Climate-related disclosures for SOEs
Implementing World Bank guidance
NOVEMBER / 2022
COP27 came and went in November and there sure will be a lot of follow up papers, policies and discussions in the next few months. But back in June 2022 World Bank (WB) released a piece of climate-focused guidance for State-Owned Enterprises (SOEs) which should be of no less importance than the conversation topics at COP27. First, a Thematic Module on Climate-Related Financial Disclosures as part of its Integrated State-Owned Enterprises Framework (iSOEF) which aims to facilitate assessment and management of climate change related information disclosure. The second, a complimentary Management and Disclosure of Climate Related Financial Impacts for State-Owned Enterprises. Toolkit for Shareholders and Regulators to help SOEs embrace the findings from the Thematic Module.
A welcome move
This work is critical at a time when climate change is in the limelight. It is also surprisingly practical aimed at SOE regulators, owners, boards and senior management, with an objective to change SOE behaviour through disclosure requirement compliance. The idea is that through compliance climate-focused strategic planning, governance, culture and risk management will have to be become business as usual.
Thematic Module and Toolkit are complimentary and both are rooted in the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). TCFD was the chosen one due to its comprehensiveness and global acceptance but other frameworks (GRI, <IR>, CDSB, SASB) were also reviewed prior to making the commitment. The IFRS Foundation’s International Sustainability Standards Board (ISSB) which will be the authority on all things climate also uses TCFD recommendations as a basis so there must be something there. At the end o the day the goal is to bring SOE disclosures on climate risks close to those of the private sector which TCFD can certainly do.
This work is critical at a time when climate change is in the limelight. It is also surprisingly practical aimed at SOE regulators, owners, boards and senior management, with an objective to change SOE behaviour through disclosure requirement compliance. The idea is that through compliance climate-focused strategic planning, governance, culture and risk management will have to be become business as usual.
Thematic Module and Toolkit are complimentary and both are rooted in the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD). TCFD was the chosen one due to its comprehensiveness and global acceptance but other frameworks (GRI, <IR>, CDSB, SASB) were also reviewed prior to making the commitment. The IFRS Foundation’s International Sustainability Standards Board (ISSB) which will be the authority on all things climate also uses TCFD recommendations as a basis so there must be something there. At the end o the day the goal is to bring SOE disclosures on climate risks close to those of the private sector which TCFD can certainly do.
Should SOEs care about climate?
SOEs are inherently problematic when it comes to governance, reporting and disclosure. There is little coherence of the regulatory framework, dispersed ownership, weak aggregate reporting, too many ineffective KPIs, lack of reporting transparency, weak internal controls, questionable auditor independence and limited non-financial reporting. When it comes to climate SOEs tend to ignore the topic altogether.
But SOEs should really care about climate. Why? Because the most devastating impact of climate change falls on infrastructure which is most likely managed by SOEs and has significant financial and service delivery consequences. Because SOEs are also likely to be significant contributors to climate change and transition to lower carbon economy is riskier and costlier for them. And that, if nothing else, should be the key takeaway from this guidance.
SOEs are inherently problematic when it comes to governance, reporting and disclosure. There is little coherence of the regulatory framework, dispersed ownership, weak aggregate reporting, too many ineffective KPIs, lack of reporting transparency, weak internal controls, questionable auditor independence and limited non-financial reporting. When it comes to climate SOEs tend to ignore the topic altogether.
But SOEs should really care about climate. Why? Because the most devastating impact of climate change falls on infrastructure which is most likely managed by SOEs and has significant financial and service delivery consequences. Because SOEs are also likely to be significant contributors to climate change and transition to lower carbon economy is riskier and costlier for them. And that, if nothing else, should be the key takeaway from this guidance.
Inside the Thematic Module and Toolkit
The Module was designed for SOE regulators and WB teams to use to assess the current status of SOE disclosure so that SOEs can then use the results to implement global standards and to do so SOEs would use the Toolkit as guidance, which makes this a nice, easy-to-use support ecosystem.
The Toolkit is where the fun is, whilst the Module provides a framework to collect information for implementation input. The guidance outlines a 5-step approach to performing the assessments and even provides the questionnaires based on TCFD recommendations for assessment teams to use. The 5 steps are:
The Module was designed for SOE regulators and WB teams to use to assess the current status of SOE disclosure so that SOEs can then use the results to implement global standards and to do so SOEs would use the Toolkit as guidance, which makes this a nice, easy-to-use support ecosystem.
The Toolkit is where the fun is, whilst the Module provides a framework to collect information for implementation input. The guidance outlines a 5-step approach to performing the assessments and even provides the questionnaires based on TCFD recommendations for assessment teams to use. The 5 steps are:
- Desk review of SOE landscape and climate documents;
- Using the adapted questionnaires survey 5-10 SOEs to assess legal adoption and actual implementation;
- Interview key stakeholders to gain insight into disclosure requirements;
- Review of additional documentation and validate information collected;
- Prepare reports and recommendations as input to implementation.
The Toolkit is then the natural next step after the assessment, lending a hand to SOEs in closing the gaps identified. The “how?” question is always the problematic one and, but here, SOEs are not left to their own devices.
TCFD recommendations discuss four pillars of climate-related disclosures. The Toolkit provides guidance for each pillar for beginner, progressing and advanced SOE users creating a sense of achievement through implementation.
TCFD recommendations discuss four pillars of climate-related disclosures. The Toolkit provides guidance for each pillar for beginner, progressing and advanced SOE users creating a sense of achievement through implementation.
Pillar 1. Governance – the oversight, leadership, organizational structure and responsibilities addressing climate change risks.
Examples of Governance actions SOEs should consider:
Pillar 2. Strategy – linking climate risks to SOE strategy
Examples of Strategy actions:
Pillar 3. Risk Management – identification, assessment and management of climate-related risks.
Examples Risk Management actions:
Pillar 4. Targets and Metrics – quantitative and qualitative measurement of achievement of climate-related objectives.
Examples of Targets and Metrics actions:
Examples of Governance actions SOEs should consider:
- Establishment and disclosure of accountabilities, Board oversight, capacity and responsibilities on climate risks and opportunities;
- Development and update of internal policies which incorporate climate change risks and opportunities.
Pillar 2. Strategy – linking climate risks to SOE strategy
Examples of Strategy actions:
- Assessment and disclosure of material impact of climate risks on strategy, planning and finances;
- Stress-testing of the strategy against climate risks such as weather changes and consideration of impact on the economy, infrastructure and business as usual;
- Consideration of possible future scenarios, including government scenarios, and assessment of their impact on value creation and capital allocation.
Pillar 3. Risk Management – identification, assessment and management of climate-related risks.
Examples Risk Management actions:
- Assessment and disclosure of how risks are identified, evaluated and managed;
- Integration of climate risks into existing risk management framework.
Pillar 4. Targets and Metrics – quantitative and qualitative measurement of achievement of climate-related objectives.
Examples of Targets and Metrics actions:
- Agreement and disclosure of metrics used to track climate-related risks;
- Setting and disclosure of targets to assess performance outcomes;
- Setting of multi-year targets and performance measures linked to national goals guided by governments.
The Toolkit also addresses an important question of how and where SOEs should present disclosures. All the usual suspects are noted including public annual financial statements and stand-alone reports on climate change risks. As long as the disclosure is regular, complete, clear, comparable, time consistent, reliable, timely and includes only material issues all should be well.
On the subject of materiality, it is recommended that how materiality was determined is disclosed. If no material impact is being reported, the underlying assumptions should be explained for absolute user-friendliness.
On the subject of materiality, it is recommended that how materiality was determined is disclosed. If no material impact is being reported, the underlying assumptions should be explained for absolute user-friendliness.
Making it happen
The SOEs are the main beneficiaries of the guidance which should give management the inspiration to go out there and start implementing. In order to do this, SOE management should:
Overall, WB guidance is a great plan forward for SOEs towards a greener future. Fingers crossed that we get to see it.
The SOEs are the main beneficiaries of the guidance which should give management the inspiration to go out there and start implementing. In order to do this, SOE management should:
- Instil the four pillars as a mandatory process flow for all things climate;
- Develop internal policies to aid compliance to the four pillar system;
- Assign roles and responsible for climate-related activities;
- Include climate into risk assessment that is linked to strategy;
- Calculate emissions, set targets and select metrics to measure performance;
- Assess opportunities of transition to lower carbon operations;
- Assess sources of funding for transition;
- Disclose climate all of the above activities in reports;
- Refine procedures and continuously improve.
Overall, WB guidance is a great plan forward for SOEs towards a greener future. Fingers crossed that we get to see it.
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