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.

Let’s continue where we left off last time, surveying some of the reaction to the proposals relating to disclosing “Scope 3” greenhouse gas emissions. This is from the Canadian Securities Administrators:

• We recognize the importance of disclosing Scope 3 emissions as part of understanding how an issuer measures, monitors and manages its climate-related risks and opportunities, since Scope 3 emissions can represent the majority of an issuer’s lifecycle emissions throughout the value chain. However, Scope 3 emissions disclosure continues to present challenges, particularly in estimating upstream and downstream emissions. Carbon accounting is a field that continues to evolve, and the market may require additional time to build expertise around Scope 3 emissions measurement and reporting. As such, we do not support mandatory Scope 3 emissions disclosures at this time.

FuturePast: Inc. provided another argument for some accommodation in this area:

• …not all scope 3 emissions will pass the test of “verifiability.” Some scope 3 emissions cannot be verified because the information is provided by a supplying entity. Absent an engagement with the supplier, a verifier of upstream emissions may not be able to obtain sufficient and appropriate evidence to reach a conclusion about the fair presentation of the emissions. We suggest that the ISSB permit the use of Agreed-Upon Procedures in this case. With respect to downstream emissions, these may be projected and should therefore be subject to validation of the assumptions, limitations and methods that generated them.

The Council of Institutional Investors, while generally supporting the proposal, also sees some room for flexibility:

• …we “remain concerned about the challenges that companies will face in calculating and reporting Scope 3 emissions.” As a result, we would not object to the ISSB providing additional guidance and potentially some accommodations to assist with the implementation of this proposed requirement. And, as a commentator has suggested, such additional guidance might include, if the disclosure is not material, a “description of why they do not view this as material, so that users of financial statements can distinguish between incomplete information and that which is not relevant.”

Harvard Management Company suggests that the best approach might differ by industry:

• we urge the IFRS to exercise caution before adopting a broad cross-industry requirement for Scope 3 emissions. It is reasonable to require reporting for the highest emitting industries and when GHG emissions reduction targets or goals include Scope 3 emissions to report their Scope 3 emissions. But for the rest, we believe that the difficulties in obtaining the necessary data from third parties and methodological uncertainties around calculating Scope 3 emissions are real and potentially costly in excess of the benefit to investors. Scope 3 disclosures should be accompanied by robust methodological explanations of the underlying inputs, assumptions and calculation methodologies used.

The Canada Climate Law Initiative argues though that entities have had plenty of time to see this coming and prepare accordingly:

• The CCLI also supports the recognition in the draft standard 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… We note that the GHG Protocol Corporate Value Chain (Scope 3) Standard was published more than a decade ago and continues to be strengthened; meaning that companies have been on notice since then of the need to begin to capture these data. Methodologies have matured sufficiently such that disclosure of relevant, material categories of Scope 3 emissions is now possible and demand for complete disclosure of GHG emissions tied specifically to net-zero emissions targets is increasingly sought by users of general financial reporting.

My own views are also along those lines, and much the same as those I expressed before on another aspect of the proposals, that the ISSB should push as hard as it can in this respect. Recall that even if the standards are finalized relatively quickly, they won’t be mandated in any jurisdiction, unless local regulators determine that they should be. Given the timelines involved in that, any mass adoption is several years away at best, by which time we’ll be even deeper in the climate change hole we’re digging for ourselves. It seems to me then that the ISSB is best advised to set a high bar, allowing those local regulators to grant issuer-specific or broader exemptions from specific aspects of the requirements if they see fit (which I doubt they should do very often – as we’ve seen time and time again in the context of IASB proposals, preparers always have some whiny argument about why they need more time to implement new standards, even as they emphasize their flexibility and responsiveness in other aspects of their business).

But before the ISSB can make a determination on that, it has to work its way through the 696 (!!!!!) comment letters…

The opinions expressed are solely those of the author