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ISSB to include Scope 3 emissions requirements

© Shutterstock / Travel maniaAerial view of container cargo on a ship.

The International Sustainability Standards Board (ISSB) of the IFRS Foundation has confirmed it will set Scope 3 disclosure requirements, though it plans to establish provisions to ease compliance.

  • The International Sustainability Standards Board (ISSB) has confirmed it will require companies to disclose their Scope 3 emissions.
  • The decision could influence jurisdictions to impose similar requirements amid market demand for greater transparency.
  • To account for the challenges related to Scope 3 disclosures the ISSB will develop relief provisions and work with jurisdictions on ‘safe harbour’ provisions.

Standardisation of reporting framworks

The ISSB has confirmed plans to publish standards and rules about the mandatory disclosure of Scope 3 emissions. Reporting Scope 3 emissions is an important step for companies looking to meet their decarbonisation and net zero goals. 

To ensure global acceptance of these standards, the ISSB will cooperate with international jurisdictions such as the EU and the US securities and exchange commission (SEC). It will also leverage the work already done by its founding and constituent standards-setting bodies.

The announcement is an encouraging step towards the standardisation of reporting frameworks. While the ISSB’s focus on standardisation was welcomed by many, its initial difference in focus (impact on enterprise value) from the EU was a concern. In the EU, under the approach deployed by the Sustainable Financial Reporting Directive (SFDR), the impact of business operations externally was a critical aspect of reporting. The ISSB’s inclusion of Scope 3 reporting is a welcome extension of its approach.

Of course, while stakeholders seeking greater transparency into a company’s emissions and impact will see this as a positive move, there are many complexities involved with the process and it appears that the ISSB intends to provide a certain amount of latitude in how companies deal with these complexities.

The ISSB’s approach envisages a phase-in period for some companies as well as a safe harbour provision, although domestic regulators will have ultimate oversight over a company’s actions. Such an approach will have its own challenges, as relaxing deadlines and compliance for some companies could lead to confusion, and raises concerns over the potential for accusations of greenwashing.

Investor and stakeholders demand Scope 3 emissions disclosures

There is increasing demand for more transparency on Scope 3 emissions as more companies make net zero commitments. As an average across all sectors, Scope 3 emissions can contribute around 75% of each company’s total greenhouse gas (GHG) footprint, based on CDP estimates.

Companies are also realising the importance of reporting Scope 3 emissions. Sectors such as the chemical industry, for example, have launched their own guidelines to determine the complexities of the emissions of their value chain.

Banks, instead, could face hefty lawsuits for their role in enabling Scope 3 emissions through finance. Carbon data analysis firm EMMI has suggested that the financing of the heavy polluting industry could result in a $6 billion bill for Australian lenders alone.

Meanwhile, the Australian Prudential Regulation is mulling the introduction of mandatory Scope 3 disclosures. EMMI believes this could result in liabilities amounting to tens of billions of dollars for banks such as Commonwealth Bank of Australia (ASX:CBA), the Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank (ASX: NAB) and Westpac Banking (ASX: WBC).

ISSB to work with jurisdictions

The ISSB seeks to ensure the interoperability of its disclosures with global requirements. It plans to establish the basis of its disclosure requirements in concert with international jurisdictions, such as the EU. It also plans to use the format employed by the Task Force on Climate-related Financial Disclosures (TCFD).

The ISSB’s standards, however, will be based on work of its founding and constituent bodies. It will build on the work around disclosures already done by Sustainability Accounting Standards Board (SASB). It will also use accounting definitions that have been established by the International Financial Reporting Standards (IFRS).

Scope 3 standard will need to stress impact over financial materiality

The ISSB approach of including international standards comes after a 4-month consultation period. A challenge identified with the ISSB approach soon after its formation was that its approach was based on single materiality. This meant that it was focused mainly on the potential financial risk of climate change impacts on the operations of a business. 

The European regulatory and standards-setting approach is largely built on double materiality. This approach adds the impact the business has on its environment, which would then provide a better estimation of a company’s total risk exposure.

Reporting on Scope 3 emissions is vital, but can be challenging. These emissions are generated indirectly throughout a company’s value chain and are further divided into 15 sub-categories.

Safe harbour provisions make allowance for Scope 3 complexities

The ISSB also plans to provide companies with some latitude in complying with the Scope 3 disclosure requirements. By its own definition, “safe harbour” gives companies protection from, or reduces, liability on information disclosed to investors and other capital market participants.

The main reason to include such a provision would be to facilitate disclosures. The safe harbour provision, however, will not prevent regulatory action where warranted. The ISSB has specified that decisions on safe harbour provision were the ultimate responsibility of securities regulators

A further provision is to allow a phase-in period for some entities. This stems from the Scope 3 reporting requirements being developed by the US SEC. In addition to making safe harbour and phase-in provisions, the SEC also proposes an exemption for companies that fall under its definition of a smaller reporting company

Relaxed compliance must not increase risk of greenwashing

Any provisions that give companies allowances in reporting must be balanced by regulatory oversight. The need to hold companies accountable to their decarbonisation commitments is an important part of setting mandatory regulatory standards for Scope 3 disclosures.

One example of this can be seen in attempts to implement the EU’s Sustainable Finance Disclosure Regulation (SFDR). Implementation of level two of the SFDR has been delayed by six months to January 2023, due to the complexity involved in reporting a products’ valuation due to environmental impacts.

This delay and confusion has primarily impacted financial funds that use the ESG label. A lack of clarity on the sustainability credentials of the underlying assets, or companies they invest in, risks adding to concerns over greenwash.  

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