The IFRS Foundation – the International Financial Reporting Standards board – today proposed to the International Sustainability Standards Board (“ISSB”) a climate reporting disclosure prototype. While this document is not currently binding, it does create set of potential standards for companies to consider. This also does create a possible expectation for recipients of financial reports of information that may be considered material for their investment decisions.
Three keys points to consider:
- There are a set of granular expectations of areas of ESG concerns, metrics for analysis that are proposed (indicating types of information one might expect a company to be able to create), and requirements for disclosure of ongoing results of monitoring of progress towards stated ESG objectives (including differentiation between achieved carbon reduction for internal and supply chain emissions versus carbon offset usage to achieve ESG goals) with percentage of management compensation dependent on achievement of ESG goals
- There are very specific definitions of specific component term of SG analysis as well as a 15 item list of Scope 3 emissions analysis components
- There are specific ESG reporting metrics for inclusion in financial reports covering general industry sectors in a granular manner, such as consumer products industries are broken down by “Apparel, Accessories & Footwear” and “E-Commerce” or Extractives and Metal Processing includes “Oil & Gas – Midstream” and “Oil & Gas – Refining and Marketing”. There are over 70 different specified industry types with individual metrics – many large firms may cover more than one specific industry sector.
This framework also provides guidance associated with the disclosures. Section 14 of the document reads:
“14 For Scope 3 greenhouse gas emissions, the entity shall provide an explanation of the activities included within the disclosed metric. For example, an online retailer may be exposed to risks or opportunities related to the greenhouse gas emissions arising out of thirdparty transportation and distribution services purchased by the reporting entity for outbound logistics of products sold to customers. The retailer may determine that information about such emissions is material to the users of its general purpose financial reports in their assessment of its enterprise value. Therefore, the retailer will explain how the emissions information provided by entities in its supply chain has been included in the determination of Scope 3 greenhouse gas emissions.”
This section would indicate that determination of whether to disclose and what to disclose will be determined individual by each company based on their interpretation of the guidance and the “materiality” of the result of analysis. But this would indicate that, at a minimum, the analysis will need to be performed.
The scope and level of effort for a response to these potential requirements may appear daunting. Early action now may minimize the disruption of corporate activities at a later date. Norton Rose Fulbright will continue to provide analysis and updates of this emerging area on an ongoing basis.
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COP26, the 26th Conference of the Parties to the UNFCCC, took take place between 1 and 12 November 2021 in Glasgow.