Horizon 2020

Against this backdrop, the disclosure agenda is currently more stakeholder- than regulation-led; various constituencies are seeking more clarity on material ESG risks while the regulatory environment is still developing. In the US, there are no line-item disclosure requirements when it comes to sustainability. Back in 2010, the SEC published Commission Guidance Regarding Disclosure Related to Climate Change, which underscores that existing disclosure requirements already cover environmental and sustainability issues and that the threshold for disclosure is materiality. At the same time, several organizations, including the Sustainability Accounting Standards Board (SASB), have attempted to devise frameworks that could assist companies in determining and disclosing material sustainability risks in a way that enables investors to compare them across companies and industry sectors.

The focus on material disclosures is also reflected in the work of the Task Force on Climate-related Financial Disclosures (TCFD) which seeks to develop voluntary, consistent climate-related financial risk disclosures by which companies can provide information to investors, lenders, insurers and other stakeholders. TCFD members – which include leading corporates and financial institutions – are seeking to both show leadership in disclosure and influence regulators for pending disclosure regimes.

In some jurisdictions, stock exchanges are also steering disclosure, either by making ESG transparency a listing requirement (e.g. Euronext France) or by proposing a set of guidelines for voluntary disclosure (such as on the London Stock Exchange and NASDAQ).

So, what should companies do? In a world of overlapping (and sometimes competing) expectations, both boards and management need to determine for themselves what issues are material to their company and ensure that they satisfy their disclosure obligations and risk oversight duties. But they cannot stop there – in this ever-evolving landscape, they should also acknowledge that there are many other issues that, while not material, may nevertheless be important to investors and other stakeholders. For these issues, rather than responding to the constant requests for disparate information, companies should develop their own disclosure and define their own engagement strategies to provide stakeholders with the information they seek. Being proactive in this way gives boards and management the opportunity to have a meaningful dialogue with their stakeholders about the issues that important to them and to the company, without diluting the message with less useful information.

Regulators are catching up

National and regional regulators are looking to meet the obligations of the Paris Climate Agreement, and, to a lesser extent, the UN Sustainable Development Goals.

In some jurisdictions, especially in Europe, lawmakers are seeking to expand disclosure requirements to include ESG considerations. The EU’s Sustainable Finance Action Plan, for example, provides recommendations to companies on reporting how their activities impact climate change and the effect climate change is having on their business through a classification system (or taxonomy) of what constitutes sustainable business activity. Critics of the EU plan however question whether the detailed classification system is sufficiently clear or meaningful to guide companies or investors.

Central banks are also weighing in, driven by concerns about physical risks to assets and supply chains caused by extreme weather events and transition risks that will arise as regulators’, investors’ and consumers’ demands shift to address the threat of climate change. To date, 46 central banks and regulators have joined the Network for Greening the Financial System, launched by Mark Carney, governor of the Bank of England (until March), and his counterparts in France and China, among others.

Legal risk and climate change

According to data from Columbia University and the London School of Economics, there have been almost 1,400 climate-related lawsuits launched around the world, with more than 130 aimed at companies by the start of December 2019. Broadly speaking, climate-related cases can be split into three groups.

There are likely to be more “behavior-moderating” cases in 2020 in which litigants expand the focus of their claims from past emissions to current corporate revenue-generating activities. Furthermore, claims will no longer be brought just by governments and NGOs; we expect a growing number of individuals to launch shareholder suits, and institutional investors to add their voices to calls for greater transparency.

For more information on legal risk and climate change take a look at our research report on the climate risk landscape, which examines the emerging threat of litigation against multinational corporations.