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Keeping up with the ‘Big Three’ Disclosure Proposals

ESG - Keeping up with the Big 3 - Scrubbed

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Keeping up with the ‘Big Three’ Disclosure Proposals

ESG - Keeping up with the Big 3 - Scrubbed

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In our recent blog, we briefly discussed the impact of Environment, Social, and Governance (ESG) on accounting and reporting and introduced the three standard-setting bodies leading the charge in navigating the complexities of ESG — U.S. Securities and Exchange Commission (SEC), International Sustainability Standards Board (ISSB), and European Financial Reporting Advisory Group (EFRAG) through the Corporate Sustainability Reporting Directive — also known as the ‘big three’.

As the focus continues to shift toward the reporting aspect of ESG, all eyes are on the three standard-setting bodies to lay the foundation for transforming the ESG reporting landscape. With the ‘big three’ rushing to get ahead of  the booming call for uniform guidance on disclosing ESG matters, stakeholders must keep up with the rapid developments that can aid in preparing ESG disclosures and sustainability reports, as well as in making sound business decisions, managing expectations, and strategic planning.

SEC’s Final Rule on Climate Change Disclosure

in March 2022, the SEC proposed a new rule to enhance and standardize climate-related disclosure. The SEC aims to finalize this rule around the second quarter of 2023 according to the Reg Flex Agenda released on January 2023.

The SEC is under constant pressure to deliver a final rule acceptable to all stakeholders and organizations as it faces political and legal challenges. A review of the public comments on the rule by the Commonwealth Climate and Law Initiative revealed that most investor coalitions, NGO/third sector organizations, asset managers, and service providers strongly supported the proposal in general. On the other hand, law firms, regulators, politicians, and trade associations were generally against the proposal. Republicans and certain corporate lobby groups were also expected to challenge the proposed rule in court once finalized. They claim that requiring companies to publish climate-related information infringes the right to free speech.

We can only speculate as to the magnitude of change the final rule will bring. For the time being, let’s recap the highlights of the proposed new rule issued last March 2022, which includes the required disclosure of:

• Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook

• Governance of climate-related risks, including risk management processes

• Scope 1 and Scope 2 greenhouse gases (GHG) emissions; Scope 3 GHG emissions if material or if the registrant set an emissions target or goal that includes Scope 3 emissions

• Climate-related financial statement metrics and related disclosures in a note to its audited financial statement

• Information on climate-related targets and goals and transition plan, if any

Below is the summary of the compliance date assuming the proposal will be adopted with an effective date in December 2022 and that the filer has a December 31st fiscal year-end:

Keeping up with the ‘Big Three’ Disclosure Proposals - Scrubbed

Meanwhile, a proposed rule for human capital management disclosures is also expected to be released during the same timeframe.

The European Sustainability Reporting Standards (ESRS)

On November 22, 2022, the EFRAG submitted the first set of draft ESRS to the European Commission (EC). The first set of standards comprises two cross-cutting standards and ten topical standards.

Keeping up with the ‘Big Three’ Disclosure Proposals-02

It is now in EC’s hands to evaluate the draft standards and propose revisions by consulting the member states of the European Union and other experts before adopting the final standards as delegated acts in June 2023, followed by a scrutiny period by the European Parliament and Council.

Forty additional sector-focused standards will be released over the next few years.

First, companies will have to apply the standards in the financial year 2024 for reports published in 2025. Listed SMEs are obliged to report from 2026, with a further possibility of voluntary opt-out until 2028, and will be able to report according to separate, proportionate standards that EFRAG will develop next year.

Although ESRS is mostly applicable to EU companies, non-EU companies can still be scoped in due to, but not limited to, the following scenarios:

• If it has a secondary listing in an EU-regulated market

• If it has an annual net turnover in the EU exceeding €150 million for each of the last two consecutive financial years and has at least one large subsidiary, one subsidiary listed on an EU-regulated market, or one branch in the EU that generated over €40 million in annual net turnover the preceding financial year

 

Revisiting IFRS S1 and IFRS S2 Exposure Drafts

On February 16, 2023, ISSB reconvened and redeliberated the IFRS S1 and IFRS S2 exposure drafts after considering the results of public consultation.

The ISSB proposed the following tentative changes:

• To amend the requirement in draft S1 to permit, but not require, preparers to consider ‘the most recent pronouncements of other standard-setting bodies whose requirements are designed to meet the needs of users of general-purpose financial reporting’ in identifying sustainability-related risks and opportunities and in identifying disclosures about those risks and opportunities. The ISSB also tentatively permitted preparers to consider t