Does The Climate Disclosure Standards Board Draft Framework Measure Up?
The Climate Disclosure Standards Board (CDSB) seeks to increase the amount and quality of environmental information included in “mainstream” reports. It is a consortium of eight business and environmental organisations seeking to help investors make informed decisions on the allocation of financial capital in a manner which supports environmental protection. The CDSB believes this requires environmental information which links environmental performance with the organisation’s overall strategy, performance and prospects and they aim to provide policy-makers with quality standard-ready material, which will allow for robust investment decision making and stability in financial markets.
Last month the CDSB released its CDSB Consultation Draft Framework. It follows a 2010 Framework which focussed on the risks and opportunities presented to organisations by climate change. The Framework aims to be a useful to tool to both sustainability professionals working with environmental information for environmental reports and financial professionals involved in mainstream reporting.
Considerable effort has been made to align the Framework with existing reporting frameworks which have been carefully and painstakingly mapped. As the Framework points out the prevalence of voluntary reporting and the development of legislation is indicative of the relevance of information. The Principle of relevance (P1, p 6) defines relevant environmental information as that which should be disclosed in the mainstream report and is determined by “taking into account all of the requirements of the CDSB Framework and the needs of investors, management and regulators”.
Curiously, given that many of the required disclosures (or REQs) are non-financial, the Principle of materiality (P2, p 7) defines material omissions, misstatements and misinterpretations as those which could influence decisions made on the basis of financial information about a company. Elsewhere (REQ-7, p 10) the Framework states that GHG emissions are always material and should always be disclosed. What is missing is a discussion of how this links to financial information and the manner in which it influences investor decisions.
The requirement in relation to GHG emissions (REQ-11, p16) is to disclose scope 1 and 2 emissions along with acquisitions and disposals which have given rise to ‘movements’ in emissions over time (exactly what constitutes a ‘movement’ in emissions?). Hiding behind offsets is not allowed – they cannot be used to reduce disclosed emissions under REQ-11, but can be disclosed under REQ-11 (p 16) where material. What is missing in the CDSB Framework and the Greenhouse Gas Protocol on which it draws is any mention of embodied carbon which should inform infrastructure decisions (see discussion in relation to impact of sports events such as FIFA omitting to consider this material impact here).
Information should be faithfully presented i.e. “complete, neutral and free from error” (P3, p 7). Disclosures should be prepared consistently (i.e. using the same policies and procedures) in order that they are comparable across reporting periods, organisations and sectors (P5, p 8), the purpose of this being to increase their value to investors.
The notion that environmental information should be connected with other information reported by the organisation is introduced in Principle 4 (P4, p 8). Specifically environmental information which is used for internal decision making should: be connected to information provided to investors; complement other information in a manner which puts financial information into context; and, be linked with strategy.
The clarity, understandability and assurability of information is addressed in Principle 6 (P6, p 9) with a useful explanation as to what assurability entails.
The Principle that disclosures should be forward looking (P 7, p 9) encourages a strategic focus on the impact of the availability, quality and affordability of natural capital on the organisation’s future performance.
The eighth and final principle is somewhat tautological requiring compliance with the other Principles – “Disclosures shall satisfy the objectives of the CDSB Framework” (P 8, CDSB, 2014, p 9) i.e. provide useful information to investors which helps them make decisions which support environmental protection and help organisations prepare and present information in a manner “that connects the organization’s environmental performance with its overall strategy, performance and prospects” (p 5). This is a very tall order and I would like to see some examples of how to do that. How would you show that link with GHG emissions for example?
Having outlined the Principles, the Framework specifies its requirements (or REQs). The organisational boundary is defined as that used in the “mainstream” report i.e. the one that includes the financial statements (REQ-01). Any reporting on entities or activities outside that boundary, has to be distinguished (p 10). This makes sense, but I’d like to see the wording changed so that reporting on supply chain issues (so far as they are relevant to the objectives of the Framework) is explicitly encouraged rather than apparently discouraged (although the Framework does go on to say that such disclosuresmay be made where the reporting organisation is exposed to a material risk or opportunity or could have a material financial impact p 11).
Disclosures outside the financial reporting boundary may also be made where the reporting organisation has the power to influence its environmental impacts. The problem with this is that if they don’t have the will to influence it, they might conclude that they don’t have the power). It is not at all clear to me how this fits with the stated objectives of the Framework (to provide useful information to investors) and, given that there is a ‘may’ rather than a ‘should’ in the wording, the result might be disclosures which talk about the good work the reporting organisation is doing to reduce environmental impacts outside its boundary – rather than disclosures which discharge a duty of accountability.
Elsewhere, in discussing the requirement that organisations disclose the ‘principal current and anticipated’ (why not just say material?) risks and opportunities affecting the organisation (REQ-10, p 15) the Framework states: “Disclosure is useful where it: Analyzes the actual and potential causes and sources of risks and opportunities associated with natural capital, for example: ̶ Availability of natural capital, including through the supply chain”.
Like other non-financial reporting frameworks (such as the International <IR> Framework and G4) the CDSB Consultation Draft Framework aims to improve governance of environmental information by requiring (REQ-8) disclosure of governance processes including the senior executive and board committee responsible for environmental information and the “nature and reliability of the underlying information and control systems used by the Board to track environmental information and provide related disclosures” (p 14).
In the spirit of holding organisations accountable (albeit not mentioned as an objective), the Framework requires organisations to report performance against targets and previous year’s performance (REQ – 12, p 17).
All in all, its a considered piece of work which takes the discussion about reporting environmental information further and reaches more people (not just the usual suspects). I felt the text threw up some some inconsistencies of purpose and I was left wanting to ask: “What is it you really want to achieve? Who are you aiming to serve?” Then I remembered the CDSB was a consortium of environmental and business organisations, presumably with quite different perspectives and priorities, and the consultation draft Framework is thus a stage in working towards a common goal. It comes down to how you best sell a story to accountants, analysts and investors that providing environmental information, and improving environmental performance is in their interests, as well as everyone else’s.
Will the reported information link environmental performance with the organisation’s overall strategy, performance and prospects? I think we have some way to go before we can do that, but it’s a start.
The consultation period for the Framework is open until 14th December. Details of how to respond are here.
Image: Miroslav Petrasko via Flickr (CC)