Lawmakers all over the world are cracking down on sustainability-related issues. Ever more visible impacts of climate change might explain this, but a closer look at international legislation dynamics shows a way broader picture. Can a comparative analysis help companies to understand what to expect next?
Moritz Scholz, Sustainability Consultant
Moritz works as a Sustainability Consultant in the EMEA region focusing on Climate Risk, Carbon Reduction strategies and Sciences Based Targets setting. With a background in energy procurement, he is particularly interested in the intersections of energy markets and sustainability.
What is happening?
Autumn is coming, and besides rain it brings Europeans the corporate sustainability reporting directive (CSRD) – just another act in a pivotal year for sustainable legislation. In March, the U.S. SEC published its proposal to Enhance and Standardize Climate-Related Disclosures for Investors, paving the way towards mandatory emission data publishing for all fillers. April marked the second phase kick-off for mandatory climate risk reporting in the UK, obliging large businesses to disclose their environmental records for financial years starting that same month. That said, none of this was unseen neither for financial authorities nor lawmakers. Previously, market regulators in Canada, Switzerland, Brazil, Singapore, Japan, Australia, and Hong Kong had already tightened their respective rules regarding mandatory disclosure.
While the sheer frenzy of activity is likely to cause thought-provoking debates, a closer look reveals another interesting detail. All these initiatives rely to a greater or lesser extent on recommendations of the Task Force for Climate-related Financial Disclosures (TCFD), an entity only created in December 2015. Fully aware of the usual slowness of international legislation dynamics, one might ask: How is it possible that the TCFD turned its work into binding legal agreements all over the world so quickly? And what does this mean for sustainable legislation overall?
TCFD Reporting Timeline in APAC. Source: Task Force on Climate-related Financial Disclosures 2021 Status Report
What is Law?
Finding answers requires a little detour, leading initially to another question: What, really, is law in an international context? Under the traditional (also called realist) perspective, the reply is clear. Only states and, to a minor degree, international organizations could be subjects of international lawmaking (e.g. Krasner, 2002). Interactions between those parties in either written (e.g. treaties) or repetitive (international customs) form would provide the basis for international legislation. The outcome of this procedure is often an interpretation of jurisprudence issued by a legitimized body, mainly the International Court of Justice (ICJ), hence a rather heavy and abstract process.
Likely in an effort to speed things up, a new form of lawmaking emerged at the beginning of the seventies: the so called soft-laws (e.g. Dupuy, 1990). Contrary to hard-laws, soft-laws rely on attraction rather than obligation. To attract, they use a cocktail of instruments such as guidelines, rankings, best practices, etc. The Programme for International Student Assessment (PISA), first conducted in 2000 by the Organization for Economic Co-operation and Development (OECD), is a good example of such a soft-law process. Galvanized by their respective positions within the overall ranking, many countries set up educational reforms that, according to Breakspear, 2012, were influenced by the recommendations of the very same organization.
What is new?
The modus operandi of TCFD is at a first glance evocative of a typical soft-law procedure. Momentum is created on an international level, followed by a set of recommendations, out of which some eventually become hard-law by finding their way into national legislations. What has changed, though, is the characteristic of the underlying actor. Until now, soft-law was mostly a domain of entities disposing of the status of an international legal personality, mainly international organizations. While it is true that scholars observe an increasing implication of private actors within international lawmaking at least since the 1990s, some also dispute their final influence on the process (e.g. Hollis, 2002).
For its part, the TCFD puts this belief to the test. Traditional international organizations are often large structures and, although normally assigned to one particular area, might have problems to define their role. On the contrary, the TCFD is a very small organization with a clearly defined goal. Despite officially counting as a private entity, it is linked to the international governance circuit through its founder, the Finance Stability Board (FSB).
Yet, it is not only its agility and embedding within the multilateral system that explain the rise of the TCFD. As far as its positioning on the international scene is concerned, similar outfits like GRI or CDP had already started to blaze the trail from the end of the 1990s on. Fully aware of that, the TCFD states in its Final Report, that for the development of its framework “the Task Force drew on its members’ expertise, stakeholder engagement, and existing climate related disclosure regimes” (P.3). Lastly, and probably its most important pillar, is its focus on financial entities, which with their transversal presence throughout the whole economy serve as a perfect lever for the work of the TCFD.
What to expect?
The combination of all the factors above contributed to the rapid spreading of the TCFD framework. Compared to this, results of classic multilateral actors in the field of sustainability look rather pale. The United Nations Framework Convention on Climate Change is constantly undermined by ambiguous behaviors of some of its most important member states. Even though they develop an extensive activity on climate issues, most professionals working in sustainability might agree that erstwhile soft-power champions like the OECD, the IMF or the World Bank are only sporadically present in their work routines. Which is all the more surprising, since due to their positioning, these organizations are theoretically in an even better position to pull the financial lever. Regarding the ICJ, Bodanksy, 2020, found out, that “even on the most generous accounting, the ‘environmental’ decisions of the Court still number in the single digits”,
Though sustainability-focused entities like CDP or GRI theoretically had the focus and agility to create huge legislative momentum before, they might have been hindered by a rather weak embedding in the multilateral lawmaking circuit as well as by a mushrooming of organizations. That said, unification is gaining momentum. Apart from the synergizing work of the TCFD, also the International Financial Reporting Standards Foundation (IFRSF), one of the most important accounting standard bodies, finally entered sustainability in November 2021. By creating the International Sustainability Standards Board (ISSB), it aims to bundle the work of the previously independent CDSB, IIRC and SASB. A move, that could further increase legal pressure, especially since the IFRSF has a certain experience in making its work mandatory. In 2002, only two years after its restructuration, the foundation managed to introduce its International Accounting Standards (IAS) as legally binding in Europe from 2005 on.
Despite these undeniable changes, it might be incorrect to speak of a real paradigm change. Situating organizations like the TCFD within the broader history of international lawmaking shows that they appear, rather, as the logical next step in the speeding up of an otherwise slow and indirect system – one which saw a first evolution through the emergence of soft-laws. Traditional international institutions will not disappear but, challenged by those new agile and highly specialized organizations, they might have to shift gears. And as history teaches us, they have the power to do that. The Montreal Protocol, for instance, was signed only 18 months after the discovery of the ozone hole and provided the world with a clear example of an international environmental hard-law.
And what to do?
Even though for now it is mainly huge organizations that are concerned by increasingly tough climate legislation, this can change quickly. As proposed in the CSRD, small to medium sized enterprises will be required to disclose. Thus, regardless the size or the location of your business, all businesses should be ready to comply.