Despite demand from investors for greater insight into companies’ plans for transitioning to a lower-carbon, higher-climate-risk economy, regulators say disclosure in this area is not well developed.
The International Organization of Securities Commissions (IOSCO) published a report from its Sustainable Finance Taskforce that said a lack of standardization is undermining the usefulness of company disclosures in this area.
The regulators examined the state of transition-plan disclosures and found there’s little consistency or comparability from company to company.
“IOSCO found that market participants are concerned about the current lack of standardization of transition-plan disclosures, with entities using different definitions and reporting frameworks or standards — or [no standards at all],” the report said.
Specifically, the regulators said:
- there are no common definitions for transition plans;
- that a lack of data prevents investors from tracking companies’ progress;
- that a lack of standards prevents investors from comparing sectors and jurisdictions;
- there’s no assurance standard for transition plan data; and
- there’s legal and regulatory uncertainty for companies when it comes to disclosing forward-looking information.
Despite the limitations of existing transition plan disclosures, IOSCO reported that market participants are “increasingly interested to use transition plans for their capital allocation, portfolio construction, risk assessment, pricing, valuation, product design and stewardship activities.”
Ultimately, investors want reliable, consistent, comparable disclosures, which may help them make better-informed investment decisions, the report said.
“The provision of poor-quality disclosures may result in inefficient capital allocation and investor harm,” it noted.
Yet, at this point, there is no specific regulation of these disclosures, the report said. Instead, regulators found that jurisdictions have taken various approaches to what companies should be disclosing about their transition plans, and that this generally takes the form of guidance, and voluntary compliance, rather than rules.
Looking ahead, the report calls for coordinated action from regulators and policymakers to formulate guidance on these disclosures that aims for consistency and comparability; to promote assurance; to enhance legal and regulatory certainty; and to build the capacity to develop, and use, these kinds of disclosures.
“Additional guidance on transition plans disclosures could clarify disclosure expectations and lead towards more standardized information. [Stakeholders] see alignment of guidance on transition plans disclosures as key so that investors can understand and compare information across different jurisdictions, even though national transition plans requirements may differ,” IOSCO said in a release.
IOSCO also also called on standards setters to “consider providing markers on what would constitute forward-looking information, in accordance with their standards and governance processes. This can support reporting entities in managing potential liability risks while disclosing much needed forward-looking, climate-related, information.”
To help policymakers and standards setters possibly develop rules in this area, the regulators’ report also sets out the most important components of transition plan disclosures to investors, including: companies’ targets; their decarbonization levers and action plans; governance and oversight; and, the financial implications of these efforts.
“Comparable, consistent and reliable disclosures of transition plans may have a positive effect on market participants’ ability to make informed decisions, ultimately benefiting both investors and the integrity of the capital markets. High-quality transition plans are key to navigate the transition towards lower GHG emissions, a climate-resilient global economy and are relevant to all jurisdictions, entities and investors,” said Rodrigo Buenaventura, chair of IOSCO’s Sustainable Finance Task Force, in a release.
IOSCO said it will continue to work with groups, such as the IFRS Foundation, “while promoting market integrity and mitigating greenwashing risks with regards to transition plans, thus supporting investors’ informational needs and the ability of markets to price sustainability-related risks and opportunities and support capital allocation.”