This week, the International Sustainability Standards Board (ISSB), the organization tasked with developing a comprehensive global baseline of sustainability disclosures for the capital markets, announced a unanimous climate decision that under its guidelines, companies will be required to use climate-related scenario analysis as part of their ESG disclosures.
Last month, the ISSB confirmed that reporting on Scope 3 emissions – those Greenhouse Gas (GHG) emissions originating in a company’s value chain, both upstream and downstream – will be included as part of required company disclosures under its new standards.
What the ISSB Announcement Means
In its efforts to clarify global climate and sustainability-related reporting standards for companies, the ISSB asserts that companies should be mandated to measure, report, and manage their climate related impacts. In addition to a host of required metrics, including Scope 1 and Scope 2 emissions, the ISSB makes it clear that under its standards companies will need to report on detailed information around the following climate-related matters:
- Scope 3: The GHG Protocol Corporate Standard classifies a company’s GHG emissions into three “scopes”. Reporting requirements around Scope 3 emissions are one of the most controversial aspects of the emerging disclosure requirements. These emissions very often account for most of many companies’ carbon footprints but are typically the hardest to track and calculate as they occur outside of the direct control of a company and its operations, in areas such as supply chains, or in their customers’ use of their products. Many larger companies have pushed back against the inclusion of Scope 3 due to the challenges of accounting for these emissions.
- Climate Related Scenario Analysis: According to TCFD guidance which will underpin the ISSB standards, scenario analysis is a tool to help companies make strategic and risk management decisions under complex and uncertain conditions such as climate change and to assess the strategic and financial implications of potential climate-related risks and opportunities, including both transition risk and physical risk.
Why the ISSB Announcement Matters
This is a significant development, as the proposed U.S. Securities and Exchange Commission (SEC) formal structure for how companies disclose climate-related risks and activities is heavily influenced by the ISSB standards. We anticipate that the SEC will have a ruling on any mandatory climate reporting for U.S.-based companies in late 2022 or early 2023.
Regardless of pending regulatory pressures, this year’s EY.com survey of public and private CEOs, found that, “73 percent of US respondents say they have already adopted ESG for strategic reasons – such as competitive advantage and lower cost of capital.” This means that more and more companies are voluntarily disclosing ESG measures and adopting them as one of many expectations for doing business today.
How the ISSB Announcement Impacts Mid-Market Companies
The latest legislations, ISSB announcements, and coming SEC ruling will accelerate climate disclosures and ESG reporting requirements. Even private companies that are not required to comply with the SEC requirements should be paying close attention to the tone shift around ESG and start preparing now for a future demanding greater transparency around ESG issues.
From a climate perspective, even companies with no plans to go public will eventually be affected. The SEC mandate for climate disclosures will not only be mandatory for public companies but is expected to impact mid-market companies as well due to their supplier relationships with public companies. As publicly held companies begin reporting Scope 3 emissions (indirect, both upstream and downstream), either due to regulations or by choice, any private company that is a part of its supply chain, will need to provide emissions data as part of the public company’s Scope 3 reporting.
The mandates will further be accelerated by the $386B in tax credits, incentives and funding in the Infrastructure Investment and Jobs Act across sectors and will surely drive more and new companies to take action to decarbonize, make their operations energy efficient, measure, and report their impact. The EPA will become more powerful as GHG emissions are categorized as air pollution by the IRA, meaning that the EPA can now release more and stricter regulations targeting specific industries.
What Climate Actions Can Mid-Market Companies Take Now
In the face of increased focus on emissions measurement and ESG reporting from various stakeholders, mid-market companies should leverage the tax credits for decarbonization of their business and prepare for climate disclosures. For companies unsure of how to begin on climate risk, we recommend the following actions:
- The first step is to assess your company’s climate risk. This starts with evaluating if and how climate impacts your company’s business model today and how a transition to a lower carbon economy will impact your future business model.
- Second is to understand the clean energy and clean transportation related tax credits and incentives in order to design your climate, energy, and logistics strategies accordingly with the potential to reduce costs up to 30% (as per this White House Report).
- Gear up for a tighter regulatory regime from the EPA (now that GHG emissions are declared as pollution) and prepare for more questions around energy/climate strategy in investor conversations and enhanced expectations around disclosures on GHG emissions, climate related risks and broader ESG issues.
- Prepare for detailed emissions calculation and reporting which may require an investment in technology and tools to streamline the journey toward compliance with regulatory and customer pressures.
Mid-market companies should look at building an ESG program and measuring, reporting, and managing climate-related matters as an investment in longevity, and an opportunity to provide accountability and leadership around these pressing issues with external stakeholders.
The bottom line for mid-market company leaders is simple: now is the time to begin thinking about climate reporting and how ESG fits into your long-term business strategy. Good.Lab helps clients build an ESG program, unpack the landscape of climate disclosures, and has designed a GHG Emissions Calculator that simplifies the process of measuring Scope 1, 2 and 3 GHG emissions, so you can quickly and confidently arrive at an estimate.
