While there may be doubts in some quarters about the mandatory introduction of climate risk reporting for US companies, many submissions to a consultation have focused on two objectives: introducing the TCFD reporting framework and ensuring the reporting rules go global.
Other parts of the world have pushed ahead with mandatory ESG reporting, but it was only in March this year, following Joe Biden’s presidential victory, that US regulators called for submissions on helping Wall Street catch up.
Companies, academics and investors have answered the call. Indeed, the world’s biggest fund manager, BlackRock, leads the way in calling for the climate reporting framework developed by the G20’s Task Force on Climate-related Financial Disclosures (TCFD) to be integrated into US reporting.
Global standards for US climate reporting
The investor goes a step further to call on the Securities and Exchange Commission (SEC), the most senior financial watchdog in the US, to work for a single set of global standards for companies and investors.
In one of many submissions by US companies to the SEC, BlackRock’s investment stewardship leaders Sandra Boss, Paul Bodnar and Elizabeth Kent, write that the investment manager “believes climate disclosures should be TCFD-aligned”. But they add: “We believe it is essential to work towards a single, globally applicable, mandatory disclosure framework and set of standards.” They say this should be based on the TCFD and offer their support to efforts by the International Financial Reporting Standard Foundation to develop a single system for reporting on sustainability.
BlackRock has big-name support. Apple, the world’s most high-profile makers of mobile phones and computers, says it favours TCFD for its own climate risk reporting, but also the introduction of standards every company in the world should use.
Arvin Ganesan, head of environmental policy at Apple, writes in the company’s submission: “We would also welcome efforts from the commission to work across borders, promoting the standardisation of carbon emission reporting frameworks at an international level. Ultimately, climate change is a global issue and harmonised approach is necessary to meet global emissions reduction targets.”
ESG ‘vagueness’ under fire
It was mid-March when the SEC began its hunt for mandatory ESG reporting measures in a speech from the then acting chair Allison Herren Lee.
In her speech Lee said the pandemic had been critical in clarifying why the separation of social value and market value was breaking down, adding to the importance of ESG. Covid, she said, highlighted worker safety and supply chain risk. But ESG was also connected to the death of George Floyd.
“We know climate presents heightened risks for marginalised communities, linking it to racial justice concerns,” Lee says. “We saw in real time that the issues dominating our national conversation were the same as those dominating decision-making in the boardroom.”
The move immediately met with pushback. Vanderbilt University law professor Amanda Rose set out an “ESG fuzziness” claim. Rose argued the “vagueness” of ESG definitions makes it difficult to identify the most important issues in the topic.
“The difficulty with these proposals is that they speak in generalities about the importance of ‘ESG’ to investors without specifying which, if any, specific ESG topics are financially material, and they invite the SEC to model a mandatory ESG-disclosure framework on frameworks developed by private standard setters without strict regard for notions of financial materiality.”
While Rose is correct that private-sector standards have proliferated, attention seems now fixed on TCFD.
The current consultation has seen other conflicts. Away from content, debate has focused on the medium for reporting. Some have called for disclosures to be made in so-called 10-k reports filed each year by US listed companies. Others, like Microsoft and the global fund manager Vanguard, have said reporting should take another route.
“If all audit or other assurance activities had to be performed at the same time as the year-end finance statements of the form 10-k, for example,” writes Microsoft vice president Keith Dolliver, “this could lead to pressure on systems and resource constrained, especially with small and medium-sized companies.”
Despite objections is seems the US is well on the way to some form of mandatory ESG reporting. Total commitment, likely under a Biden presidency, may also see US officials work for a global set of standards. That would be a game changer. But home rules are likely to be the first priority.