The Global Shift Towards Mandatory Climate-Related Reporting

As the climate crisis intensifies, transparency in climate-related risks and opportunities is becoming critical for businesses and investors. Mandatory climate-related reporting is emerging as a powerful tool for governments to ensure accountability, encourage sustainable practices, and facilitate a transition to a low-carbon economy. By requiring organizations to disclose their environmental impact and mitigation strategies, countries aim to foster transparency, align businesses with global climate goals, and mitigate systemic financial risks.

In this blog, we explore key nations leading the charge in mandatory climate-related reporting, the frameworks they adopt, and the broader implications for the global economy.

Countries Driving the Future of Mandatory Climate-Related Reporting

1. United Kingdom: A Global Pioneer in Climate Disclosure

The United Kingdom has taken a proactive approach to mandatory climate-related reporting. In 2021, it became the first G20 country to mandate climate disclosures in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations. These regulations apply to large companies, banks, insurance firms, and publicly listed businesses, covering around 1,300 organizations.

Key Highlights of the UK’s Policy:

• Companies must report on governance, strategy, risk management, and metrics related to climate risks and opportunities.
• These disclosures aim to provide investors with consistent and comparable data.
• The UK’s broader goal is to achieve net-zero emissions by 2050, and mandatory reporting aligns corporate practices with this vision.

The UK’s leadership in climate reporting is driving other nations to follow suit, setting a high benchmark for transparency and accountability.

2. European Union: Standardized Sustainability Reporting

The European Union (EU) has been at the forefront of sustainability efforts, implementing the Corporate Sustainability Reporting Directive (CSRD) in 2022. This directive builds on the earlier Non-Financial Reporting Directive (NFRD) and significantly broadens the scope and depth of sustainability disclosures.

Key Features of CSRD:

• Requires large companies (over 50,000 entities) and listed SMEs to report on their environmental, social, and governance (ESG) impacts.
• Companies must use the European Sustainability Reporting Standards (ESRS), ensuring consistency across member states.
• Reporting includes information on climate risks, transition plans, and greenhouse gas (GHG) emissions.

The CSRD’s comprehensive scope demonstrates the EU’s commitment to embedding sustainability into its economic framework, enhancing investor confidence and promoting green investments.

3. New Zealand: A Focus on Financial Sector Accountability

New Zealand has set a global precedent by being the first country to mandate climate-related financial disclosures specifically for the financial sector. Introduced in 2021, the requirements align with TCFD recommendations and apply to banks, insurers, and investment managers managing over NZD 1 billion in assets.

Key Aspects of New Zealand’s Approach:

• Entities must disclose how they identify, assess, and manage climate-related risks.
• The policy ensures that the financial sector plays a critical role in the country’s journey to a net-zero economy by 2050.
• The disclosures help investors understand climate risks and direct capital towards sustainable projects.

New Zealand’s initiative highlights the importance of the financial sector in driving climate action and serves as a model for other nations.

4. Japan: Integrating Climate Risks into Corporate Governance

Japan has made significant strides in climate-related reporting through its revisions to the Corporate Governance Code and Sustainability Disclosure Standards. In 2022, the Tokyo Stock Exchange mandated listed companies to disclose climate-related information in line with TCFD recommendations.

Key Requirements in Japan:

• Companies must provide details on climate governance, risk management, and scenario analysis.
• Reporting is part of broader efforts to attract global investors by aligning with international ESG standards.
• The focus on TCFD-aligned reporting reflects Japan’s commitment to integrating climate considerations into corporate strategies.

Japan’s move underscores the importance of incorporating climate risks into governance frameworks, strengthening investor confidence in its capital markets.

5. United States: A Bold Proposal for Enhanced Transparency

While the United States has yet to implement nationwide mandatory climate reporting, the Securities and Exchange Commission (SEC) proposed groundbreaking rules in 2022 to enhance climate disclosures. These rules would require publicly traded companies to disclose their carbon emissions, climate risks, and mitigation strategies.

Highlights of the SEC Proposal:

• Companies must report Scope 1 and Scope 2 emissions, with Scope 3 emissions reporting required in certain cases.
• The proposal aims to ensure that investors have access to consistent, comparable, and reliable climate-related information.
• If finalized, the rule could place the U.S. at the forefront of corporate climate transparency.

The SEC’s initiative reflects growing pressure from investors and stakeholders for robust climate disclosure practices, signaling a shift in the U.S. regulatory landscape.

6. Canada: Aligning with Global Standards

Canada has taken steps towards mandatory climate-related reporting by adopting measures that align with international frameworks like TCFD. In 2022, the Canadian Securities Administrators (CSA) released guidance on ESG disclosures for public companies, emphasizing the importance of consistent and comparable reporting.

Key Developments in Canada:

• The CSA requires companies to disclose climate risks, opportunities, and emissions data.
• Canada’s initiatives are part of its broader commitment to achieve net-zero emissions by 2050.
• Financial institutions play a pivotal role in financing the transition to a sustainable economy.

Canada’s approach balances flexibility with rigor, allowing companies to tailor disclosures while ensuring alignment with global best practices.

7. Australia: Moving Towards Mandatory Disclosures

Australia is making strides toward mandatory climate-related reporting, recognizing the financial and environmental risks posed by climate change. In 2023, the government announced plans to introduce TCFD-aligned reporting requirements for large businesses and financial institutions.

Key Features of Australia’s Plans:

• The initial focus is on high-impact sectors like mining, energy, and finance.
• Reporting will include governance, risk management, metrics, and targets related to climate risks.
• These measures aim to enhance investor confidence and drive sustainable economic growth.

Australia’s move reflects a broader regional trend, with countries in the Asia-Pacific increasingly adopting climate disclosure frameworks.

Broader Implications of Mandatory Climate Reporting

1. Empowering Investors and Stakeholders: Climate-related disclosures provide investors with crucial insights into the financial impacts of climate risks, enabling informed decision-making and encouraging sustainable investments.
2. Driving Corporate Accountability: By mandating transparency, governments hold businesses accountable for their environmental impact, incentivizing them to adopt greener practices and align with climate goals.
3. Mitigating Systemic Risks: Climate risks pose significant threats to financial stability. Mandatory reporting helps identify vulnerabilities, enabling timely interventions to mitigate systemic risks.
4. Accelerating the Transition to Net-Zero: Transparent disclosures align corporate strategies with national and international climate targets, fostering a collective effort towards a sustainable future.

Challenges in Implementation

Despite its benefits, mandatory climate-related reporting faces several challenges:

• Standardization: Ensuring consistency across industries and jurisdictions is complex.
• Data Reliability: Companies may struggle to collect and verify accurate data, particularly for Scope 3 emissions.
• Compliance Costs: Small and medium enterprises (SMEs) may face significant financial and administrative burdens.

To address these challenges, governments must provide clear guidelines, support capacity-building, and promote collaboration between regulators, businesses, and stakeholders.

Conclusion

Mandatory climate-related reporting is a critical step towards addressing the global climate crisis. Countries like the UK, EU member states, New Zealand, and Japan are setting the standard for transparency and accountability, inspiring others to follow suit. As more nations adopt mandatory disclosure requirements, businesses will face increasing pressure to integrate sustainability into their core strategies.

The rise of mandatory climate-related reporting represents a turning point in global efforts to combat climate change. By fostering transparency, mitigating risks, and driving sustainable investments, these initiatives are paving the way for a resilient and low-carbon future.