Transcript by Kensho.

Lindsey Hall: I'm Lindsey Hall, Head of Thought Leadership at S&P Global Sustainable1.

Esther Whieldon: And I'm Esther Whieldon, a Senior Writer on the Sustainable1 Thought Leadership team.

Lindsey Hall: Welcome to ESG Insider, a podcast hosted by S&P Global, where we explore environmental, social and governance issues that are shaping investor activity and company strategy. 

If you're a regular listener to this podcast, you might know that Esther and I are normally recording from our separate home recording studios. Over the past 4 seasons, we've grown this into a weekly show that's been downloaded close to 1.5 million times, and we hear regularly from our listeners around the world. Well, last week, we tried something a little different. We took the show on the road.

Esther Whieldon: That's right. Our colleagues at S&P Global Market Intelligence hosted an ESG Insider Live event. This meant that Lindsey and I sat down to interview four guests in front of an audience live in New York. The topic of the day's discussion was the fast-evolving climate disclosure landscape. And if you couldn't join us live in person, today we're bringing you highlights from those interviews.

Lindsey Hall: We'll hear from someone who used to work at the US Securities and Exchange Commission about the changing landscape for climate regulation in the US. To understand the global landscape for climate disclosures, we'll hear from someone who works at the International Sustainability Standards Board, or ISSB. The Board issued its first 2 sustainability disclosure standards in June 2023.

To understand how corporations are approaching climate disclosure, we'll talk to the former Chief Executive of another standard organization, the Global Reporting Initiative, or GRI, and we'll talk to the Chief Sustainability Officer at one of the world's largest banks. Before we dive into these interviews, a quick bit of review on some of the regulations and developments you'll hear about today.

One is the U.S. Securities and Exchange Commission's pending final decision on its proposed climate disclosure rule. The SEC proposed the rule in 2022. And as we'll hear from today's first guest, one big question is what the commission will do about Scope 3 emissions in the final rule.

Under the SEC rule proposal, large companies will be required to estimate and disclose Scope 3 emissions if they either set a decarbonization target that includes Scope 3 emissions or if they've found Scope 3 emissions to be material to their operations and financial performance.

Quick primer. On this podcast, we try to avoid jargon and acronyms as much as possible and put things in plain English. So in simple terms, Scope 1 emissions are direct emissions from a company's operations. Scope 2 emissions are indirect ones, and those are primarily derived from purchased energy. 

Lastly, there's Scope 3 emissions. And these occur up and down the company's supply chain as well as when a customer uses the products. And for financial institutions, the Scope 3 financed emissions come from the investments they make or the loans they finance.

Esther Whieldon: The SEC final rule is pending. But in the meantime, California Governor Gavin Newsom in October 2023 signed into law a rule that would require thousands of companies operating in the state to report their greenhouse gas emissions, including Scope 3 emissions.

California is the world's fifth largest economy, and the emissions reporting requirement would apply to about 5,300 companies. In today's episode, you'll also hear the TCFD mentioned. That's the Task Force on Climate-related Financial Disclosures. Okay. Now let's turn to our first interview with Emily Pierce, who is Chief Global Policy Officer at Persefoni. She starts off by describing her background.

Emily Pierce: I'm the Chief Global Policy Officer at Persefoni, which is a software tool to help companies manage and account for their carbon emissions. But before that, I was at the Securities and Exchange Commission. I was in the Office of International Affairs there. And in that role, I worked quite a bit with other securities regulators around the world through an organization called the International Organization of Securities Commissions, that's IOSCO.

And in that role -- so I was there for 12 years. And in that forum, securities regulators come together and talk about common challenges and common solutions. And increasingly, climate risk is clearly a risk that's global and climate financial risk was impacting markets around the globe. And at the same time, increased -- a dramatic increase globally in investors interest in sustainable investing and investors demanding more information about climate risk.

But ultimately, across the globe, no matter where you sat, the information for investors was insufficient and the information for issuers was actually a very inefficient system for providing the information investors were asking for. 

So the U.S. regulatory landscape is rapidly evolving, and I think we'll have some certainty in the near future, at least on this next phase. But let's go back to what is the landscape and what is the foundation of that landscape.

And I like to focus on the fact that there are already obligations to disclose information about your climate risk. The SEC issued guidance in 2010, making clear that climate risk could be a financial risk. And if it was, companies should make disclosures about it. So we're in long-standing transition of SEC disclosure regulation.

And over time, over the next decade, more and more information came out in the voluntary space and in a more cohesive framework way based on the Task Force on Climate-related Financial Disclosures. And what's really happening now is a global movement to enhance and standardize the details around that disclosure.

Building on the Task Force on Climate-related Financial Disclosures but adding an additional details and comprehensive data points. And that's what the SEC rule is doing. It's enhancing and standardizing climate-related disclosures. So what we're waiting to see is exactly what they ask for, what the specifics are.

Esther Whieldon: So what are some key aspects of the proposed SEC rule that you're keeping your eye on for what they're going to do with at the end?

Emily Pierce: So there's a few. I'll start with the one that I think everybody is watching for, which is the question of "to Scope 3 or not Scope 3". I think what I'm really watching for there is not the yes or the no. But how does the SEC respond to the increasing awareness and understanding in the markets that carbon emissions disclosure needs to be comprehensive. Scope 1 and Scope 2 without Scope 3 doesn't tell the whole story.

The question is whether or not they require it, but I think, ultimately, corporates need to be thinking about that because it's not just for an SEC disclosure, carbon emissions tell you about your transition risk. They're an important metric to understanding transition risk. Regulators around the world are moving forward with requirements that do include all three scopes.

Again, it's for comprehensive reporting. We're seeing that in California as well. And it's also very important to target setting. Many companies who are setting targets include Scope 3. That information needs to be included. So the California legislation is another element of this broader trend in the global understanding that climate risk is financial risk and comprehensive carbon emissions information is important to understand that.

California is really driven by the understanding that climate risk doesn't just impact businesses, but it impacts the real economy. And so what's driving California's regulations, not necessarily specifically investor-focused information, but it's understanding where that broader risk lies for -- in transition risk. So when I talk about regulation in some ways, it's responding to markets, but market expectations are going to be driven by new regulations.

California is clearly one of those. By requiring Scope 1, 2 and 3 emissions of all companies doing business in California with revenue over $1 billion and more broader climate risk disclosure based on the TCFD recommendations for companies $50 million and higher doing business in California, they're really adding to this message about the importance of good disclosure and good information about the risks faced by companies, by governments.

And again, the SEC is one slice of that. The SEC is focused on investors who are investing in companies that are listed on US public markets. A very narrow-focus, very important focus. But in understanding what matters to those investors, you have to look at the broader context of what's happening in the markets.

And that's where I think it's really important to understand that GHG emissions information needs to be comprehensive and a company's understanding of its climate risk and how it's managing and how it's preparing for the transition also needs to be sufficient.

Esther Whieldon: We heard Emily say that disclosing Scope 1 and 2 emissions, but not Scope 3, leaves an incomplete picture of the company's climate risk. But how will Scope 3 disclosures change over time? Here's Emily.

Emily Pierce: I think what we're going to see over time is company's Scope 3 calculations are going to get better. There'll be more primary data in the system. And again, with more regulation rolling out and more companies making GHG disclosures as part of their broader regulatory requirements, there will be more information in the system. So it's going to be an evolution, but it's one that we're ready for.

Esther Whieldon: So we heard from Emily how the regulatory landscape in the US as well as globally has evolved over the years to now focus on enhancing and standardizing climate disclosures. So how does that fit with the international regulation and standards landscape? To hear more, let's turn to our next guest, Neil Stewart. Neil is the New York-based Director of Corporate Outreach for the IFRS Foundation, which formed the ISSB.

A note on some of the acronyms you'll hear him mention. SASB is the Sustainability Accounting Standards Board. That's another standards body that has now been consolidated into the IFRS Foundation.

He also mentions EFRAG, that's the European Financial Reporting Advisory Group, and its role is to ensure the IFRS standards are responsive to European needs and concerns. Lastly is the CSRD, that's the EU's Corporate Sustainability Reporting Directive, a set of sustainability reporting rules for companies. Okay, here's Neil describing his role.

Neil Stewart: So I'm Director of Corporate Outreach for the ISSB for the IFRS Foundation. I work with issuers building awareness and understanding of our standards, including the ISSB Standards. the new ISSB Standards, but also the SASB standards.

In some ways, my job has never been busier, but also, I don't think I've ever had an easier job in a sense in talking to companies, I don't have to push them towards this disclosure. They're getting pulled by investors. So going back to the SASB days, this is what drove this wave of disclosure and the use of investor-focused standards and frameworks like the SASB standards and the TCFD recommendations.

And today, for example, you can see with the IFRS sustainability alliance, we have nearly 400 members, over 200 of them are asset managers and asset owners, around $61 trillion in assets under management. They had been calling for years for TCFD and SASB disclosure. Now the ISSB is evolving those investor-focused standards and frameworks into a new global standard, a global baseline of high-quality disclosure.

Esther Whieldon: Yes. So the ISSB has been pretty busy this summer. Can you talk us through some of the highlights of what's happened?

Neil Stewart: Let me give you 5 quick headlines that happened in June and July. It really sums up, I think, where we've come from and how fast things are moving and where we're going to. 

So June 26, we launched the first 2 standards: IFRS S1 and S2. S1 is a foundational standard calling upon companies or guiding companies to disclose material information on their sustainability-related risks and opportunities. IFRS S2 is our climate standard. So incorporating the TCFD recommendations with a layer of industry-specific disclosure, drawing from the SASB standards all around climate risk. 

Next announcement, July 6, the Financial Stability Board, which had established the TCFD in 2015, announced that the ISSB Standards are the culmination of the TCFD's work, and they're handing over responsibility for monitoring climate risk to the ISSB starting next year. So you may have seen this week, the TCFD put out their annual report on climate risk disclosure, their last annual report. Starting next year, it's ISSB. So with the TCFD recommendations, we've incorporated them into the standards and really the TCFD is passing the baton. 

Next, July 25, IOSCO, which Emily described, having completed their review of the standards, announced they were endorsing the standards for use around the world — 130 member jurisdictions, regulators in markets around the world, 95% of the world's market cap. IOSCO is encouraging those jurisdictions to consider incorporating the ISSB Standards into their frameworks. 

Next one, fourth one, July 27, this is a lot nerdier it might not seem so important, but it's actually really important. And that is a digital taxonomy, XBRL tagging for sustainability information. This is so important in ensuring the integrity of the data from gathering it to storing it, to assuring it, reporting it, getting into the hands of investors. It's also really important in what I'll talk about interoperability, the speaking between jurisdictions and between standards. We have to have this common digital language underpinning the standards.

Last headline, July 31. Europe came out with the final delegated act for the CSRD, and we were able to announce, along with the European Commission and EFRAG that we have achieved a really high degree of alignment in our climate requirements. So the companies that are reporting with the ISSB Standards and with the CSRD will have very little duplication reporting, additional reporting burden really reduces the complexity. So there you have it. That was our pretty busy summer.

Esther Whieldon: It sounds like you hit a couple other questions I was going to ask, which is, how were jurisdictions responding? Are there any particular jurisdictions you'd like to highlight in terms of uptake or maybe even pushback?

Neil Stewart: So remember that the ISSB Standards in one way have been built for the coming mandatory regulation around the world. We saw it coming. A lot of, the whole G7 that we're going to do TCFD. Many countries around the world we're moving towards mandatory sustainability disclosure. We built the standards.

Jurisdictions had already been preparing in different ways. So the U.K. has been on the path for a couple of years, looking at the ISSB. We had China setting up mechanisms. Brazil, Japan, setting up a Sustainability Standards Board with Japan.

Canada, setting up a Canadian Sustainability Standards Board. Since the Standards were finalized and especially since IOSCO's endorsement, we start to see the pace really pick up. Jurisdictions now are putting out proposals for how they're bringing the ISSB Standards into rules. We're seeing consultations in Hong Kong, in Singapore, in Australia, in the UK currently.

And so you start to see this all falling into place of how this is going to look as we build out the global baseline. What we want to make sure is that we don't end up with regulatory fragmentation in the same way that we had an alphabet soup of voluntary fragmentation. We want to see consistent application of the ISSB Standards around the world.

Esther Whieldon: It sounds kind of like we reported on a few years ago, how there's a lot of uptake in making the TCFD mandatory, right, in embedding that into code. And it sounds like the same thing is happening for the ISSB.

Neil Stewart: Exactly. Yes. And in many cases, it is the same jurisdictions who were moving towards mandatory TCFD like the U.K. that now see that, well, here's the standards we need to make for really rigorous investor-grade financial reporting level disclosure around climate.

Esther Whieldon: So what about for corporations? What are you hearing from them in terms of their response?

Neil Stewart: So here's the thing is that this is not just a mandatory top-down push. I talked about the investor pull. And what we see is companies are seeing this as -- companies need a globally -- a global, internationally accepted, really rigorous framework for disclosure of climate and other sustainability risks, and we have it in the form of the ISSB. What we see now is even in jurisdictions where we don't necessarily expect rules imminently, the companies still see rules coming, they see the future coming at them, and they see the ISSB Standards as a No Regrets approach to that future of mandatory, again, rigorous investor-grade disclosure. 

That's one reason that companies are looking at the ISSB. The other is that investor demand. The investors, again, they want narrative information around climate risks and other sustainability risks, and they want the metrics, and they want targets. The ISSB gives them the framework. 

And then the final thing that I think is really pulling companies into this is this prospect of a global language. For within their operations, wherever they do business around the world with their customers, with their suppliers, with the regulators in those different jurisdictions, this really reduces the burden that work in gathering the data and assuring it, reporting it and it reduces the reporting risk and cost.

Esther Whieldon: Neil went on to build on Emily's earlier point about how Scope 3 emissions are an important indicator of transition risk for companies.

Neil Stewart: As Emily said, investors clearly see Scope 3 as the -- one of the best possible measures or indicators of transition risk for companies. They've got to understand what companies' transition risks are and Scope 3 gives them that picture. They also want to see that companies are managing it, that companies understand where are their risks, how are they managing them, and how are they going to get to this transition. 

So we have included Scope 3 in S2. One of the things to emphasize here, though, is that like with all requirements in the ISSB Standards, it's still subject to a company-level materiality assessment. So this is not just a blanket demand that companies report all their upstream and downstream emissions, but rather to assess, is this material to investor's decision-making?

Lindsey Hall: So we heard from Neil about the international landscape. But how are companies approaching this? 

For that discussion, let's turn to our next guest, Tim Mohin. Tim is former Chief Executive of the Global Reporting Initiative, or GRI. He's also previously led sustainability functions at Intel, Apple and semiconductor company, AMD. Today, Tim is a partner and Director in climate and sustainability at the Boston Consulting Group, or BCG, and he publishes an ESG and Climate Newsletter on LinkedIn. Tim started off by describing what he's hearing from the companies he works with.

Tim Mohin: It is a complex topic. There's a lot going on in this space. And I would just say that it's confusing, okay? There's a lot of companies out there that are looking at this and going, "I don't know what to do." And let's face it, sustainability reporting is not new. I mean 96% of the S&P 500 currently issues some sort of voluntary sustainability disclosure. And I ran GRI for a while, the Global Reporting Initiative, and that was kind of the foundation of it. So this area is not new.

What is new is that it's all being driven into financial reports. It's being mandated and that means it has to be assured. It means it's got to follow a whole new schedule and process, and companies are confused. They don't know what to do. And there's different standards in Europe and ISSB. And so what I'm seeing out there in the world is a lot of confusion and a little bit of fear to be honest.

Lindsey Hall: Can you take us behind the scenes a little bit in the work that you're doing? Like what kind of conversations are you having? What kind of companies are you talking to? What fears, concerns, challenges are they expressing?

Tim Mohin: Yes. So there's 2 big things. One is this -- what we're calling an ESG transformation. How do I get these structures and processes together? And by way of background, I worked in the private sector. 22 years in the private sector doing the stuff kind of working in the salt mines, let's face it, the sustainability department wasn't exactly at this big table.

They were struggling in obscurity a lot. That's changed. And all of a sudden, this has to come up. And so one of the practices that we do is helping to integrate all of those systems and processes to get climate and broader sustainability reporting into financial disclosure. 

But the other, and this is often what we miss when we start talking about this, is the use of the data. I mean why are we doing all this? Is it to check a box? No. It's to look at this information and to make use of it. And so a lot of times, we're just thinking, once it's out there and it's done, we're finished. Or some investors are going to read it, and that's going to change the world. The biggest and best use of this is by your company. And so if you look at the -- we've talked about the Task Force on Climate-related Financial Disclosures, TCFD. I'm going to try and spell out every single abbreviation.

Lindsey Hall: Thank you.

Tim Mohin: There are 11 different disclosures in the TCFD — 8 of them are qualitative. There are things like do you have a Board committee? Do you set goals? Do you track progress against those goals? I mean data is only useful if it's used. We have to have the system structures and processes to decarbonize some of these really tough to abate sectors. And that's the other thing that BCG is working on, working with big companies on some of their toughest problems.

Lindsey Hall: So we have the opportunity here today. You're here. Our other guests are here. What have you been hearing so far? How would you help us connect the dots from what we've heard about the US landscape and the international landscape to the challenges that you're hearing companies express?

Tim Mohin: Stepping back, I was CEO of the Global Reporting Initiative until late 2020. And I think Neil used the term alphabet soup. I used to bristle when I heard that term. Alphabet soup. No, it's GRI. That's the one you should look at. In fact, I think we're back there again, unfortunately. The world has always wanted the sort of single standard to rule them all.

And when you really think what is a standard, a standard is something we all agree to do the same way. And yes, we have a very big difference of opinion between how the Europeans have decided to integrate environmental, social and governance, ESG, into financial and how the rest of the world is doing it. And so there continues to be this dichotomy. And I think that companies are really confused about this. They don't necessarily have to be at odds, but it's just adding to the confusion.

Lindsey Hall: Okay. One question I always like to ask my guests on the podcast is what have I not asked? What do you think -- what am I missing? What should I be asking for this conversation about the disclosure landscape?

Tim Mohin: I'll go back to what I said before. Data is only useful if it's used. I think we get lost in the abbreviations and all the different organizations that seem to be at odds. And it's fun to think about conflict. But I like to think about solutions. I mean I've dedicated my whole career to sustainability. I'm actually in my 40th year of working in this space.

And we really are at a tipping point when these issues are now being considered by the Boards and the C-suites of every major multinational. This is why I joined BCG. We're sitting with these companies trying to help them solve these problems. And suddenly, climate change is not just a risk to solve, but it's an opportunity. I mean, think about it, the entire economy is changing. We have transportation. We have energy. We have housing. We have everything changing because of climate change, creates huge opportunities. So for me, I'm actually really optimistic. I'm really excited about the future, and that's what you didn't ask me.

Lindsey Hall: So far today, we've heard a lot of different perspectives. We also wanted to hear from a bank in this discussion because financial institutions play a vital role in decarbonizing the economy. Our fourth and final guest at the Live event was Val Smith, Chief Sustainability Officer at Citigroup, which is one of the largest banks in the U.S. and the world. Here she is describing her role and how it has changed over time.

Val Smith: I've been at Citi for over 19 years now, always in what we now call the sustainability function. Prior to that, I spent about 10 years in different parts of the environmental sector. So been at it for a long time. It is really interesting and exciting to be at this moment, where so much is changing so fast. 

Within Citi, my team and I work on Citi's enterprise-wide sustainability strategy. We help to develop and support and drive our priority initiatives, such as our $1 trillion sustainable finance goal and our net zero commitment. And we do a lot of engagements. Trying to understand what's out there in the world. What are expectations for Citi? What do we need to know? Bring that information inside the bank to really continue to push ourselves forward in this space.

Lindsey Hall: And what you heard Tim saying about how the landscape within companies has changed and how sustainability really has a seat at the big table now. Is that -- does that jive with your own experience?

Val Smith: It does. I mean I think when you've been at this for a long time, the change feels gradual, but I think we can look back and see a couple of key tipping points. I remember when I was like in the hallway, ran into a colleague, sort of talking about what was happening in the sustainability space, maybe it was around 2017 or 2018.

And I remember that we said when investors start to focus on this space, that's when everything will change. And it feels now prescient to have talked about that because that's, in fact, exactly what happened. When I started at Citi in 2004, one of my responsibilities was to engage with stakeholders and investors. And I remember on my first day, I had lunch with a group of interested investors. 

Who were the interested investors that wanted to talk to sustainability people? Socially responsible investors and religious investors. Grateful for that, right, because they really created this space for mainstream investors to really come in and start to not just talk about socially responsible investing, but investing according to environmental, social and governance issues. 

And so we've really seen, I think, this pivot with obviously, banks and financial institutions getting very involved in this space, our investors getting involved and now, of course, regulators getting involved.

Lindsey Hall: So Val went on to talk about investor expectations around climate disclosure and how those are changing. She also talked about Citigroup's approach to measuring and managing Scope 3 emissions and much more. We're going to share all of that in next week's episode of the podcast, and I hope listeners will tune in to hear more from one of the world's largest banks.

Esther Whieldon: And before we end today's episode, let's hear what our guests had to say when I asked if they had any insights to offer on when the SEC might finalize its climate disclosure rule. Here's what Tim Mohin and Emily Pierce had to say.

Tim Mohin: The longer they wait, the harder it gets. I mean we do have an election coming up. There's been a lot of discussion, and no one has a crystal ball. I do think the latest official word was October. It is October. But there was something recently published that it may, in fact, take longer. And I think we all saw SEC Chairman Gensler's remarks in the House Finance Committee testimony sort of talking about how difficult it is to sort out all the comments and criticisms, frankly, of the rules. It's a very long-winded way of saying is no one knows.

Emily Pierce: But I do want to emphasize the rigor that is involved in going from a proposed rule to a final rule. Over 14,000 comments. That is -- I think that the staff is close to making a recommendation, but they also need to respond to the changing context around again, I was talking a little bit earlier about Scope 3 or not Scope 3. What are the market expectations? And how is -- how have things evolved since 2022 when the proposal was issued? Cost-benefit analysis is also dependent on what else is happening in the market.

So I think there are some things that continued to need to be evaluated. I think it would be good for markets generally, if it was out by the end of the year, and I think that is certainly the ambition. But again, a lot has to be done. And as Chairman Gensler said, they're working to get the rule right and balance all the competing pressures, not working against the clock.

Esther Whieldon: So we've covered a lot of ground in this episode. We've had quite a bit of discussion on the value of disclosing and tracking Scope 3 emissions, including from Emily Pierce. And we heard Neil add that Scope 3 disclosures are indicators to investors that companies understand their risks and have plans for managing them.

Lindsey Hall: We also heard Tim Mohin about the confusion and fear new reporting expectations are causing in some cases. And he talked about how disclosures need to be more than just a check-the-box exercise. We heard from both Tim and Val Smith describing how the landscape within companies has changed, and how sustainability really has a seat at the big table now in the C-suite.

Esther Whieldon: We hope you'll tune in for the rest of our coverage from ESG Insider Live, and we hope you'll join us in person for our next event.

Lindsey Hall: Thanks so much for listening to this episode of ESG Insider and a special thanks to our producer, Kyle Cangialosi. Please be sure to subscribe to our podcast and sign up for our weekly newsletter, ESG Insider. See you next time.

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