ISSB Votes to Include Scope 3 Greenhouse Gas (GHG) Emission Disclosures in Updates to Draft Standards

By Phil Molé, MPH

It’s been a busy year for the International Sustainability Standards Board (ISSB). The Board had already completed its consolidation with the Value Reporting Foundation (VRF), assumed oversight over the Sustainability Accounting Standards Board (SASB) standards, and released its first two draft standards for public consultation. During its recent meeting held on October 18-21, ISSB also made key decisions about its future priorities, including a resolution to retain disclosure requirements for all three scopes of greenhouse gases (GHGs) in its Climate Standard. Anyone interested in pursuing or maintaining ESG maturity needs to be aware of ISSB’s latest plans.

Here are the major highlights of ISSB’s October meeting, and a breakdown of what they mean for your ESG journey.

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Background on Draft ISSB Standards

To ensure we understand the intentions and context of the Board’s latest activity, it’s important to review some background about the formation and purpose of ISSB, and where things stood prior to the October meeting.

Need for Consolidation of ESG Reporting Frameworks

Let’s start the story with the rise of ESG as a major approach to business management during the last few years. As mounting evidence confirms that ESG maturity correlates with better profitability and better ability to avoid business disruptions and drops in share price, ESG won acceptance as the new standard in business excellence.

But with greater emphasis on ESG performance came greater emphasis on ESG disclosures, and with greater focus on disclosures came a proliferation of disclosure frameworks. Understandably, companies, financial institutions, and public stakeholders began asking for a more streamlined ESG reporting framework to improve their ability to monitor risks and opportunities. Stakeholders wanted a reliable ESG reporting framework to support reliable disclosures. They also preferred that the framework wouldn’t “reinvent the wheel” but would build upon existing reporting frameworks and be usable by organizations around the world.

The International Financial Reporting Standards (IFRS) Foundation® addressed the growing demands for a consolidated reporting framework by forming the ISSB on November 3, 2021 at the COP26 event in Glasgow, Scotland. The IFRS’s financial accounting standards are currently accepted in 140 countries, so the Foundation had a good vantage point upon which to build and consolidate ESG reporting frameworks.

The ISSB’s page states that the Board will, “deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them make informed decisions.” The page also states that ISSB’s standards will cover important ESG topics, including climate risks, and will build upon existing general standards such as those issued by SASB, while also developing industry-specific standards.

What Has ISSB Accomplished So Far?

The ISSB has been directly fostering consolidation through absorption of other standards and standards-setting bodies into their organization. The VRF which had brought together the SASB and the Integrated Reporting Framework (another major reporting framework focused on providing good data that helps organizations build long-term value), has now fully consolidated into the IFRS Foundation. This means that oversight of the SASB standards, including various industry-specific standards, has shifted to ISSB.

As we’ve previously blogged about, ISSB also published its first two draft standards earlier this year.

IFRS S1 – “General Requirements for Disclosure of Sustainability-related Financial Information” (the General Requirements Standard)

This draft standard proposes that disclosure of sustainability-related risks and opportunities in ISSB standards be centered around the four pillars of governance, strategy, risk management, and metrics and targets. It also establishes that ISSB uses a lens for determining materiality – what ESG information they consider important – based on investor value. This kind of lens is commonly known as a financial materiality perspective because it’s based on determining the kind of information investors would need to assess enterprise value.

IFRS S2 – “Climate-related Disclosures” (the Climate Standard)

The draft Climate Standard proposes to require companies to disclose their absolute Scopes — 1 (direct emissions from operations), 2 (from energy use), and 3 (from their broader value chain) greenhouse gas (GHG) emissions—as well as the intensity of those emissions per unit of economic or physical output. Scope 3 GHGs have historically been the most difficult for companies to track, because they’re from sources upstream or downstream relative to the company’s operation and are not under the company’s direct control – emissions associated with treatment, storage, and disposal facilities (TSDFs) that treat the company’s waste are one example. GHG Protocol’s Scope 3 Standard, which is the most accepted accounting reference for Scope 3 GHGs, lists 15 separate categories of Scope 3 emissions, and the draft S2 standard indicates that companies would base their GHG accounting on the GHG Protocol categories.

Companies following the standard would also need to disclose information on their plans or targets related to climate issues, and how transition climate risks could impact their business model, strategy, and cash flows.

ISSB kept the public comment period open on its two draft standards until July 29, 2022, after which they began the process of sifting through and analyzing stakeholder feedback.

Highlights from IFRS Foundation’s October Meeting

Our discussion of the background above brings us right to the moment that ISSB representatives took their seats at the beginning of the Board’s October meeting. The meeting, held from October 18 through October 21^st in Montreal, provided an opportunity for Board members to vote about future actions, including their intentions about how to move forward on their standards based on the public consultation.

Here are some of the high-level takeaways.

Required Disclosure of All Three Scopes of GHGs

If you’ve been following the ISSB since its formation last year (or if you’ve just read our summary above of ISSB’s publication of its first draft standards), you may well be wondering what’s actually changed here. After all, ISSB’s Climate Standard (“S2”) already proposed that entities following the standard would need to disclose its gross GHG emissions and GHG emissions intensity. But proposing and doing are two different things, especially considering the role of public consultation. If stakeholder feedback had come back strongly against the proposal to require disclosure of all three scopes of GHGs, ISSB would have had an uphill battle writing that requirement into the final draft of the standard.

That’s not what happened. Staff paper “AP4B: Scope 3 Greenhouse gas emissions,” prepared for discussion at the October meeting, discussed the feedback received during the public comment period, and found that most respondents agreed with the proposal to require an entity to disclose its Scope 3 GHG emissions. According to the staff paper, respondents argued that the transition risks a company may have because of its GHG emissions aren’t limited to the GHG emissions within their direct control and would include Scope 3 GHGs. The staff paper provides some examples of these risks, which could include exposure to higher costs, decreased availability of supplies or lower demand due to the risk of increased carbon prices, the risk of being unprepared for introduction of more (or more stringent) GHG regulations, and the potential loss of customers who might redirect their preferences toward companies who are more successfully managing their contributions to climate risks. Based on this feedback, the staff paper recommended that ISSB move forward with its proposal to require disclosures of all scopes of GHG emissions.

A press release reports that during the October meeting, ISSB voted unanimously to require companies to disclose all three scopes of GHGs. The unanimous vote is an important detail because it provides more evidence of strong agreement about the importance of these disclosures, including within ISSB itself. The resolution also specifically affirmed the disclosures would include the 15 categories of GHGs detailed in GHG Protocol’s Scope 3 Standard. Based on this vote, ISSB will now move forward on writing these requirements into a final version of the standard.

ISSB also reportedly plans to develop relief provisions to help companies apply Scope 3 requirements. According to the press release, “this relief will be decided at a future meeting and could include giving companies more time to provide Scope 3 disclosures and working with jurisdictions on so-called ‘safe harbour’ provisions.”

Clarification of Concepts in ISSB’s General Standard

ISSB also confirmed it will use the same definition of “material” already used in IFRS accounting standards, and at a future meeting, will discuss how to determine what is “material” information. ISSB seeks to clarify that the purpose of the disclosures their standards will require is to serve the purposes of investors – i.e., that standards are based on financial materiality.

Facilitating Compatibility with Jurisdictional Requirements

As discussed earlier, one of the main purposes of ISSB was to facilitate more consolidation and harmonization among ESG standards-setting bodies. At the October meeting, ISSB stated its intention to continue working with agencies such as European Financial Reporting Accounting Group (EFRAG) to improve alignment with their standards, and that ISSB standards provide a good foundation for jurisdictional standards-developing agencies to build upon. Additionally, the press release states that ISSB will be modifying at least some of the language in its draft standards to improve alignment with other standards.

Setting Future Agenda Priorities

Based on feedback received from stakeholders during the public consultation period for its initial two standards, ISSB will be focusing its future work on two main priorities: “foundational” work supporting the adoption and application of its first two standards, and new areas of work.

Foundational work: According to the press release, ISSB will develop supporting materials and a digital taxonomy to facilitate digital ESG reporting. ISSB also plans to make targeted improvements to the SASB standards, now that the VRF has fully integrated with IFRS Foundation and oversight of the SASB standards has transferred to ISSB.

New areas of work: During the October meeting, ISSB representatives discussed creating a “request for information” (RFI) on agenda priorities for future work. ISSB plans to release the RFI in early 2023 and will use it to request stakeholder feedback on proposals for new research and standards-setting projects.

In its press release, ISSB states that they intend to complete their review of feedback received on its proposed standards by the end of 2022, and to issue the final standards “as early as possible” in 2023.

Key Takeaways on ISSB’s Updates

We can see that ISSB’s October meeting was fruitful, and that the Board has a great deal of activity in motion. It’s a lot to get your head around, so here are some of the major themes, or high-level takeaways.

GHG disclosures are foundational to ESG maturity. If there’s a commonality we see across all ESG disclosure frameworks, as different as they may be in other respects, it’s that all of them require tracking and disclosure of GHG emissions. Furthermore, the major frameworks like SEC, EFRAG, and ISSB all base their accounting of GHG emissions on the GHG Protocol and stress the importance of including Scope 3 GHG emissions in that accounting. The complication is that companies have historically struggled to identify and accurately track their Scope 3 GHGs. Modern ESG software can help by giving you a single platform for tracking and reporting all three scopes. The best solutions even include utility integration capabilities to electronically capture energy usage data, eliminating the time and potential errors associated with manual data entry, while also automatically applying the correct emission factors, converting usages to the right units, and facilitating reporting that is aligned with major ESG disclosure standards.

SASB Standards will continue evolving under ISSB’s oversight. When administration of the SASB standards passed to ISSB following the consolidation of VRF into IFRS Foundation, many stakeholders wondered whether ISSB would be revising the standards, and if so, how quickly they’d be doing so. The October meeting makes it clear that this work is in progress right now, as ISSB considers the most effective targeted improvements to make to SASB standards. A lesson here is that when ISSB gained oversight of the SASB standards, it wasn’t a “one and done,” and the SASB standards are neither going away nor remaining static. They will be evolving standards under ISSB’s administration.

ISSB remains focused on its role in guiding and consolidating ESG disclosure frameworks. All indications from the October meeting are that ISSB remains dedicated to not only consolidating ESG disclosure frameworks, but also collaborating with other ESG standards-setting bodies to create as much harmonization as possible between remaining frameworks. As we talked about in a previous blog, this harmonization work is a major part of ISSB’s mission as requested by stakeholders, and the continuation of this work shows us ESG is here to stay. Global stakeholders foresee a long future for ESG, and ISSB has a key role in paving the way for that future.

Looking for More Information on ESG?

If you’re looking for more information on ESG, we’ve got you covered.

To access a growing repository of information and resources on ESG, check out our ESG Central page.

For more information about the GHG Protocol and its central importance across ESG disclosure frameworks for GHG accounting, check out our previous blog post.

For more on how to track all three scopes of GHG emissions, download our guide, “Tracking All Three Scopes of Greenhouse Gas with ESG Software.”

Our on-demand webinar, “ESG – What You Need to Know Now” provides a broad overview of what ESG is and how businesses can successfully navigate the journey from traditional EHS management to ESG maturity. A good companion piece to that is this blog post, “Have You Mastered the ESG Pyramid?” which lays out why ESG builds upon and depends upon a solid foundation of good EHS management. Our guide, “An Overview of ISO 14001: Using the Standard to Improve Environmental Management” expands on that lesson to show you how an environmental management system patterned after ISO 14001 can help you navigate the journey from EHS management to ESG maturity.

If you want to learn more about materiality, download “What are Materiality and Double Materiality? Here’s What You Need to Know.” From there, “ESG Materiality Assessments: Practical Guidance and Best Practices” will give you the tips you need to effectively conduct your materiality assessments.

Finally, for a really deep dive into ESG topics, attend the upcoming VelocityEHS Virtual ESG Conference. Join us on November 15, 2022 for five sessions that will discuss topics such as the proposed mandatory SEC climate disclosure requirements, how to choose the right carbon management software for your organization, tracking social sustainability goals, Green Chemistry, and managing climate risks. We’ll give you the information you need to successfully build and maintain ESG maturity!

REGISTER FOR OUR VIRTUAL ESG CONFERENCE HERE!

Let VelocityEHS Help!

The world of ESG is constantly evolving. Our ESG Software, part of the VelocityEHS Accelerate® Platform, provides exactly the support you need. You can easily track all three scopes of your GHG emissions, with reporting capabilities aligned with major ESG disclosure frameworks. Built-in Materiality Assessment capabilities also help you easily generate surveys and materiality matrices you can share with stakeholders, so you be sure you’re identifying and focusing on important ESG issues such as your Scope 3 GHGs.

ESG is here to stay, so get the tools you need in place today to pursue and maintain ESG maturity. Request a demo or contact us today to learn more about how we can support your continuing ESG journey.