IFRS Seeks Input On Reducing Scope 3 Sustainability Reporting Requirements
On April 28, the International Sustainability Standards Board released an exposure draft proposing a reduction in climate related reporting requirements. The move comes as sustainability reporting requirements, viewed as inevitable in 2021, are being rolled back globally. The ISSB proposal calls for a reduction in Scope 3 reporting requirements, a move that will further frustrate climate activists. The draft is open for comment until June 27, with the changes expected to be adopted by the end of 2025.
Sustainability reporting, climate related risk reporting, and broader environmental, social, and governance reporting, requires companies to disclose information relating to climate change and environmental concerns in a specialized financial report. The climate related disclosures, including greenhouse gas emissions, are the direct result of the Paris Agreement and the goal to reduce GHG emissions to net-zero by 2050.
The push for sustainability reporting saw drastic gains over the past few years. The United Nations formed industry specific initiatives to drive the reduction of GHG emissions. Financial investors forced businesses to voluntarily disclose information to allow for informed decision making on non-financial factors. This connection created a need for an international standard for sustainability reports.
In 2021, during COP 26, the International Financial Reporting Standards (IFRS) Foundation trustees announced the formation of the International Sustainability Standards Board (ISSB) 'to develop—in the public interest—a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors' information needs. In 2023, the the ISSB released the IFRS Sustainability Disclosure Standards. The IFRS Sustainability Disclosure Standards are divided into two reporting tiers, IFRS S1 and IFRS S2, with both going into effect January 1, 2024.
The IRSR Sustainability Disclosure Standards mandated reporting from three different sources, known as scopes. Generally, Scope 1 refers to direct GHG emissions from sources that are owned or controlled by the company, Scope 2 refers to GHG emissions from the generation of purchased electricity consumed by the company, and Scope 3 refers to indirect GHG emission along the value chain.
Scope 3 has been the most problematic for companies. The gathering of the information not only required forcing suppliers to disclose GHG emissions, but also the calculation of the emissions of consumers. Companies have advocated that this is overly burdensome and too costly.
While the move from the ISSB is surprising, it is following international trends. While the European Union initially included Scope 3 in the European Sustainability Reporting Standards formed under the Corporate Sustainability Reporting Directive, proposals are currently under consideration to reduce the ESRS requirements, including the impact of Scope 3. In the U.S., the Securities and Exchange Commission initially included Scope 3 in their Climate-Related Risk Rule, however excluded it in the final rule. The rule never went into effect due to legal challenges. Following the 2024 election of President Trump, the SEC has started the process to revoke the rule.
In the press release, Sue Lloyd, ISSB Vice-Chair, said: "It is the role of a responsible standard-setter to listen to market feedback from the earliest implementation stages, and to support preparers in the application of our Standards. As a market-focused standard-setter, we have taken steps to respond in a timely manner by proposing targeted amendments helping preparers where possible, without causing too much disruption and ensuring that our Standards continue to enable the provision of decision-useful information to investors.
'Proposing these amendments to a relatively new Standard is not a decision that was taken lightly—we have carefully considered the need for such amendments and have sought to balance the needs of investors while considering cost-effectiveness for preparers. Our due process is fundamentally important to us. We always consult our stakeholders when proposing changes to our Standards and are balancing the need to respond to stakeholders' needs on a timely basis with giving all interested parties the opportunity to participate in providing feedback by setting a 60-day comment period.'
The proposal includes 'relief from measuring and disclosing Scope 3 Category 15 GHG emissions associated with derivatives and some financial activities; relief from the use of the Global Industry Classification Standard (GICS), in some circumstances, in disclosing disaggregated financed emissions information; clarification on the jurisdictional relief to use a measurement method other than the Greenhouse Gas Protocol for measuring GHG emissions; and permission to use jurisdiction-required Global Warming Potential (GWP) values that are not from the latest Intergovernmental Panel on Climate Change (IPCC).'
The comment period is open until June 27. Those wishing to comment may do so either through a comment letter or the online survey. If the ISSB significantly rolls back Scope 3 reporting, sustainability reporting around the world will look drastically different.
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