The International Sustainability Standards Board (ISSB) announced recently that it would mandate the reporting of Scope 3 greenhouse gas (GHG) emissions – or emissions resulting from a company’s supply chain – as part of its ESG disclosure standards currently under development. Given how tricky such emissions can be to assess, the move signals the criticality of carbon footprint reporting to both investors and regulators. The ruling was unanimous.
The ISSB is an independent, private sector body falling under the International Financial Reporting Standards (IFRS) Foundation. It was born of the much-publicized COP26 climate summit held in Glasgow last year. Its mandate is to create a unified, global set of baseline sustainability reporting standards to help investors understand the sustainability profiles of companies and their related risks and opportunities.
The ISSB’s decision echoes other regulatory moves in 2022, such as the US Securities and Exchange Commission’s proposal to mandate climate disclosures, or the historic passing of the Inflation Reduction Act, set to spend over $70 billion on reducing carbon emissions across all sectors of the US economy. And lest we forget, national commitments to hit net zero by 2050 are only 28 years away.
To appreciate the central role of carbon emissions reporting in sustainability and environmental regulation, we explain the meaning of Scope 1, 2 and 3 GHG emissions and their associated implications.
Legal experts predict that the SEC will take until the end of 2022 to finalize and publish a rule, in some form, on mandatory climate disclosures. However, they say, this rule will almost certainly face legal challenges. In particular, experts believe the SEC will face claims that the rule is an overreach of its regulatory authority. Other contentions include the belief that mandatory reporting places an undue burden on companies and might hurt financial returns.
The protocol provides guidelines for reporting on the emissions of the seven greenhouse gases listed under the Kyoto Protocol: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulphur hexafluoride and nitrogen trifluoride. Of these, carbon dioxide is by far the most emitted greenhouse gas as a result of human activity.
The GHG Protocol classifies the reporting of emissions into three main categories:
Scope 1 (direct emissions): GHG emissions produced by operations that are directly controlled or owned by the reporting company.
Scope 1 emissions are further divided into four classes:
Scope 2 (indirect emissions): GHG emissions produced indirectly from the reporting company’s outside purchase of necessities such as electricity, heating or cooling.
Scope 3 (indirect emissions outside company purview): Indirect GHG emissions resulting from the supply chain of the reporting company.
Scope 3 emissions are difficult to assess because they do not fall under company control. So much so that the ISSB will provide what it calls “relief provisions” to help businesses comply with its frameworks’ mandated Scope 3 reporting requirement.
Scope 3 emissions are divided into no less than 15 categories and include emissions resulting from business travel, employee commuting, wastewater treatment, landfill waste, transportation and distribution of goods, and investments (see below), among other considerations.
In addition to Scope 1, 2, and 3 emissions, investors should be aware of their financed emissions. Financed emissions are those emissions generated by the loans and investments of any financial institution such as a bank or investment firm. Accounting for financed emissions allows organizations to better asses sustainability-related risks and opportunities associated with their investments.
To do this, the Partnership for Carbon Accounting Financials (PCAF) was launched in 2019. Conceived by financial institutions, this industry-led framework condenses and standardizes the collection, assessment and reporting of financed emissions.
ESGTree’s automation of the PCAF framework simplifies this process by allowing companies to input basic activity related information to calculate their carbon emissions across all scopes while providing investors with figures and analytics for financed emissions of their portfolio. ESGTree is currently working with Canadian banks to automate their PCAF data collection, analysis, and reporting.
ESGTree helps private capital investors automate ESG data collection and analysis for their portfolio companies. Our platform features include our carbon calculator, customizable and automated ESG frameworks, multi-level report viewing, trends analysis dashboard, and other features aimed to make ESG work for everyone.