create a global baseline standard" for climate exposures. 

Currently, though, the industry-led push to boost ESG disclosure has devolved into a confusing "alphabet soup" of standards that undermines investor efforts to assess corporate progress on climate, according to Servais.

"I belong to the school of financial supervisors who don't have any problem with self-regulation until it doesn't work anymore," said Servais. "And then we have to switch to something else, maybe another kind of regulation."

IOSCO, whose members oversee more than 95% of the world's markets, is preparing to weigh in on new environmental, social and governance reporting standards being drafted by the ISSB. The board said last week that it expects to issue final versions by the end of June, so that the reporting standards can go into effect in 2024. 

IOSCO will decide soon whether to endorse the standards, Servais said. 

"The goal is how to avoid an alphabet soup which is currently already the case with some private labels," Servais said during a conversation at his office in Brussels, where he also serves as head of the Belgian financial supervisory authority. "The question is how to avoid that with the next generation of public standards, because people are not interested at all in switching from one standard to another."

Launched in 2021, ISSB operates under the auspices of the IFRS Foundation, whose accounting standards are used in almost 170 countries. While voluntary, ISSB's standards are also expected to be widely adopted by governments as a corrective to the current hodgepodge of voluntary frameworks. 

Most IOSCO members represent emerging markets and may lack data and expertise to fully implement the standards immediately, Servais said. "So we need to be flexible."

ISSB received more than 1,300 responses to draft proposals last year as investors, companies and industry organizations made their case for how requirements should look. One contentious issue was about the disclosure of greenhouse-gas emissions. 

The FSB, which monitors the global financial system, said it has teamed up with the Network for Greening the Financial System to examine how financial institutions' transition plans can be tapped to manage broader risks to financial stability. The network is made up of more than 100 central banks and financial supervisors.

As it stands now, reporting levels are dismal. Almost two-thirds of roughly 17,000 companies recently reviewed by Sustainalytics didn't disclose emissions from operations and electricity use, known as Scopes 1 and 2. The rate of non-disclosure climbed to 75% when including the broader category of Scope 3. A separate report last week by nonprofit CDP found that less than 5% of companies have 1.5C-aligned targets and disclose the data investors need to verify decarbonization plans. 

"IOSCO's voice as a representative of global securities regulators will be important in getting the ISSB's standards to the finish line," said Lindsey Stewart, director of investment stewardship research at Morningstar Inc. "The key risk is if institutional investors continue to object to fundamental aspects of the standards, such as the overall reporting objectives or mandatory Scope 3 reporting."