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International Sustainability Disclosure: Change Is Coming

March 8, 2021, 9:00 AM

Corporate sustainability reporting is about to change in significant ways in response to two implacable forces: increasing pressure from advocates to include climate disclosure in investment decision-making, and investor need for global consistency in sustainability standards criteria.

Calls for international agreement on sustainability reporting standards recognize that businesses and investors operate transnationally and need the ability to compare data and information meaningfully across jurisdictions. What will these developments mean in the corporate reporting landscape?

The emphasis on climate-related risks and opportunities expands on existing financial reporting requirements relating to material and reputational risks. Climate-related considerations, along with other environmental, social, and governance (ESG) factors, include impacts on water, biodiversity, and other ecosystem assets, sometimes referred to as “natural capital.” Methodologies for quantifying positive and negative impacts for these factors throughout supply chains can translate into business value and risk.

While the Biden administration’s Securities and Exchange Commission is expected to play a lead role in the U.S. in prescribing climate change and ESG-related reporting requirements, many believe the U.S. will look to the international community for model approaches , such as the European Union’s new disclosure rule set to take effect in March 2021.

Harmonizing Disclosures and Assessments

Many signs point toward increasing global harmonization of ESG disclosures and related internal risk assessment measures. The Taskforce on Climate- related Financial Disclosures (TCFD), chaired by Michael Bloomberg, founder and majority owner of Bloomberg LP, is a central reference point for these efforts. [Bloomberg Law is operated by entities controlled by Michael Bloomberg]

In addition, the newly formed Taskforce on Nature-relatedDisclosures (TNDF) seeks to shift finance from risk assessment associated with nature loss toward investment in nature-based solutions with the goal of reducing both acute and systemic risks. TNDF is poised to incorporate approaches for accounting for nature such as:

  • Standards for measuring the extent, condition, and value of ecosystems, such as the U.N. System of Environmental-Economic Accounting (SEEA), British Standard 8632 Natural Capital Accounting for Organizations, and the Biological Diversity Protocol (BD Protocol);
  • Transparent and Align, EU-based projects that seek to harmonize environmental measures and accounting practices for products—for instance, the amount of water used in the production of two different breakfast cereals; and
  • The U.S. Environmental Protection Agency’s (EPA) National Ecosystem Services Classification System Plus (NESCS), which defines a non-overlapping and hierarchical classification system to help identify the ecosystem services used in cost-benefit analysis and natural capital accounting.

Second-Generation Capital Accounting

These approaches are often described as second-generation natural capital accounting. They provide a means of measuring a company’s positive and negative environmental impacts and cumulating them among business units or supply chains into a single metric that could be integrated into risk analyses, life-cycle assessments, and internal financial statements.

For example, using these approaches, the natural capital impact of a business’s 10 facilities might be measured on a relative rank basis using a unit denominated as “quality acres.” If 30 acres of a 100-acre land holding are impacted by clearing, 70 quality acres would remain. On the other hand, if the 30 acres could be managed by thinning or some other selective cutting method, the 100-acre parcel could be deemed to offer something greater than 70 quality acres. The land provides additional ecosystem services (e.g., water purification and carbon sequestration) and biodiversity that can also be measured.

Such an analysis would demonstrate a net gain in natural capital due to revised land management compared to the baseline or other scenarios. Net gains in natural capital may also be gleaned during site restoration by adapting “restoring with nature” approaches.

Second-generation approaches are receiving widespread attention, including from:

  • Science Based Targets Network, a business-nonprofit organization partnership between the Carbon Disclosure Project, the U.N. Global Compact, World Resources Institute, and the World Wide Fund for Nature. The SBTN is setting global limits on land use, biodiversity loss, water withdrawals and impacts to oceans, and establishing a method to translate these standards to individual corporate targets;
  • The U.S. Convention on Biological Diversity and the International Union for Concerned Scientists, which help set global conservation agendas, including targets like those set by the Biden administration for protecting 30% of U.S. federal lands and waters; and
  • The World Bank, Capitals Coalition, World Business Council for Sustainable Development (WBCSD), and governments around the globe, which incorporate these goals into governmental and funding mandates.

Opportunities for Businesses

The trend toward global harmonization of climate-related risk disclosure provides opportunities for businesses to receive credit for valuable ecosystem restoration and mitigation through incorporation of natural capital accounting in ESG reporting.

Companies in forestry, manufacturing, chemicals, food, clothing, and aggregates, among others, are voluntarily integrating these techniques into their internal analysis and public disclosures. It is critical that these concepts be incorporated in a consistent way into any new disclosure mandates. The business community must take responsibility for educating policymakers to understand how natural capital accounting can be used to mitigate climate change impacts, and making sure these important concepts are accepted in the full range of financial, sustainability, and securities disclosure regimes.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Karen C. Bennett is a partner in the Washington, D.C., office of Lewis Brisbois and co-chair of both the Environmental & Administrative Law Practice and the Government Relations group. She resolves regulatory problems, focusing primarily on permitting, compliance, litigation, and legislative and regulatory policy.

Jane C. Luxton is the managing partner of Lewis Brisbois’ Washington, D.C., office, co-chair of the Environmental & Administrative Law Practice, Government Investigations & White Collar Defense Practice, and the Government Relations Group Leadership. She has extensive experience in environmental as well as other federal regulatory, policy, and litigation matters.

Pieter Booth is a principal scientist with Net Gain Ecological Services. He has over 30 years of experience as an environmental scientist and is a recognized thought leader in developing and applying decision-making tools based on the effective management of biodiversity and ecosystem services.

John Finisdore, with Sustainable Flows, Melbourne, Australia, helps corporations maximize returns from natural capital. He is a recognized expert in natural capital risk assessment and analysis, and helped build several best practices guidance documents.

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