As we addressed here, the International Sustainability Standards Board has issued its first two exposure drafts, General Sustainability-related Disclosures and Climate-related Disclosures, both open for comment until July 29, 2022.

To recap the background on a key aspect of the climate-related proposals, the most commonly cited standard for measuring greenhouse gas emissions is the GHG Protocol Corporate Standard first published in 2001 and periodically updated since then. It defines three scopes of GHG emissions from the perspective of the reporting entity: Scope 1 GHG emissions are direct emissions from owned or controlled sources; Scope 2 GHG emissions are indirect emissions from the generation of purchased energy; Scope 3 GHG emissions are all indirect emissions not included in Scope 2 that occur in the value chain of the reporting entity, including both upstream and downstream emissions. Scope 3 emissions are further divided into 15 categories, eight of which are upstream, and seven of which are downstream from the reporting entity. Against that background, this is from the exposure draft:

• The disclosure of Scope 3 GHG emissions involves a number of challenges, including those related to data availability, use of estimates, calculation methodologies and other sources of uncertainty. However, despite these challenges, the disclosure of GHG emissions, including Scope 3 emissions, is becoming more common and the quality of the information provided across all sectors and jurisdictions is improving. This development reflects an increasing recognition that Scope 3 emissions are an important component of investment-risk analysis because, for most entities, they represent by far the largest portion of an entity’s carbon footprint.
• Entities in many industries face risks and opportunities related to activities that drive Scope 3 emissions both up and down the value chain. For example, they may need to address evolving and increasingly stringent energy efficiency standards through product design (a transition risk) or seek to capture growing demand for energy-efficient products or seek to enable or incentivize upstream emissions reduction (climate opportunities). In combination with industry metrics related to these specific drivers of risk and opportunity, Scope 3 data can help users evaluate the extent to which an entity is adapting to the transition to a lower-carbon economy. Thus, information about Scope 3 GHG emissions enables entities and their investors to identify the most significant GHG reduction opportunities across an entity’s entire value chain, informing strategic and operational decisions regarding relevant inputs, activities and outputs.
• For Scope 3 emissions, the Exposure Draft proposes that:
  • an entity shall include upstream and downstream emissions in its measure of Scope 3 emissions;
  • an entity shall disclose an explanation of the activities included within its measure of Scope 3 emissions, to enable users of general purpose financial reporting to understand which Scope 3 emissions have been included in, or excluded from, those reported;
  • if the entity includes emissions information provided by entities in its value chain in its measure of Scope 3 greenhouse gas emissions, it shall explain the basis for that measurement; and
  • if the entity excludes those greenhouse gas emissions, it shall state the reason for omitting them, for example, because it is unable to obtain a faithful measure.

Unsurprisingly, some respondents disliked this proposal. This is from REALPAC, a Canadian real estate association:

• …we disagree with the baseline required to include Scope 3 emissions for all entities. While we strive to develop an industry approach where we can disclose Scope 1, 2, and 3 GHG emissions in the future, only a few of the largest entities will be able to meet these requirements. Scope 2 emissions are often outside of owners’ operational control (retail, industrial, apartments without submetering), or the data is difficult to organize (e.g., deep lake water cooling, district steam heat). Scope 3 is a new frontier for many of our members, particularly embedded carbon data in buildings.
• A requirement to disclose Scope 3 GHG emissions is currently not feasible for many of our members and will take several years to implement. Many are hiring staff and consultants to develop the processes to collect and report this information. However, complications exist in setting boundaries and collecting data for these emissions. For many entities within the real estate industry, collecting data on Scope 3 emissions is challenging, as (in many cases) tenants only provide information on their energy use on a voluntary basis. This is further exacerbated by the lack of a formal, standardized methodology for reporting on Scope 3 emissions within the industry….Until challenges in scoping, collecting, and verifying these amounts have been addressed, we suggest that entities should not be required to disclose Scope 3 emissions.

Lloyds Bank provided a financial services perspective:

• …real economy disclosure needs to mature, particularly in less developed sectors, in order for financial services firms’ Scope 3 disclosures to improve fully. We recommend consistency with the TCFD for Scope 3 disclosures where this is strongly encouraged rather than mandated, recognizing the data availability and quality improvements required across firms. A sector phase-in…combined with a materiality-based approach for the disclosure of Scope 3 financed emissions would be a pragmatic proposal.

More reaction, pragmatic and otherwise, next time…

The opinions expressed are solely those of the author