ISSB confirms mandatory disclosures across Scopes 1, 2 and 3

The International Sustainability Standards Board (ISSB), has voted unanimously to require company disclosures on Scopes 1, 2 and 3 greenhouse gas (GHG) emissions.

However, the ISSB plans to develop “relief provisions” – to be decided at a future meeting – to help companies apply the Scope 3 requirements.

It said the provisions could include giving companies more time to provide Scope 3 disclosures, as well as working with jurisdictions on “safe harbour” arrangements, which would offer companies protection from, or reduce, liability on information disclosed to investors and other capital market participants.

The ISSB voted on the GHG emissions disclosures at its October meeting in Montreal, Canada, following analysis of the feedback on its proposed standards received during a public consultation that closed at the end of July.

The board sought public feedback on two proposed sustainability-related disclosure standards: the draft IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information and the draft IFRS S2 Climate-Related Disclosures.

Lindsey Stewart, director of investment stewardship research at Morningstar, said: “It’s rare – possibly unprecedented – to see international standard-setting undertaken at this pace.”

However, he added that, “notwithstanding the speed of progress, the ISSB will need to quickly resolve some key issues revealed in feedback to their first two draft standards”.

Data availability and quality

The underlying IFRS paper on Scope 3 GHG emissions, written by Tory Yoshida and Caroline Clark-Maxwell, stated that staff recommended the ISSB “address the data availability and data quality challenges raised by respondents".

It suggested following the Corporate Value Chain (Scope 3) Accounting and Reporting Standard, which has been developed in response to the demand for an “internationally accepted method to enable GHG management of companies’ value chains”.

As the standard stated: “The GHG Protocol Corporate Standard allows companies flexibility in choosing which, if any, Scope 3 activities to include in the GHG inventory when the company defines its operational boundaries.”

The IFRS paper also set out – under staff recommendations and areas for consideration – the need for the ISSB to consider how it can work with regulators to introduce safe harbour provisions, stating “a safe harbour does not prevent a regulator from taking action, if warranted”.

It suggested that the ISSB can support the introduction of safe harbour provisions through “collaborating with regulators to provide insight into the availability and development of the data needed by entities to provide reliable Scope 3 disclosure”.

Morningstar’s Stewart said that matters concerning materiality, transition plans and targets, scalability and questions on “financed and facilitated” emissions that most impact the financial services sector, still needed to be resolved.

“There’s also the critical question of how to maintain a ‘global baseline’ of interoperable standards when regulators such as the US SEC and the European Commission appear to be headed in different directions to the ISSB in some of these key areas,” he added.

Asset managers divided on Scope 3

A recent survey by Morningstar found that US and European asset managers remain divided on ESG disclosure reporting standards.

It surveyed 20 asset managers based in the US and Europe, with more than $40trn combined in assets under management, with most agreeing that Scope 1, which covers direct emissions from a company, and Scope 2, which covers indirect emissions from electricity purchased and used, disclosures are “essential”.

However, only eight asset managers favoured mandatory Scope 3 disclosures.

According to Morningstar, BlackRock, Invesco, State Street, T Rowe Price, and Vanguard were among those that believe the methodologies for disclosing Scope 3 emissions are “not sufficiently mature to require mandatory disclosure by all companies at present”.

The ISSB intends to complete its deliberations on the proposed standards by the end of 2022, with a view to issuing the final standards “as early as possible” in 2023.