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’ll 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, positioning itself as a global leader in financial transparency. In 2021, the UK became the first G20 country to mandate climate disclosures in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

These regulations apply broadly, covering an estimated 1,300 organizations, including large UK-registered companies, banks, insurance firms, asset managers, and publicly listed businesses. The goal is to embed climate considerations into core financial decision-making across the economy.

Key Highlights of the UK’s Policy:

• Governance: Companies must report on the board’s oversight and management’s role in assessing and managing climate-related risks and opportunities.
• Strategy: Disclosures must detail the actual and potential impacts of climate-related risks and opportunities on the organization’s business model, strategy, and financial planning, often utilizing scenario analysis (e.g., a 2°C or lower scenario) to test resilience.
• Risk Management: Reporting must describe the processes used by the organization to identify, assess, and manage climate-related risks and explain how these processes are integrated into the overall enterprise risk management framework.
• Metrics and Targets: Companies must disclose the metrics used to assess climate-related risks and opportunities, including Scope 1 and Scope 2 Greenhouse Gas (GHG) emissions, and, where appropriate, Scope 3 emissions. They must also report on their performance against set targets to manage climate change.

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

• Net-Zero Alignment: Mandatory reporting explicitly aligns corporate practices and investment decisions with the UK’s broader goal to achieve net-zero emissions by 2050.
• Preventing Greenwashing: By applying a common, structured set of TCFD-aligned requirements, the rules help to improve the quality and verifiability of climate information, which aids in mitigating greenwashing risk.

The UK’s coordinated action between government and financial regulators ensures that climate-related information is available and consistently used across the entire investment chain.

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 are aligned with the widely recognized Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

These rules apply to banks, insurers, and investment managers overseeing over NZD 1 billion in assets, ensuring that the major players in the financial system are accountable for climate risks.

Key Aspects of New Zealand’s Approach:

• Risk Management Mandate: Covered entities must explicitly disclose how they identify, assess, and manage climate-related risks. This integrates climate risk into the core financial risk management framework.
• Net-Zero Alignment: The policy ensures that the financial sector plays a critical role in the country’s broader journey to achieve a net-zero economy by 2050. By measuring and disclosing risks, financial institutions can adjust their lending and investment portfolios.
• Capital Allocation: The disclosures help investors understand climate risks and opportunities across their portfolios, which is intended to direct capital towards sustainable projects and away from high-carbon investments.
• Global Precedent: By focusing first and foremost on the financial sector, New Zealand has demonstrated a targeted and high-impact way for small nations to enforce climate accountability.

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 primarily through revisions to its Corporate Governance Code and the establishment of sustainability disclosure standards. This approach directly integrates climate considerations into the core management framework of companies.

Key Requirements in Japan:

In 2022, the Tokyo Stock Exchange (TSE) mandated that listed companies disclose climate-related information in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations.

• Companies must provide details on climate governance (board oversight).
• Reporting must cover climate risk management processes.
• Disclosure requires scenario analysis to assess resilience against different climate futures.

Strategic Goal: This reporting mandate is part of broader efforts to attract global investors by aligning Japan’s capital markets with international ESG standards.

The focus on TCFD-aligned reporting reflects Japan’s commitment to integrating climate considerations into corporate strategies. This move underscores the importance of incorporating climate risks into governance frameworks, ultimately 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 for publicly traded companies. This initiative reflects growing pressure from investors and stakeholders for robust climate disclosure practices, signaling a significant shift in the U.S. regulatory landscape.

Highlights of the SEC Proposal:

The proposed rules would require public companies to disclose their carbon emissions, climate risks, and mitigation strategies to ensure investors have access to consistent, comparable, and reliable climate-related information.

• Companies would be required to report Scope 1 (direct) and Scope 2 (indirect from purchased energy) emissions.
• Scope 3 emissions (all other indirect emissions in the value chain) reporting would be required if the emissions are deemed material or if the company has set a public emissions reduction target that includes Scope 3.
• Risk and Strategy Disclosure: Companies must provide details on climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition. They must also detail their mitigation strategies and internal governance processes related to climate risks.
• Assurance Requirement: The SEC proposal includes a requirement for the attestation (assurance) of reported Scope 1 and Scope 2 emissions, which would phase in over time, further enhancing reliability.

If finalized, the rule could place the U.S. at the forefront of corporate climate transparency by standardizing disclosures for one of the world’s largest capital markets.

6. Canada: Aligning with Global Standards

Canada has taken steps towards mandatory climate-related reporting by adopting measures that align with international frameworks like the Task Force on Climate-related Financial Disclosures (TCFD).

In 2022, the Canadian Securities Administrators (CSA), the umbrella organization for provincial and territorial securities regulators, released guidance on ESG disclosures for public companies, emphasizing the importance of consistent and comparable reporting.

Key Developments in Canada:

• Disclosure Requirement: The CSA guidance requires companies to disclose climate risks, opportunities, and emissions data. The requirements emphasize the four TCFD pillars: Governance, Strategy, Risk Management, and Metrics/Targets.
• Net-Zero Alignment: Canada’s initiatives are part of its broader commitment to achieve net-zero emissions by 2050, aiming to align corporate disclosures with national climate strategy.
• Financial Sector Role: Financial institutions are highlighted as playing a pivotal role in financing the transition to a sustainable economy. Disclosures ensure that climate risks and opportunities are integrated into lending and investment decisions.
• Canada’s incremental, guidance-based approach signals a clear regulatory expectation for high-quality, TCFD-aligned climate reporting.

7. Australia: Moving Towards Mandatory Disclosures

Australia is making significant 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:

• Initial Focus Sectors: The initial focus is on high-impact sectors that have the greatest exposure to or impact on climate change, such as mining, energy, and finance. This targeted approach ensures that the most systemically important entities report first.
• Reporting will include governance, risk management, metrics, and targets related to climate risks.
• Strategic Goal: These measures aim to enhance investor confidence by providing consistent, comparable data, thereby facilitating better capital allocation decisions that support 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 (both physical and transition risks). This enables informed decision-making, allowing investors to properly price risk, evaluate long-term resilience, and actively encourage sustainable investments by directing capital toward low-carbon companies.
2. Driving Corporate Accountability: By mandating transparency, governments hold businesses accountable for their environmental impact. This incentivizes companies to not only report on their current practices but also to actively adopt greener practices and align their long-term strategies with national and international climate goals (e.g., setting science-based targets).
3. Mitigating Systemic Risks: Climate risks pose significant threats to financial stability (Systemic Risks), impacting bank lending portfolios, insurance liabilities, and asset valuations. Mandatory reporting helps regulators and financial institutions identify vulnerabilities and concentrations of risk across the system, enabling timely interventions to mitigate these systemic threats before they cause widespread economic harm.
4. Accelerating the Transition to Net-Zero: Transparent disclosures align corporate strategies with national and international climate targets. By creating a standardized language for climate impact, reporting fosters a collective effort towards a sustainable future, accelerating the overall transition to a net-zero economy by making climate-positive actions measurable and rewarding.

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.

The rise of mandatory climate-related reporting represents a turning point in global efforts to combat climate change. As more nations adopt mandatory disclosure requirements (like the proposed SEC rules in the US and plans in Australia), businesses will face increasing pressure to integrate sustainability into their core strategies.

By fostering transparency, mitigating financial risks, and driving sustainable investments, these initiatives are fundamentally paving the way for a resilient and low-carbon future.