ISSB “Straying” from Core Purpose with Scope 3 Inclusion

Despite investors calling for disclosure of all emissions, there are concerns the board is reaching beyond its remit. 

The International Sustainability Standards Board’s (ISSB) decision to include Scope 3 emissions in its incoming climate and general sustainability reporting standards risks extending beyond the board’s enterprise value focus.  

“The purpose of the IFRS Foundation, and by extension the ISSB, is to provide financially relevant, reliable, consistent, and comparable information to investors,” said Tim Mohin, global sustainability expert and ESG Advisory Committee Member for the UK Financial Conduct Authority (FCA), adding that the ISSB had integrated other organisations with the same “financial lens” for this reason.  

“By now adopting Scope 3 across the board, the ISSB could be straying from its core purpose,” he told ESG Investor. 

In the board’s October and December meetings last year, it was agreed that, following initial transition reliefs, companies will be asked to provide Scope 3 emissions disclosures in line with the GHG Protocol Standards. In instances where entities believe it is impracticable to estimate their Scope 3 emissions, they will be asked to disclose how they are managing or thinking about those emissions. 

The ISSB plans to provide support through implementation guidance, scalability measures and a framework for measurement. 

“While Scope 3 for many companies is the majority of their ESG impact, is it also the majority of their financially relevant ESG impact?” asked Mohin, most recently Chief Sustainability Officer at climate reporting technology company Persefoni, and previously CEO of the Global Reporting Initiative (GRI), which sets standards for sustainability disclosures which incorporate double materiality. 

The two ISSB standards are focused on enterprise value, meaning that companies will be asked to disclose how environmental and social factors contribute to or erode a company’s total value. 

“It might be more efficient for the ISSB to focus on a more simplified model for Scope 3 disclosures, such as including any ‘financially material ESG risks and opportunities’ in the company’s value chain as an open-ended question in the standards,” said Mohin. 

The board’s decision has been largely driven by investor responses to its consultation last year, which warned a focus on enterprise value may be too narrow.  

“The ISSB has heard that companies and investors cannot fully understand transition risks without the disclosure of absolute gross Scope 1, 2 and 3 emissions,” an ISSB spokesperson told ESG Investor. 

Before building out guidance for Scope 3 disclosures, the ISSB needs to get its existing disclosure and accounting standards right first, Mohin said, noting that environmental disclosure platforms such as CDP are already developing voluntary Scope 3 disclosure guidance. 

“The ISSB can leverage relationships with these organisations as a learning lab before pulling Scope 3 into international financial disclosure standards.” 

Due to be finalised this year, the ISSB’s climate and general sustainability standards are being developed to serve as a global baseline for sustainability-related reporting and are expected to be adopted into law by jurisdictions. 

The IFRS Foundation, a global reporting standards setter, established the ISSB in Q4 2021, subsequently integrating the Sustainability Accounting Standards Board and the Climate Disclosure Standards Board.  

Breathing room 

To give companies time to get to grips with Scope 3 disclosure, the ISSB has also introduced ‘reliefs’. 

This will provide companies with a temporary exemption from Scope 3 reporting requirements for a minimum of one year from the launch of the climate standard, giving them time to establish processes and collate the necessary data to fulfil reporting requirements.  

“As with all of our standards, we will review and monitor application to ensure our standards are fit for purpose,” the ISSB spokesperson said.  

“We are also focused on providing capacity building to support companies and markets as they look to apply our standards for the first time, recognising that this will be new for lots of companies and time will be needed to develop processes and skills.” 

Helen Finlay, Associate Global Director of Policy Engagement at CDP, has welcomed the Scope 3 reliefs and is reassured that the ISSB is not “throwing companies in at the deep end”, as the majority have a lot of work to do in preparation. 

CDP research found that, on average, Scope 3 emissions were 11.4 times higher than Scope 1 and 2 emissions in 2020. However, in 2021, 71% of assessed companies reported their Scope 1 and 2 emissions in 2021 compared to 20% disclosing their Scope 3.  

Road to harmonisation 

The ISSB’s incorporation of Scope 3 is pivotal to ensure global harmonisation with other emerging sustainability disclosure standards, CDP’s Finlay said. 

“Scope 3 emissions are also included in the European sustainability reporting standards (ESRSs) and in the US Securities and Exchange Commission’s (SEC) proposed climate disclosure rule,” she said. “The ISSB’s inclusion is another powerful and positive signal of the harmonisation of disclosure standards – something CDP and the market have long called for.” 

The EU has opted for a different path, adopting a double materiality lens, meaning that companies will be required to outline how sustainability issues are impacting their business, as well as the organisations’ impact on sustainable development beyond their internal operations. The ESRSs will apply to all companies falling under the scope of the Corporate Sustainability Reporting Directive (CSRD), which was formally adopted this month and will apply from next year.  

Carol Adams, Professor of Accounting at Durham University Business School, has urged the ISSB to collaborate more closely with the GRI, which is working with the European Financial Reporting Advisory Group (EFRAG) to develop the ESRSs, to ascertain interoperability. 

GRI has welcomed the ISSB’s efforts on financial materiality,” Adams said. “The ISSB has not reciprocated by, for example, encouraging the use of GRI standards to report their impact as a necessary precursor for all that judgement that Exposure Draft S1 was calling for on financially material matters”. 

At COP15 in Montreal, ISSB Chair Emmanuel Faber also announced that the board would be advancing work on nature-focused and just transition-related disclosures. 

“The ISSB’s role is not to subsume all ESG reporting,” said Mohin. 

“If the board continues on its current path to serve all stakeholder needs, it threatens its own existence. We are already seeing the backlash against ESG in the US and this could proliferate – especially if the ISSB adopts issues outside of the bounds of financially relevant information.” 

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