Industry

TCFD Scope 3 Review Supports Net-Zero Scrutiny

Comprehensive reporting on all corporate emissions essential for investors, regulators and policymakers working towards low-carbon economy, says GRI.

Asset owners will be in a stronger position to assess the credibility of corporates’ net-zero pathways following a consultation by the Task Force on Climate-related Financial Disclosures (TCFD) to improve Scope 3 greenhouse gas (GHG) emissions disclosures, according to Bastian Buck, Chief Standards Officer for the Global Reporting Initiative (GRI).

The TCFD has published two public consultations. The first proposes updates to existing guidance on climate-related metrics and data. The second consultation is an assessment of current market developments for future-looking metrics. Industry has until 7 July to respond, with the TCFD publishing finalised guidance this autumn.

“One of the criticisms of the TCFD framework in the past was that they were not actually outlining detailed climate-related metrics for Scope 3. In anticipation of COP26 in Glasgow this November, the TCFD is making an effort to be more robust and is making more detailed proposals,” Buck told ESG Investor.

Scope 3 emissions are all indirect emissions that occur in the supply chain of the reporting company, including upstream and downstream. For financial institutions, this includes emissions facilitated by financing or investment activities.

When the 2017 TCFD final report was published, there were a number of unresolved issues concerning the measurement of Scope 3 and financed emissions, with TCFD explaining that Scope 3 disclosures should be included only “if appropriate” and financially material to the investor.

However, the new public consultation to update the 2017 guidance notes that reporting around Scope 3 emissions has “matured enough to warrant inclusion in disclosures”, particularly as Scope 3 disclosures are increasingly being demanded by investors.

“Data and methodologies have matured sufficiently such that disclosure of relevant, material categories of Scope 3 emissions is now appropriate for all sectors. Disclosure is particularly important for organisations for which Scope 3 emissions account for 40% or more of the total emissions of the organization or for which Scope 3 emissions have been deemed a significant risk in their value chain,” TCFD said.

Furthermore, banks, insurance companies, asset managers and asset owners require Scope 3 emissions disclosures in order for them to better understand their own financed emissions. This will help them evaluate how their loan, underwriting or investment activities could expose them to carbon-related assets, the consultation said.

The inclusion of Scope 3 emissions within TCFD-aligned disclosures means that corporates will be expected to have a transparent view of all emissions they produce, giving investors a clear picture of the corporate’s commitment to net-zero and decarbonisation progress, Buck explained.

“These changes will actually help substantiate the GRI’s own disclosure expectations. We hope to build these most recent changes into the GRI framework,” he added.

Although the consultation period is short, Buck says the exercise may encourage further discussion by policymakers at COP26. The fact the framework is already widely adopted should make it a strong vehicle for the consolidation of global net-zero priorities, he said.

“There’s a good chance that we will end the process in Glasgow with net-zero as the global ambition, in which case I would like to see the TCFD framework adopted by policymakers in order to achieve a clear net-zero scenario,” Buck added.

Prior to this update, last year the GRI collaborated with four other standards-setting bodies: CDP, Climate Disclosure Standards Board (CDSB), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB). The so-called ‘group of five’ launched a sustainability standards prototype, which builds on the TCFD’s four pillars of reporting: governance, strategy, risk management, and metrics and targets.

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