Policymakers and regulators must work together to form a “coherent and coordinated” global approach to sustainability disclosure, urges a new report from the Investment Association (IA).

Financing Transition, published last month, sets out a wide range of commitments that the IA is making to encourage progress among the world’s investment community towards a net-zero economy.

In the report, the IA welcomes efforts made since COP26 in 2021 to introduce “robust and consistent” standards on sustainability disclosure to boost the quality and comparability of data on climate and nature-related risks and opportunities across the whole investment chain. 

However, a lack of global harmonisation of those standards is creating confusion and complexity for investors and issuers, the IA warns

At the same time, a significant mobilisation of capital is required to speed up the transition to a low-carbon economy. Stakeholders must therefore ensure that the financial sector is able to channel funds towards climate-friendly and nature-positive investments – all while managing the risks and opportunities that stem from the transition, plus the physical impacts of climate change.

Transparency and integrity

The IA says it will engage with policymakers to push for greater interoperability of global sustainability standards, including the convergence between the International Sustainability Standards Board (ISSB) and European Sustainability Reporting Standards (ESRS) frameworks.

At the same time, the IA says it supports the need for a coherent regulatory framework around environmental, social and governance data and rating providers to boost transparency and integrity in the responsible investment market. It will also seek to enhance public-private cooperation to enable wider use of blended finance, plus other models of transition finance.

Meanwhile, the IA has committed to supporting investment managers in meeting their climate- and nature-related financial disclosures requirements by improving the data used in disclosures aligned to the Task Force on Climate-Related Financial Disclosures and an evolution of disclosure rules to better incorporate ISSB, the Taskforce on Nature-related Financial Disclosures and the Transition Plan Taskforce (TPT) standards and frameworks.

The IA also says it will encourage the development and adoption of scenario analysis to explore risks and opportunities in climate-related financial disclosures. To that end, the IA has committed to taking part in the Climate Financial Risk Forum, hosted by the Financial Conduct Authority and Prudential Regulation Authority.

Tackling a mismatch

IA Public Policy Specialist Paul Scaping told ICAEW Insights that the report reflected the demands for transparency and openness that corporate investees routinely face. “Some of our members came to us and essentially said, ‘We’re having these expectations of other companies in other sectors – so, perhaps we should be doing it ourselves, too.’”

Finance professionals have a role to play in the dialogue between investors and investees on sustainability matters, he says. However, members continue to flag up a mismatch between companies’ stated climate strategies and disclosures in their financial statements.

“I fully appreciate that accountants will be numbers people first,” Scaping says, “but there’s a need to join up the narrative that a company is putting out with what investors will see in the numbers. This is a live issue, as the International Accounting Standards Board is currently consulting on illustrative examples of how companies should report the effects of climate-related and other uncertainties in their financial statements.”

Understanding specifics

Finance teams need to make sure they are employing people with the necessary skills and understanding to bridge the gap, Scaping says. “Someone needs to assure the board that, having looked at the possibility of a mismatch, they are confident on the basis of what they have seen that the climate strategy is appropriately reflected in the numbers.”

Scaping says that there is a tendency among some finance teams to report on scenarios in general terms, or to examine issues through a ‘whole-economy’ lens. However, best business practice is to look at the particulars of the company in question and understand what its specific risks and opportunities would be.

“A good starting point for any company looking to get into those details is to explore the TPT’s disclosure framework and accompanying recommendations, which will help companies to resolve some of the key questions they may ask.

“The framework also provides companies with guidance on how to tackle areas where they don’t yet have adequate information or are unable to disclose something and must explain why that’s the case.”