Climate Change Reporting Standards for Banks: Key Developments

Banks are flooded with compliance requirements from multiple climate change and environment, social, and governance (ESG) reporting standards and frameworks. These standards and their implementation are critical in setting the pace and scope of changes to come—and the agenda for banks to catalyze positive change.

The Task Force on Climate-Related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB), Climate Disclosure Standards Board (CDSB), and Global Reporting Initiative (GRI) are some of the more widely recognized organizations in climate change reporting. Banks and anyone keeping score, including investors and analysts, recognize the urgent need to standardize, reduce duplication in, and simplify ESG reporting.

In 2022, standards emerged from the Big Three: the International Sustainability Standards Board (ISSB), European Financial Reporting Advisory Group (EFRAG), and U.S. Securities and Exchange Commission (SEC). Since then, investors and banks globally have kept a close eye on the development of these climate change reporting standards. Let’s dig into major changes.

Development in ISSB standards

Upon careful deliberation, the ISSB board has made several changes to its sustainability reporting standard. Major updates are as follows:

• Effective date—ISSB standards will take effect 1 January 2024. However, early adoption of the climate change reporting standards is also permitted.
• Transitional reliefs—Acknowledging the reporting challenges, the board has introduced a slew of transitional reliefs to extend the deadline out one year to 1 January 2025. This extension provides a much-needed respite to entities, including:
  • Disclosure reports are due at the half-year interim reporting period and must be submitted within 9 months at the end of the annual reporting period
  • Measurement of GHG emissions is used as a basis from the Greenhouse Gas Protocol Standard
  • Entities do not need to disclose Scope 3 GHG emissions
  • Comparative information is not required to be disclosed
• Financed emissions—A few important decisions for banks and financial institutions include:
  • The three industries required to disclose financed emissions are Asset Management & Custody Activities, Commercial Banks, and Insurance companies
  • Entities do not need to disclose their emissions intensity, such as emissions per unit of physical or economic activity
  • The Investment Banking & Brokerage industry does not to disclose its facilitated emissions
  • Exclusion of derivatives in the calculation of financed emissions
  • No requirement to disaggregate disclosures by carbon-related industries
• General GHG emissions—changes to decisions on emissions disclosure requirements include:
  • No longer necessary to disaggregate GHG emissions by constituent gases – Note it is still required by the US SEC rules
  • It is required to use a location-based method when disclosing Scope 2 emissions
• Proportionality approach—Amidst concerns from smaller entities regarding application and lack of resources to comply with full suite of requirements, the ISSB board will provide additional guidance and reference materials. Entities are required to make use of reasonable and supportable information into their consideration for disclosures like scenario analysis.
• Different reporting periods—Entities are allowed to include data from their value chain that have different reporting periods subject to certain conditions.
• Industry-based disclosures—Sustainability Accounting Standards Board (SASB) standards relating to industry-based disclosures are now included as a major part of Climate-related Disclosures (S2) standard.
• Climate-related targets—Entities need to provide clear information on targets, including organizational hierarchy scope, identify the GHG emission scopes, transition plans, etc.
• Interoperability—ISSB continues to collaborate with Global Reporting Initiative (GRI) and find an intersection with ESRS reporting. The Carbon Disclosure Project (CDP) has also made a commitment to incorporate S2 into its global disclosure platform.

Development in ESRS standards

After public consultation, the European Financial Reporting Advisory Group (EFRAG) has made a few changes to its standards, including:

• Effective date—A phased approach to adoption for different type of companies.

  2024	2025	2026	2028
  Large EU companies	Other large companies	Other listed SMEs	Non-EU parent

• Transitional reliefs—Similar to ISSB, EFRAG has shown flexibility by introducing the following reliefs:
  • 1 year, effectively from 1st January 2025, for publishing comparative information
  • 3 years, effectively from 1st January 2027, for providing information on value chains if originally unavailable
  • 3 years, effectively from 1st January 2027, or publishing quantitative disclosures on financial effects from material risks and opportunities
• Climate disclosures—Updates include:
  • Internal carbon pricing is a separate disclosure requirement
  • Revised reporting boundary for financial statements, for example, separate disclosures for consolidated accounting group and unconsolidated ones
  • Scenario analysis is included within the meaning of resiliency analysis
  • Sector-specific requirements will be developed
• Architecture—In an attempt to make it interoperable, EFRAG has made the following changes to its architecture:
  • Reduced number of standards from 13 to 12 by incorporating requirements in ESRS 2 – General disclosures
  • Adopted a four-pillar structure, like the Task Force on Climate-related Financial Disclosures (TCFD) & ISSB: (1) Governance, (2) Strategy, (3) Impact, risk, and opportunity management, and (4) Metrics and targets
  • Key concepts, definitions, and disclosure requirements in the cross-cutting and climate standards are now aligned with those proposed by the ISSB
• Materiality—EFRAG has chosen to remove the ‘rebuttable presumption,’ whereby all disclosure requirements are presumed material unless the company has reasonable and supportable evidence to rebut this presumption.
• Interoperability—ESRS continues to work with ISSB on aligning its disclosures on concepts like financial materiality, value chain, etc.

Oracle’s view

Both ISSB and ESRS have made several strides to ensure a wider acceptance of the climate change reporting standards, including the introduction of reliefs around Scope 3 emissions and implementation timelines. Meanwhile, the relevance of climate change reporting remains strong with disclosure requirements and general financial reporting to be included within the annual reports. Lastly, standard-setters must look for ways to reduce the burden of multiple reporting and continue working towards interoperability.

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