Global consistency: navigating CRFD regimes

December 2024  |  FEATURE | RISK MANAGEMENT

Financier Worldwide Magazine

December 2024 Issue

Climate change is the defining issue of our age. It is a global threat, encompassing rising average temperatures, natural disasters, shifting wildlife habitats, rising seas and a range of other impacts. That threat is escalating rapidly, according to the United Nations, with no corner of the globe immune from its devastating consequences.

And yet, despite the size of the threat, the world is by no means powerless to respond. Laws and policies governing action on climate change abound, with regulatory bodies worldwide continuing to roll out stringent climate-related financial disclosure (CRFD) requirements. Such actions reflect a broader trend toward global consistency in climate reporting.

“We are seeing some common standards incorporated into CRFD regimes around the world,” affirms Elisa de Wit, a partner at Norton Rose Fulbright. “These include standards produced by the Task Force on Climate-Related Financial Disclosure (TCFD), the International Sustainability Standards Board (ISSB) and the Greenhouse Gas Protocol.”

One issue, however, is that global CRFD regimes are generally not in accord as yet, with the scope, liabilities and implementation of each regime differing markedly by jurisdiction. That is a potential stumbling block for those multinational companies which may assume the approach they take toward disclosures in one jurisdiction is applicable in another.

But standards bodies around the globe are taking note. “For example, the Australian Accounting Standards Board recently made the decision to more closely align its standards with those of the ISSB,” explains Ms de Wit. “And in May this year, the European Union’s (EU’s) standards body also released helpful guidance on the interoperability of its own regime with ISSB standards.

“The most significant CRFD regimes are likely to be those which both cover large, globally significant economies and require scope 3 emissions reporting, for example those of the EU and California,” she continues. “Entities in these jurisdictions will need to consider how they can assess the emissions profiles of complex, international supply chains to the required degree of assurance.”

Keeping pace

To keep pace with the rapid development of CRFD reporting, multinational companies need to ensure they are up to date with the various regimes they may become subject to, while remaining cognisant of all the associated opportunities and risks in doing so.

“Companies must be aware if they fall under the scope of any regimes and, if not, when they might do so,” points out Ms de Wit. “For those operating across multiple jurisdictions – which are each phasing in a CRFD regime over the course of several years – this quickly becomes a complex exercise.”

In the UK, for example, CRFD reporting has been required since 2021 and applies to large companies and certain public interest entities in the UK that meet two of the three following criteria: turnover of £36m or more, a balance sheet total of £18m or more, or 250-plus employees.

“Once they know they should be reporting, the next question to ask themselves is whether they are able to,” continues Ms de Wit. “Do they have the capacity, access rights and internal processes to report correctly? To assess this, we recommend, as a first step, conducting a skills gap analysis to determine if they have the technical know-how to report on, say, scope 3 emissions.”

Once capacity is established, companies can access a TCFD framework – structured around four thematic areas – to help them more effectively disclose CRFD risks and opportunities through their existing reporting processes.

The first area covers disclosing the company’s governance around climate-related risks and opportunities. The second area covers disclosing the actual and potential impacts of climate-related risks and opportunities on the company’s businesses, strategy and financial planning where such information is material. The third area covers disclosing how the company identifies, assesses and manages climate-related risks. And the fourth area covers disclosing the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material.

“While potentially onerous, CRFD reporting will provide incredibly useful data for companies,” adds Ms de Wit. “The standardisation of reporting will also bring transparency to the market in relation to so-called ‘green claims’. That said, the flipside of such disclosures is that companies are vulnerable to regulator prosecution, which will be overwhelmingly civil in nature, but with the potential to escalate into criminal penalties.”

Evolving requirements

With the US, Japan, the EU and Singapore all expected to introduce their own jurisdiction-specific CRFD regimes over the next few years, the pressure on companies to understand and adhere will ramp up considerably.

“Standards bodies are alive to the difficulty of multinationals being required to comply with multiple, diverging CRFD regimes,” contends Ms de Wit. “However, a key part of their mandate is considering how these standards should be adapted to best suit their home markets, so we should not expect global consistency anytime soon.

“Nevertheless, with an eye on additional and broader disclosure regimes coming down the track, companies will benefit from taking a proactive role in response to existing and proposed CRFD regimes,” she concludes. “They should be reassured that spending the time and resources now to build internal capacity and prepare for these reporting requirements will be a worthwhile investment in the coming years.”

© Financier Worldwide

BY

Fraser Tennant