On a High Note: Global Climate Disclosures to Include Scope 3 Emissions

On a High Note: Global Climate Disclosures to Include Scope 3 Emissions

The International Sustainability Standards Board (ISSB) of the International Financial Reporting Standards Foundation (IFRS) recently proposed more comprehensive standards surrounding greenhouse gas disclosures in financial reporting. At an October meeting, the board unanimously voted to require companies to disclose emissions on Scope 1, 2, and 3.

Climate Now: Scope 1, 2, and 3 Emissions explained, April 13, 2022.

Bloomberg: ISSB Chair on New Sustainability Disclosure Standards, March 31, 2022.

The board currently requires companies to disclose both direct emissions (Scope 1) and emissions from purchased energy (Scope 2). But requiring disclosure of Scope 3 emissions -- emissions generated by a company’s suppliers and customers -- has historically been a controversial move. It puts a great burden on companies with large supply chains beyond their direct control, and can distort understanding of which companies are really working to decarbonize. Yet Scope 3 emissions often represent the bulk of a company’s aggregate climate impact, and must be accurately reported and systematically addressed to reach net-zero targets.

The US began its move towards mandating disclosure under the Biden Administration, but has not adopted the more rigorous disclosure standards set by the ISSB -- instead, the US Securities and Exchange Commission (SEC) proposed a rule that would require publicly-traded companies to spell out their direct and indirect greenhouse gas emissions. Ferocious pushback from both corporations and Republican lawmakers has delayed its adoption indefinitely, however.

Yahoo Finance: SEC Chair Gensler defends climate disclosure and crypto regulation proposals, September 15, 2022.

Reuters: Update from the SEC on ESG Disclosure Regulation, May 19, 2022.

CNBC: SEC chief Gary Gensler on agency's proposed changes to climate disclosures, March 21, 2022.

The proposed ISSB guidelines represent a growing consensus among regulatory bodies that companies must report emissions accurately to combat greenwashing and allow investors to properly assess financial risks. The London Stock Exchange (LSE), for instance, recently became the first trading center in the world to publish listing rules regulating carbon trade. The regulations aim to bolster and expand carbon capture projects, while simultaneously increasing company transparency and easing carbon credit trading.

Meanwhile, in the US, the Biden Administration proposed a more accurate "social cost of carbon” earlier this year in order to pave the way for future emission reduction policy. The estimated dollar amount, calculated based on the sociopolitical and economic damages caused by continued oil drilling, was measured at $51 per metric ton of carbon emissions -- nearly quintupling the figure calculated by the Trump Administration.

Though the metric was challenged by Republican attorneys general from 13 states, the US Court of Appeals recently threw the case out, since the revised social cost has not yet been implemented in rulemaking processes or permitting decisions.

UCTV: Social Cost of Carbon, June 5, 2022.

Bloomberg: Reaching Corporate Net Zero, March 25, 2022.

Science Based Targets Initiative: The Net-Zero Standard | A deep dive into setting corporate science-based net-zero targets, April 11, 2022.

IEA: A 10-Point Plan to Cut Oil Use, March 18, 2022.