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Overview of Sustainability Standards & Disclosures

Corporates are challenged to have sustainability goals by the financial markets, investors, customers, employees and very shortly mandated by SEC’ Climate Disclosure mandates. Sustainability reporting standards are a foundational component for businesses to share and assess their impacts and performance within an industry. It encompasses a wide range of topics, including greenhouse gas (GHG) emissions, carbon footprints, resources and materials, and supply chain operations, making it a robust tool for organizations to communicate their environmental practices, risks, and opportunities to stakeholder groups and the general public. Sustainability reports drive awareness for better operational decision-making and enhance the ability to develop environmentally-focused values.

A recent study on global sustainability reporting found that 92% of S&P 500 companies publish sustainability reports annually, making it the fastest-growing type of non-financial reporting over the past decade. What makes sustainability reporting challenging is that this type of reporting needs to be more transparent and consistent, as there are hundreds of sustainability standards, guidelines, and frameworks available to choose from.

However, the movement toward national and international standardization is underway. Globally recognized sustainability reporting organizations like the ISSB, SEC, TCFD, and SBTi are working to develop frameworks to ensure transparency and consistency throughout the reporting process, which should bring a new era of sustainability reporting to fruition.

With ESG becoming mainstream and strategic agenda topic for Board, the multitude of ESG reporting frameworks are aligning with “big three” proposals released in 2022 as per PwC: in the European Union (EU) as part of the Corporate Sustainability Reporting Directive (CSRD), internationally by the International Sustainability Standards Board (ISSB), and in the United States by the Securities and Exchange Commission (SEC). Public companies would be impacted by one or more of these rules based on where they operate. Private companies would also need to report in some form eg companies in their value chain. Among the three proposals, SEC proposal is more narrowly focus on climate related risks and opportunities.

Salient points of key ESG frameworks and rules are covered below
  • International Accounting Standards Board
  • SEC for Climate disclosures,
  • GHG Protocol focus on Scope 2 and 1,
  • Task Force on Climate-Related Financial Disclosures
  • Science Based Targets initiative’s (SBTi)
  • RE100

ISSB: IFRS Sustainability Disclosure Standards (SDS)

The newly formed International Sustainability Standards Board (ISSB) is an independent, private-sector entity that aims to develop and approve IFRS Sustainability Disclosure Standards (SDS) for enhanced and consistent reporting. The ISSB recently proposed its first set of guidelines regarding corporate sustainability disclosures for public consultation.

The ISSB’s two-pronged proposal creates a comprehensive global outline to promote integrity and transparency for ESG and sustainability-related disclosures:

  1. IFRS S1: General Requirements for ESG-Related Financial Disclosures
  2. IFRS S2: General Requirements for Climate-Related Disclosures

IFRS S1 focuses primarily on sustainability-related financial disclosures by considering, assessing, and managing all financially-driven ESG risks and exposures involved with a company’s operations. The exposure draft will allow for more consistent, complete, comparable, and verifiable financial information to help assess an organization's enterprise value.

IFRS S2 focuses primarily on an entity’s relationship with the environment, outlining reporting standards for more consistent, complete, comparable, and verifiable quantitative and qualitative disclosures regarding climate-related risks and opportunities.

The upcoming ISSB sustainability standards will provide a compass for investors and board members to operate following global sustainability measures, and credible, thorough ESG reporting will act as a foundation for financial and operational strategies.

Companies applying these standards must implement suitable processes and controls to meet the requirements needed to remain compliant, and getting ahead of the curb is imperative to ensure all guidelines are met by the time the standards come into effect. While all entities with a stake in ESG or climate-related operations must prepare thoroughly, those with ESG standards and reporting already in place will likely find it easier to make the transition.

Although the ISSB’s proposals only currently act as guidelines for corporate sustainability disclosure, national and international organizations may soon follow with their own stricter, more intensive mandates.

Below, we outline the current and expected mandates from a few leading international organizations.

SEC: Rules for Climate Disclosure

The Securities and Exchange Commission (SEC) proposed a new set of standards for climate-related disclosures in March 2022, requiring organizations to report information regarding risks that would impact their business, operations, and financial conditions, as well as disclosures of metrics for climate-related financial statements. The proposed reporting standards would include the organization’s greenhouse gas emission data, which have become a key assessment metric for climate-related risk factors and exposures.

The proposed standards would require registrants to report on the following:

  1. Governance of climate-related risks and any relevant risk management strategies.
  2. How climate-related risks have had or will likely have a material impact on its operations and financial statements - whether short-term, medium-term, or long-term.
  3. How identified climate-related risks have impacted or are likely to impact a registrant’s strategy, business model, and outlook.
  4. How climate-related events and transition activities impact a registrant’s financial statements - including financial estimates and assumptions of financial statements.

Any entity that already conducts scenario analyses, has developed and implemented transition plans, or has publicly committed to climate goals or targets will also be required to make disclosures that would enable investors to understand the complexities of the registrant's climate-related risk management strategies.

The SEC’s proposed reporting rules would require an entity to report any information regarding its Scope 1 emissions (direct emissions) and Scope 2 emissions (indirect emissions resulting from purchased energy, including electricity). Further, the rules would require a registrant to report all Scope 3 emissions (emissions resulting from upstream or downstream activity within a value chain) if they have set GHG emissions targets or goals encompassing Scope 3 emissions.

The proposal for Scope 1 and Scope 2 reporting standards would allow a “phase-in” period for registrants, with compliance deadlines dependent on the entity’s filing status. An additional and separate phase-in period would exist for all Scope 3 disclosures.

Industry experts expect the SEC to finalize and adopt a version of the reporting guidelines by mid 2023.

GHG Protocol: Corporate Accounting & Reporting Standards

GHG Protocol is a consortium of businesses, governments, NGOs, and other organizations that provide globally-recognized and standardized frameworks for entities in public and private sectors to measure and manage their greenhouse gas emissions. GHG Protocol is utilized by more than 90% of Fortune 500 companies with a stake in emissions reporting - making it one of the world's most widely used emissions reporting standards.

The GHG Protocol for Corporate Accounting & Reporting provides a stepwise approach for organizations to quantify and report their GHG emissions and was developed with the objectives to:

  • Prepare companies for GHG inventory that represents an accurate and transparent account of emissions with a standardized approach and guiding principles.
  • Simplify and minimize the costs associated with compiling a GHG inventory.
  • Provide information that can be used to strategize and effectively reduce GHG emissions.
  • Provide information to facilitate the adoption of voluntary or mandatory GHG programs.
  • Increase consistency and transparency in GHG reporting and accounting

In the most recent Corporate Accounting & Reporting standards update, Scope 2 emissions are defined as “indirect GHG emissions from the purchase or generation from acquired electricity, steam, heating, or cooling consumed by an entity.” In contrast, Scope 1 emissions are defined as “any direct emissions produced on-site or in company-owned vehicles,” while Scope 3 emissions refer to a company’s overall supply chain emissions.

Scope 2 emissions are regarded as the primary driver of a company’s reporting score, so most entities need to focus heavily on this set of Scope2 standards. There is a survey underway to make the rules for Scope2 emission stricter or ensure ‘additionality’.

TCFD: Framework & Disclosure Recommendations

The Task Force on Climate-Related Financial Disclosures (TCFD) developed a framework for companies and organizations to effectively and accurately disclose climate-related risks and opportunities in their reporting processes. TCFD’s disclosure recommendations are adoptable on a wide scale and can apply to organizations across a wide array of sectors. The recommendations are structured around four core areas:

  1. Governance
  2. Strategy
  3. Risk Management
  4. Metrics and Targets

In October 2021, TCFD released revised guidance for companies to disclose their plans for the transition to net zero - which includes reporting standards for Scope 1, Scope 2, and Scope 3 emissions. These revised guidelines are aimed at financial and non-financial sectors and groups, including banks, insurance companies, asset owners, asset managers, energy, transportation, materials & buildings, and agriculture, food, & forest products.

Following TCFD recommendations, organizations should disclose Scope 1 and Scope 2 GHG emissions data independently from material assessments. They should also include Scope 3 emissions and all identified and related risks when applicable. Organizations should calculate their GHG emissions following the GHG Protocol methodology to allow for more standardized and easily-integrated reporting across reporting organizations and jurisdictions. Historical periods should be included in the reports for trend analysis, and all calculation methodologies should be included.

SBTi: Framework & Net-Zero Progress

The Science Based Targets initiative’s (SBTi) Net-Zero Standard is the first framework to incorporate net-zero targets into climate-related reporting. The guidance, criteria, and recommendations offered by SBTi provide a science-based approach to bringing net-zero goals and targets to fruition through a standardized approach to reporting. The framework aims to provide business leaders with the necessary clarity and confidence for operational decision-making while adding simplicity and transparency to a complex reporting process.

The key requirements of SBTi’s Net-Zero Standard are as follows:

  1. Focus on rapid, deep emission cuts: Cutting value-chain emissions is the most effective and efficient pathway to minimizing the global temperature rise to 1.5 degrees C. This primary focus of the Net-Zero Standard is overarching and is meant to be applied as priority #1 for organizations. The standard covers the entirety of value chain emissions and includes those produced by a company’s processes (Scope 1 emissions), purchased electricity and energy (Scope 2 emissions), and emissions created by suppliers and end-users (Scope 3 emissions). Most companies need to decarbonize by 90-95% to reach net-zero status under these standards.
  2. Set near and long-term targets: Entities who wish to adopt SBTi’s Net-Zero Standard should set near and long-term targets, which can be achieved by making rapid emissions cuts and halving all emissions by 2030. By 2050, organizations should be producing near-zero emissions, with all residual emissions neutralized.
  3. No net-zero claims until long-term targets are met: An organization will only be considered to have reached net-zero when long-term, science-based targets are met. A company must use carbon removal methods to neutralize limited emissions that have not yet been eliminated.
  4. Go beyond the value chain: The SBTi framework encourages companies to outreach their efforts by investing in science-based targets to help mitigate the effects of climate change. Climate finance is a primary focus moving towards net zero, but deep emissions cuts are necessary to reach climate targets. Emissions must be reduced both in and out of a company’s value chain.

RE100: Framework & Progress

RE100 is a renewable energy initiative aiming to support the commercial transition to 100% renewable electricity. Global energy data shows that companies within the commercial and industrial sectors account for approximately half of the world’s electricity consumption. To support global climate initiatives, RE100 developed a guidance framework to help these sectors transition to 100% renewables. There are strict criteria to be a RE100 company including annual electricity demand of 100GWh; and making public commitment to sourcing 100% renewables throughout their entire operations publicly along with a target year. The guidelines help companies specify targets and target dates, with yearly reporting required to assess progress against their target.

The RE100 Technical Advisory Group (TAG) defines renewable electricity as “electricity generated through biomass or biogas, geothermal, water, solar, and wind energy resources. Renewable electricity sources include:

  • Self-generated facilities (on-site or off-site)
  • Third-party purchases from on-site installations
  • Direct line access to off-site generators with no grid transfers
  • Direct purchase from off-site grid-connected generators (ex: Power Purchase Agreement (PPA))
  • Green electricity from energy suppliers
  • Unbundled Energy Attribute Certificate (EAC) purchases
  • Default-delivered renewable electricity from the grid supported by Energy Attribute Certificates
  • Default delivered renewable electricity from 95%+ renewable grids

RE100’s annual reporting has historically used two primary reporting routes:

  1. The CDP Climate Change Questionnaire
  2. The RE100 Spreadsheet

However, in 2022, RE100 retired its spreadsheet for reporting, as the CDP Climate Change Questionaire now covers and captures the same information.