Pinnacle Environmental participated in the Berkeley Haas 27th Annual CFRM Conference on Financial Reporting held on March 20, 2024. The conference centered around the theme of “Corporate Sustainability Measurement & Reporting: From Whether to How.” It comprised four sessions featuring panelists offering diverse perspectives on the intersections of financial markets and Environmental, Social, and Governance (ESG) considerations. These sessions were categorized into Company, Assurance, Standards Board, and Investors perspectives. Each panel addressed the challenges associated with ESG implementation within their respective industries. These discussions provided insight into the ongoing developments in the ESG regulatory landscape and an opportunity to discuss future-oriented strategies, aspirations, and objectives. Many themes echoed throughout the panels.

• “Hope is not a strategy”. These words underpinned each set of panel conversations. The time for design and analysis is over and the world must act immediately to reach the Paris Agreement goal of limiting warming by 2˚C.
  
  Regulations coming into effect in the next few years will change the business landscape and require a change-of-mindset with approach on what information is provided to investors and regulators. What used to be exclusively financial data will be supplemented with climate-related impact statements (e.g., GHG emissions), and discussions of material climate-related financial risks. Targets and goals in line with the Paris Agreement (or the most contemporary science) will be required. External review (assurance) will allow for more trust in the system as reported information will be audited and certified.
  
  In order to thrive in the coming regulatory landscape, businesses will need to start looking at their operations differently. Understanding what needs to be reported is only the first step. Identifying and implementing change will be the next hurdle.

• While change is required, it’s not a money problem. The biggest challenge to implementing real change are people and the stigma around the term “ESG”. Multiple research papers have been published recently demonstrating that companies or investments with higher alignment with ESG principals have higher returns. One of the investor panelist noted that pensions overseen by democratic managers have returned $30B more over a decade than republican managers.
  
  While there may be cost involved with the efforts required by the new regulations, the cost of failure to act is much higher. The world has long been aware of climate-related environmental damage from GHG emissions and pollution. Current climate impacts have been modelled for decades and scientists have been warning the public about the real-world implications of a warming global climate for just as long. The climate change problem is neither acute nor misunderstood. Future climate-related risks are predictable and can be quantified. This information is materially relevant to investors and to the operations (and plans) of the business.
  
  Implementing reductions will also require upfront capital expenditure; however, this cost may be offset from the improvements. Evaluating GHG emissions and environmental impact can be a way to identify inefficiencies and improve operational processes. 
  
  While the connotation of “ESG” may require rebranding, the sentiment stays the same: do the right thing. We all want the same thing – a clean environment and place to live, a fair chance in the workplace, and equitable working conditions and pay. Asking businesses to operate with these principles in mind is not only a moral imperative but has proven positive impact on the bottom line.

• We’re in a transition economy. The world has used 70% of its natural resources since the start of the industrial revolution. Simply put, we have run out of enough for everyone and we are now in a global resource constraint. Something must change and the economy must decarbonize. This transition to a new financial mindset – people, planet, profit – will have growing pains, but upside opportunities are endless: businesses can identify and invest in operational and/or climate efficiencies; investors can make more informed investments with a better understanding of risk; and investments into people (e.g., training, turnover, etc.) will lead to better working conditions. Pushing through the discomfort of change is required to create a better world together.

• The world will not wait for the SEC. After 2 years of comments, the SEC passed the Final Rule on March 6, 2024, including GHG-emission-related disclosures and analysis of climate-related financial risks. The Final Rule is a “watered-down” version of the proposed rule (e.g., Scope 3 emissions were excluded). Numerous lawsuits from both sides – those who want more included, and those who want less – were filed against the rule, and as of March 15, 2024, a temporary stay has been issued.
  
  Regardless, the SEC is only one of four global frameworks: ESRS, ISSB, SEC, and California. Mandatory disclosures required by these frameworks begin as soon as 2025. In the modern global economy, businesses that span multiple jurisdictions will still need the information available even if it’s not required by the SEC.
  
  The push for regulation is being driven by investors. It doesn’t matter if business leaders “believe” in climate change since investors do, which makes climate-related risks material decision-making as defined by the Supreme Court. People (investors/stakeholders) want this information in order to make more informed decisions. The current regulatory landscape was created to standardize and legitimize climate-related data and claims.

• There is still work to do. While the scientific basis of each of the frameworks are the same, the requirements (and timelines) for each are different. The GHG protocol generally underpins GHG Emission calculations. However, each framework has varying requirements of what to report, and how. Similarly, the Taskforce for Climate-related Financial Disclosures (TCFD) provides a reference for climate-related financial risk analysis for each of the frameworks, but differing levels or definitions of “materiality” produce different results. The international community’s goal is a single global reporting standard, but this goal will not be met before the shift to climate-related disclosures begin. Current and future frameworks must balance between feasible and optimal to achieve mass adoption, which will be required to meet the Paris Agreement goal.
  
  International standards and frameworks will continue to shift as scientific understanding improves and will not be limited to just GHG emissions. Other environmental impacts (e.g., ocean, ecosystems, nature) will be the next step in providing a holistic evaluation of a business’s total output, economically and with respect to the environment and society.
  

ESG frameworks are a new standard of due diligence that is provided as a way to inform investors of potential financial threats imposed by severe environmental conditions or the changing regulatory landscape. Climate-related risks have been analyzed to the extent that a quantified financial impact can be evaluated. Climate change is not new and the resulting acute impacts (e.g, severe weather events, disasters) are the new normal. Refusing to accept the risk is choosing willful ignorance.

Pinnacle would like to thank UC Berkeley Haas and CFRM for hosting, and all of the moderators, speakers, and panelists who participated. A special thank you to Moss Adams for the invitation to join them at their table and attend the conference.