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Companies Must Disclose Pollution Caused by External Suppliers, Global ESG Rulemaker Says

October 26, 2022

Multinational and other companies will be required to disclose their indirect greenhouse gas (GHG) emissions, according to the International Sustainability Standards Board (ISSB)’s Oct. 20, 2022 decisions, much of which lines up with the portion of the U.S. SEC’s proposal that U.S. businesses do not like.

The disclosures, which fall under Scope 3 indirect emissions such as those caused by companies’ suppliers, would make up the bulk of emissions for businesses.

Proposed Scope 3 disclosures have gotten the most push back from accountants over concerns that it would be tough to get the data, some of which may not be available or would be hard to estimate.

At a future meeting the board will develop relief provisions to help companies to apply the requirements, the discussions indicated. This could include giving companies more time to provide Scope 3 disclosures and working with jurisdictions on “safe harbour” provisions. Safe harbor provisions would provide companies protection from, or reduces liability on information disclosed to investors and other capital market participants, the board said.

“It is important to include Scope 3,” ISSB Vice Chair Jingdong Hua said. “But recognizing the specificity in each jurisdiction, I certainly would urge staff in the final standard to allow for jurisdictional flexibility, both in the safe harbor and in relief,” he said. “My sense is there will be a day where we will all converge to a standard without the need for a safe harbor and relief and that is where the Scope 3 will be fully measured. But the speed with which to get there can be very different from jurisdictions from different continents, also recognizing that we can’t impose that—that the regulators in each jurisdiction have to make that decision.”

In addition to Scope 3, the board also voted to require companies to disclose Scope 1 direct emissions from a company; and Scope 2 indirect emissions from electricity purchased and used, applying the current version of the GHG Protocol Corporate Standard.

The ISSB said it will use the same definition of material as is used in International Financial Reporting Standards (IFRSs) and at a future meeting will discuss the need for further guidance on how to determine what is material information.

The deliberations were related to its March climate reporting proposal based on comment letter feedback the board received. Respondents generally supported the proposed disclosure rules, the discussions indicated.

The discussions are toward the issuance of final rules next year. Deliberations will continue in November.

Concerns on Scope 3 Include ESG Rating Matters

The decisions are significant for U.S. multinational companies that have to report using both IFRS and U.S. GAAP. Currently, there are concerns bubbling up in the U.S. surrounding the SEC’s March proposal on the same topic as it would require companies to disclose emissions they are directly responsible for as well as those from their supply chains and products. Some worry that Scope 3 disclosures will affect their ESG rating if their suppliers are not in compliance – affecting their ability to obtain credit and/or clients.

The disclosure rules are being developed as there has been a global push to require the disclosure of environmental, social and governance (ESG) related information, stemming from fears that GHGs are causing the climate to change.

GHGs are created when fuel is burned and if a company knows how much fuel is burned it can calculate how much GHG is being created, sustainability practitioners have said. To estimate total emissions, fuel consumption data is used plus other data. The concept of “Scope” is used in the sustainability industry to delineate direct and indirect emission sources, inspire transparency, and provide utility for different types of organizations and different types of climate policies and business goals.

Three Scopes are defined by GHG accounting and reporting purposes: Scope 1, which refers to owned emissions associated with what a company burns to operate, including gas in company cars, heating oil or fuel to power equipment; Scope 2 refers to purchased emissions, including electricity, steam, heating, and cooling; and scope Scope 3 refers to all other indirect emissions that support a business – and there are 15 categories of them.

Must be Interoperable With Jurisdictional Requirements

During discussions, the ISSB stressed the need for its standards to be interoperable with jurisdictional requirements as the rules are to be a global baseline of requirements.

Most notably, the board heard from comment letter respondents that it was important to achieve interoperability with the proposals published in Europe and the United States, the discussions indicated. The timing of the ISSB’s discussion is especially important because there is specific urgency in relation to the ISSB working with European Financial Reporting Advisory Group (EFRAG) on achieving greater alignment given the timelines to advance standard-setting due to the legal requirements of the Corporate Sustainability Reporting Directive (CSRD) in Europe.

Specifically, in April, the ERAG launched a public consultation on proposed European Sustainability Reporting Standards (ESRS), with a comment period ending in August 2022. The EFRAG Sustainability Reporting Board and EFRAG Sustainability Reporting Technical Expert Group have considered the comments received and the resulting first set of draft ESRS are expected to be handed over to the European Commission (EC) in November 2022 to be considered for adoption.

[Thomson Reuters]