The ISSB affirms that the IFRS Disclosure Standard for Climate Change will include Scope 3 Emissions

Reporting on Scope 3 emissions – those originating in a company's value chain and beyond its direct control – will be required under new standards being developed by the International Sustainability Standards Board (ISSB) of the IFRS Foundation, according to a statement released by the ISSB on Friday.

The judgment represents an important milestone in the development of climate and sustainability-related reporting standards for firms, as investors and other stakeholders demand more information on the management of climate risks and impacts by companies.

Regulators in major global jurisdictions, including Europe, the United Kingdom, and the United States, among others, have enacted or are drafting mandatory sustainability reporting requirements for firms, with the majority significantly influenced by ISSB standards.

Scope 3 emission reporting requirements are one of the most problematic features of emerging disclosure systems. These emissions make for the great majority of many firms' carbon footprints, but they are often the most difficult to manage and calculate since they occur outside of the direct control of companies, in areas such as supply chains or in the consumption of their products by customers.

Following the March 2022 release of proposed climate-related disclosure requirements by the U.S. Securities and Exchange Commission (SEC), the Commission received strong backlash on its plans for Scope 3 reporting, which were usually even less restrictive than other emerging standards. BlackRock, one of the most outspoken advocates for corporate climate reporting, has called for a more flexible 'comply-or-explain' approach from the SEC on Scope 3, rather than mandatory reporting, noting that the methodological complexity involved in tracking emissions and the lack of direct company control diminish the utility of Scope 3 disclosure.

At its October meeting, the ISSB agreed unanimously to demand company disclosures on Scope 1, Scope 2, and Scope 3 greenhouse gas emissions, while also declaring that it will develop "relief mechanisms" to assist corporations in complying with the Scope 3 standards. These provisions, which will be resolved at a later meeting, may include providing corporations more time to give Scope 3 disclosures and collaborating with jurisdictions to offer "safe harbour" laws that provide protection or reduced responsibility for disclosed Scope 3 information. These provisions are comparable to those in the initial SEC proposal.

The ISSB intends to conclude debates on its first two proposed standards for company sustainability and climate-related disclosures by the end of this year and to publish the final standards as soon as feasible in 2023.