Connecting Sustainability Reporting and Arctic Sea Ice Melting: The Urgency for Action

Connecting Sustainability Reporting and Arctic Sea Ice Melting: The Urgency for Action

Introduction:

The demand for consistent and comparable data in sustainability reporting has been growing, driven by investors and financial institutions. To address this need, the International Sustainability Standards Board (ISSB) was established by the International Financial Reporting Standards (IFRS) Board of Trustees. The ISSB aims to develop a global baseline for sustainability-related financial disclosures. In Southeast Asia, there is a potential alignment of mandatory climate disclosure requirements with major global markets, making the ISSB standards a regulatory requirement. As exposure drafts of the standards were released in April 2022, it is crucial to understand the proposed requirements and their implications.

The Proposed Standards:

The ISSB standards consist of a base standard, IFRS S1, which covers general requirements for the disclosure of sustainability-related financial information. Additionally, there is a thematic standard, IFRS S2, focused specifically on climate-related disclosure. These standards leverage the existing framework of the Task Force on Climate-related Financial Disclosures (TCFD) and require extensive disclosures on governance, strategy, risk management, and metrics and targets. The goal is to provide stakeholders, particularly investors, with clear, consistent, and comparable information about a company's sustainability and climate-related risks and opportunities.

Governance and Climate-Related Risk Management:

The proposed standards emphasize the importance of understanding the governance processes, controls, and procedures used to monitor and manage climate-related risks and opportunities. Organizations must disclose detailed information about the individuals or bodies responsible for managing these risks and opportunities, ensuring they have the necessary skills and oversight. The standards also require organizations to incorporate climate-related thinking into their broader strategic decision-making processes. This goes beyond the current TCFD requirements and highlights the need for a comprehensive approach to governance and risk management.

Strategy and Business Transformation:

Under the proposed standards, organizations must disclose their strategies for addressing significant climate-related risks and opportunities. This includes assessing the potential impact on their business models, strategies, cash flows, and access to capital in different scenarios. The standards also require organizations to disclose how climate-related risks and opportunities have affected their financial position, performance, and cash flows in the reporting period. Moreover, organizations are expected to outline their plans to respond to these risks and opportunities, including business transformation strategies and actions to enhance resilience. This level of detail goes beyond the current TCFD requirements and emphasizes the importance of proactive planning and adaptation.

Metrics, Targets, and Emissions:

The proposed standards introduce new requirements for measuring, monitoring, and managing significant climate-related risks and opportunities. They call for separate disclosures of Scope 1 and 2 carbon emissions, as well as the addition of Scope 3 emissions, which include emissions from an organization's supply and value chains. Scope 3 emissions are recognized as a challenging area, and additional guidance may be provided to support organizations in meeting this disclosure requirement. Furthermore, the standards emphasize the use of industry-based metrics to contextualize disclosures and assess performance towards set targets.

Connecting Sustainability Reporting and Arctic Sea Ice Melting:

The urgency for action on sustainability reporting becomes evident when considering the alarming state of the Arctic sea ice cover. Records show that summer sea ice has been decreasing at a rate of almost 13 percent per decade. In 2020, the Arctic experienced the highest level of sea ice melt since records began in 1979. This highlights the pressing need for organizations to address climate-related risks and opportunities through robust sustainability reporting practices. By aligning with the ISSB standards, companies can contribute to the global efforts in mitigating climate change and its impact on critical ecosystems like the Arctic.

Actionable Advice:

• 1. Embrace the ISSB Standards: Organizations should familiarize themselves with the exposure drafts of the ISSB standards and actively engage in the comment process. By aligning their sustainability reporting with these standards, companies can enhance transparency and comparability, satisfying the demands of investors and financial institutions.

• 2. Strengthen Governance and Risk Management: Organizations should invest in robust governance structures and risk management approaches to effectively address climate-related risks and opportunities. This includes ensuring the right skills and oversight, integrating climate-related thinking into strategic decision-making, and regularly reviewing and adapting plans in response to changing circumstances.

• 3. Set Ambitious Targets and Prioritize Emissions Reduction: To demonstrate commitment to sustainability, organizations should set ambitious emission reduction targets and disclose their plans for achieving them. This includes comprehensive measurement, monitoring, and management of carbon emissions across scopes, as well as exploring opportunities for emission offsets and industry-specific metrics.

Conclusion:

The ISSB standards offer a framework for consistent and comparable sustainability reporting, aligning with global efforts to address climate change. By embracing these standards, organizations can enhance their governance, strategy, risk management, and metrics and targets disclosures. The urgency for action is underscored by the record-low Arctic sea ice cover, emphasizing the need for proactive measures to mitigate climate-related risks. By taking actionable steps towards aligning with the ISSB standards, companies can contribute to building a sustainable future while meeting the demands of investors and financial institutions.