Values-Based Compliance:
Climate-Related Financial Disclosure
Laws and regulations related to corporate and social responsibility (CSR) and environmental social and governance policies (ESG) are expanding in recent years.  Enforcement authorities are also moving to address ESG matters in their policies, acknowledging that “climate risks and sustainability are critical issues for the investing public and our capital markets”[1].  The most recent example is SEC announcement of a Climate and ESG Task Force as part of its Division of Enforcement.[2]  The Climate and ESG Task Force will develop initiatives to proactively handle ESG-related misconduct, including identifying the material gaps or misstatements in issuers’ disclosure of climate risks and analyzing disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.

In addition to regulatory framework, asset managers, investors and shareholders demand more ESG compliance from companies.  There is also a heightened emphasis on ESG and on green and sustainable finance products that emerged in the midst of the Covid-19 pandemic.

In its letter to CEOs, Larry Fink, Chairman and Chief Executive Officer of BlackRock, the world's largest asset manager, emphasized that “climate risk is investment risk” and indicated a start of an accelerating transition to sustainable investment options, enabling acceleration of capital toward companies that are better positioned to address climate risk.[3]  Increasing number of investors is directing their funds to sustainability-focused companies, meaning that companies able to articulate their long-term environmental strategy will have an advantage.  For investors to evaluate sustainability levels, the companies need to provide information about their exposure to climate-related risks and ability to manage them.  Guidelines on such disclosure have been outlined by the Task Force on Climate-related Financial Disclosures (TCFD)[4],established by the Financial Stability Board in order to develop recommendations for effective climate-related disclosures that would enable better understanding of the financial system’s exposures to climate-related risks.

The TCFD is establishing a framework around climate-related disclosure to help investors evaluate risks and upsides of a transition to a lower carbon economy.  Compliance with the developed standards is part of the voluntary engagement by the private sector; it is not driven by governmental enforcement, but rather is a values-based compliance.  Key elements of the recommended disclosure are:
(a)   Governance - management’s assessment and management and board’s oversight of climate-related risks and opportunities;
(b)  Strategy –identification of climate-related risks and opportunities and their impact on the company’s business, strategy and financial planning;
(c) Risk Management – processes for identification and management of climate-related risks, as part of the company’s overall risk management;(d)  Metrics and Targets –parameters used to assess and manage climate-related risks and opportunities and performance against identified targets. Potential benefits associated with implementation of climate-related disclosure may include better access to capital from climate-conscious investors, better risk management and strategic planning, and more effective compliance with exiting disclosure requirements.  We anticipate that in the coming years, more companies would evaluate the necessity of ESG-related accountability, driven by greater market interest in businesses committed to ESG.  This interest will likely be supported by studies showing how companies with better ESG profiles and ability to communicate climate resiliency can outperform their peers and therefore justify a “sustainability premium.”  

[1] SEC Acting Chair Allison Herren Lee in “SEC Announces Enforcement Task Force Focused on Climate and ESG Issues”, Press Release, March 4, 2021 https://www.sec.gov/news/press-release/2021-42?utm_medium=email&utm_source=govdelivery
[2] “SEC Announces Enforcement Task Force Focused on Climate and ESG Issues”, Press Release, March 4, 2021 https://www.sec.gov/news/press-release/2021-42?utm_medium=email&utm_source=govdelivery
[3] Larry Fink’s 2021 letter to CEOs: https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter  
[4] Task Force on Climate-Related Financial Disclosures(fsb-tcfd.org)
Our Services >