The holiday lull of ESG information and activity is over and we are back to full throttle. Here are a few items we think are noteworthy:
IFRS ESG Accounting Standards – Don’t Hold Your Breath
There has been much optimism about the impending development and launch of international accounting standards for ESG and climate matters since the announcement at COP26 of the International Sustainability Standards Board (ISSB) under IFRS. However, the separation between ISSB and IFRS in the standards development process and potential timing of IFRS integration of ISSB recommendations into actual accounting standards are probably not generally acknowledged or appreciated. The IFRS Accounting Standards Advisory Forum meeting held December 9-10, 2021 and Agenda Items AP2 – AP2L show the stark realities which may be disappointing to many.
Our View: While the creation of ISSB is indeed a positive development, it doesn’t mean speedy development of ESG-specific international accounting standards. Documents from the December meeting clearly show that IFRS standards development and ISSB activities are wholly independent of each other, and that IFRS will continue to follow their established due diligence process for new standards. It will be some time before we see new IFRS ESG proposals for public review (which would be after ISSB recommendations are developed and presented to IFRS). Even after IFRS finalizes new standards, each nation’s financial regulator must adopt them through their own national administrative approval processes. If SEC publishes their proposal soon as expected, they (and FASB) may be first to the table with a final ESG/climate accounting standard. In a bit of a flip-flop, that could put the US in a stronger position of influence on the international standard.
Anti-Fossil Fuel Initiative Faces Anti-Trust
The Net Zero Insurance Alliance is a group of insurers ostensibly formed as a collaborative effort that includes Axa SA, Allianz SE and Swiss Re AG to stop underwriting fossil fuel risks. Bloomberg reported that the group “might be liable to anti-competition litigation if they act together against specific industries.”
Our View: Honestly, I wondered when and how anti-trust would raise its head in the myriad of collaborations and initiatives targeting fossil fuels. We will probably see more of this. It would be prudent to keep this in mind when considering joining, participating in or relying on the work of such groups.
Does the Same Fate Await Banks?
A group of the largest North America-based financial institutions joined forces to create the Risk Management Association’s Climate Risk Consortium. According to the organization’s website, the initiatives include:
- Helping banks develop a climate risk strategy, including risk appetite, training, policies, and Board assessments.
- Communicating in a common voice to regulators and assessing/preparing for regulatory disclosures.
- Developing common metrics and targets for reporting and benchmarking; organizational design for scenario analysis and stress testing.
Our View: The website is bare bones at the moment and doesn’t provide substantive information or work products. When it gets rolling, it could face similar anti-trust roadblocks like the insurance industry. Caution is warranted.
UK Audit Regulator – We Giveth and We Taketh Away
In the UK, mandatory climate-risk disclosures will go into effect this year for more than 1,300 of the largest UK companies. Alongside this, the Wall Street Journal reported that the UK Financial Reporting Council (FRC) which is in the process of folding into the Audit, Reporting and Governance Authority, “is reviewing feedback on a series of proposals to reform the country’s audit sector, including placing a cap on the number of audits the Big Four firms – Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers – can perform. Those structural changes would fall into the ARGA’s remit.”
Our View: UK-based companies engaging any of the Big 4 to undertake audits as part of the new climate risk disclosures could find themselves having to change auditors in a couple years if the audit cap comes to fruition. At the same time, climate disclosure audits may be classified as “non-audit services” such that they wouldn’t be counted as audits. For years, I’ve heard companies lament about disruptions caused by having to “train” new auditors. UK companies concerned about this potential in the future may want to consider selecting an auditor other than one of the Big 4 firms to perform audit-like activities related to the new climate disclosures.