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How Can Private Equity Position Itself for the US SEC’s Climate Disclosure Rules?

The United States Securities and Exchange Commission (SEC) is poised to release its highly anticipated climate-related disclosure rules for public US companies – a ruling that has been in the making for over a year.

Originally published in March 2022, the SEC proposed that all publicly listed US companies be mandated to report their climate data in alignment with reporting recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).
When the proposal was then opened for public comment, the SEC received over 3,400 letters, significantly more than it customarily does when seeking public input.

While the SEC ruling applies to public companies, given the current global regulatory environment, along with calls for greater scrutiny of ESG claims within the private equity industry, it is only a matter of time before similar climate considerations be asked of private funds. Moreover, although the proposal will almost certainly face some measure of legal challenges, this will likely not deter 98% of companies from implementing climate reporting, according to a PricewaterhouseCoopers survey of 300 senior executives at US public companies with at least $500 million in revenues

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Decoding Climate Disclosures for Financial Institutions 2024

Climate risk is now recognized as financial risk — and rightly so. Understanding climate risk, as well as climate opportunities, is a paramount concern for investors, regulators, and indeed, all economies striving towards sustainable business models and net-zero futures. This is why ESGTree has published a comprehensive guide for financial institutions to stay ahead of the game: Decoding Climate Disclosures for Financial Institutions. In this guide, we break down and simplify the much anticipated climate reporting proposals by the US Securities and Exchange Commission (SEC), the International Sustainability Standards Board (ISSB) and the European Financial Reporting Advisory Group (EFRAG).

While the ESG regulatory landscape is evolving and complex, ESGTree is with you every step of the way. Between our Carbon Calculator, streamlined data collection platform, automated ESG reports, and benchmarking capabilities, we believe the climate challenge is really an opportunity for business excellence.

Join the sustainable finance revolution. Join ESGTree.

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Drowning in DDQs – Tanya Carmichael / ESGTree Podcast Interview

We recently had an insightful conversation with Tanya Carmichael, ESGTree’s Advisory Board Member, ex-Head of Global Funds Private Capital at Ontario Teacher’s Pension Plan (OTPP) and ex-Chair of the Institutional Limited Partners Association (ILPA). In our candid talk below, Tanya shares her thoughts about ESG integration, reporting and how LPs can prevent GPs from drowning in due diligence questionnaires (DDQs).

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A Brief Guide to SFDR Reporting and Compliance

When the European Union’s Sustainable Finance Disclosure Regulation (SFDR) came into force in March 2021, it signalled to the world that the EU was ready to take a global lead on ESG reporting and sustainable finance.The move impacted all financial market participants and financial advisors based within the EU. Along with the European Green Deal (which aims to see the bloc carbon neutral by 2050), and the EU’s “green taxonomy” (an industry-based classification system of what can and cannot be marketed as a sustainable product), a potent mix of regulatory mechanisms is set to usher Europe towards an economy in line with the Paris Agreement and the United Nations Sustainable Development Goals (SDGs).

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The ISSB Standards: A Milestone in the Global Economy 

The ISSB Standards: A Milestone in the Global Economy On 26th June, 2023, the ISSB finally launched its inaugural sustainability standards, ushering in a new era in international corporate reporting The International Sustainability Standards Board (ISSB) has issued its first two IFRS Sustainability Disclosure Standards: the IFRS S1, which provides a set of general disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term, and the IFRS S2 , which sets out specific climate-related disclosures and is designed to be used with IFRS S1.

On 26th June, 2023, the ISSB finally launched its inaugural sustainability standards, ushering in a new era in international corporate reporting

The International Sustainability Standards Board (ISSB) has issued its first two IFRS Sustainability Disclosure Standards: the IFRS S1, which provides a set of general disclosure requirements designed to enable companies to communicate to investors about the sustainability-related risks and opportunities they face over the short, medium and long term, and the IFRS S2 , which sets out specific climate-related disclosures and is designed to be used with IFRS S1. Both standards fully incorporate the 4 pillars of the Task Force on Climate-related Financial Disclosures (TCFD), namely Governance, Strategy, Risk Management, and Metrics and Targets.

Interestingly, the TCFD – which has been adopted into the UK law and is used voluntarily by many of the world’s biggest asset managers – is now set to move into the administration of the ISSB; this merger marks a significant advancement in the ISSB’s promise of bringing cohesion among the plethora of sustainability standards and frameworks available for asset managers.

The IFRS S1 and IFRS S2: In a Nutshell

While the final Standards contain several notable changes from the 2022 drafts , they continue to lean heavily on industry-specific disclosure topics issued by the Sustainability Accounting Standards Board (SASB) and strongly align with the European Sustainability Reporting Standards (ESRS), Global Reporting Initiative (GRI), the Greenhouse Gas Protocol, and many more (see Figure 1 below).

Figure 1

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IFRS S1: The IFRS S1, for instance, asks companies to report on a range of risks and opportunities, beyond climate, partly by leveraging the works of predecessor organisations such as the Sustainability Accounting Standards Board (SASB), the Climate Disclosure Standards Board (CDSB) and the International Integrated Reporting Council (IIRC). This ensures a global baseline and allows the ISSB standards to be applicable to any accounting framework.

IFRS S2: In much the same way, companies using IFRS S2 must be fully compliant with the TCFD recommendations and must provide information on physical and transitional climate-related risks and opportunities. Industry-specific disclosures are also included here, building on the SASB standards but with improvements for international applicability.

In a nutshell, the S1 & S2 are characterized by the key elements highlighted in the Table below:

S1

S2

Scope

Contains general requirements for disclosure of sustainability-related financial information

Contains climate-related disclosures

Disclosure requirements

Asks for disclosure of material information about sustainability-related risks and opportunities

Emphasizes the need for consistency and connections between financial statements and sustainability disclosures, requiring financial statements and sustainability disclosures to be published at the same time

Sets out disclosure of material information about climate-related risks and opportunities

Sets out disclosure for transition planning, climate resilience, and Scope 1, 2 and 3 greenhouse gas emissions. (For more details on this disclosure, click here)

Specificity of reporting requirements

Sets out general reporting requirements on topics such as water, biodiversity and social issues

Requires disclosure of information, when material, about climate risks (for example, flood risk), transition risk (for example, regulatory change) and climate-related opportunities (for example, new technologies)

Incorporation of other frameworks

Points to other standards and frameworks (for example, SASB, IIRC and CDSB) in the absence of specific IFRS standards

Incorporates TCFD Recommendations and includes SASB Standards’ climate-related industry-specific topics and metrics as illustrative guidance

Adoption Timeline

Both Standards are effective for annual periods beginning on or after 1 January 2024, with substantial transitional reliefs to allow preparers more time to align reporting of sustainabilityrelated financial disclosures and financial statements

Both Standards are effective for annual periods beginning on or after 1 January 2024, with substantial transitional reliefs to allow preparers more time to align reporting of sustainabilityrelated financial disclosures and financial statements

Adopting the ISSB Standards

The IOSCO Approval: Impact on Voluntary and Mandatory Reporting

The International Organization of Securities Commissions (IOSCO) is conducting an independent assessment of the ISSB standards, with its approval necessary before individual national securities regulators can adopt the standards into their respective regulatory frameworks. This will mark a breakthrough for the ISSB Standards, transforming their very nature from Voluntary to Mandatory.

Transition Groups & Reliefs

Now that IFRS S1 and IFRS S2 are issued, the ISSB will work with jurisdictions and companies to support adoption. The ISSB acknowledges that this level of reporting is “new for many, and represents a significant change in reporting practices globally,” so its first steps to help in adoption will include creating a Transition Implementation Group to support companies that will be using the standards and launching capacity-building initiatives to support effective implementation.

Additionally, the ISSB is also offering “transitional reliefs” to facilitate companies’ initial reporting pursuant to the Standards. More specifically, in their first year of reporting, companies need not: (i) provide sustainability reporting at the same time as traditional financial reporting, (ii) disclose Scope 3 emissions, (iii) calculate Scope 1 and 2 emissions using the Greenhouse Gas Protocol if the company has previously used a different framework for doing so, (iv) provide comparative information relative to prior reporting years and (v) provide disclosures around sustainability-related risks and opportunities beyond those required by the Climate Standard.

Challenges to Adoption

While such concessions will ease the reporting burden on many companies, smoothen the transition period, and encourage compliance, companies will still struggle with data gathering, verification, and technical compliance requirements and may need to outsource or partner with SaaS companies such as ESGTree to gear up for the January 2024 reporting period.

ESG SaaS to Ease the Reporting Burden on Financial Institutions

Since the ISSB requirements are built on an amalgamation of the ESG standards shown in Figure 1, companies and financial intuitions that adopt these standards now, rather than later, will be better equipped to meet and exceed regulatory compliance in the future. Those that are new to sustainability disclosures can use this year (2023) to prepare for the application of ISSB rules by:

Evaluating internal systems and processes for collecting, aggregating, and validating sustainability-related information across the company and its value chain

Reviewing the sustainability-related risks and opportunities that affect the company’s business

Understanding the IFRS Standards by either visiting the ISSB website or contacting the ESGTree Customer Success Team for more customized and stepwise guidance

Incorporating the SASB standards and CDSB framework, TCFD recommendations, and/or the Integrated Reporting framework (all which ISSB leverages) into the company’s ESG reporting process

Partnering with ESG technology solutions like ESGTree will simplify and streamline the collection of large ESG data sets and carbon emissions calculations and will automate the ESG standards and frameworks mentioned in Figure 1 as a first step towards compliance with the IFRS Standards.

Although the landscape of global sustainability reporting remains fragmented and evolving, the publication of the IFRS Standards represents an important step toward establishing a common understanding of the basic information required to assess the sustainability-related risks and opportunities businesses face.

About ESGTree

On 26th June 2023, the International Sustainability Standards Board (ISSB) introduced its pioneering IFRS Sustainability Disclosure Standards, marking a transformative moment in global corporate reporting. The IFRS S1 and IFRS S2 standards emphasize both general and climate-specific disclosures, integrating key principles from the Task Force on Climate-related Financial Disclosures (TCFD). These standards aim to unify the numerous sustainability frameworks, further supporting the transparency of businesses in disclosing sustainability-related financial risks and opportunities. With their integration set for January 2024, these ISSB standards will be instrumental in streamlining global sustainability reporting.🌐
Purpose-built for private capital investors, ESGTree’s data automation solutions allow private equity and venture capital firms to gain insights into their portfolio companies’ ESG performance over time, attribute ESG data correctly, and benchmark their data to assess a portfolio company’s progress in relation to other comparable companies in the region. These insights enable investors to identify potential risks and opportunities and make informed investment decisions based on a portfolio company’s ESG performance. Our cloud-based platform and advisory services meet the needs of both seasoned ESG managers as well as those entering the world of ESG for the first time.

The federal budget targets three priority areas: healthcare, affordability for everyday citizens, and the clean economy transition. It proposes $43 billion in net new spending over the course of six years, slightly raising the country’s debt-to-GDP ratio for the next two. Current federal debt is at $1.18 trillion.

Budget 2023: Clean Economy

The 2023 budget provisions for a clean economy cover the following areas:

· Clean energy and electrification (e.g., support for innovating the electricity grid)
· Clean manufacturing
· Greenhouse gas emissions reduction
· Electric vehicles and batteries
· Infrastructure
· Critical minerals
· Support for other major projects