Currently, there are very limited reporting requirements around carbon emissions. This has led to inconsistent reporting between companies with some companies providing minimal-scope carbon footprints whilst other organisations dedicate resources to detailed carbon footprinting.
But this is set to change; the International Sustainability Standards Board (ISSB) have released two draft standards that will be issued internationally in 2023 that set out the reporting requirements for sustainability and climate change.
The UK Government has disclosed its intention to integrate these standards into the UK GAAP reporting requirements in due course.
Who will be impacted by the ISSB standards?
The ISSB has been put together by the IFRS (International Finance Reporting Standards) and these standards are used by companies to provide globally comparative Financial Statements. Companies operating in multiple countries will tend to report under the IFRS reporting framework to ensure transparency, accountability and efficiency.
The Standards have been developed so that they can be applied alongside existing reporting frameworks such as the IFRS and UK GAAP. The UK Government has not yet disclosed how quickly it intends to adopt them and apply them to companies, but we can assume it will start at some point in 2023 following their final release by the ISSB. If they are consistent with their rollout of the TCFD (Taskforce for Climate-related Financial Disclosures) recommendations, we can assume they will start with listed companies, followed by large companies and then small and medium entities.
What do companies currently have to do?
In the UK there are two pieces of sustainability reporting regulation that companies are subject to.
Large companies, partnerships and listed companies that use more than 40MWh of energy are required to report under the Streamlined Energy and Carbon Reporting Regulations (SECR). This requires them to report their scope 1, 2 and partially scope 3 CO₂ emissions in their financial statements. Companies are also required to disclose what they have done in the year to reduce their carbon emissions, and an industry-appropriate intensity KPI. This could be Emissions per £ Turnover, or per kg of products.
The second piece of regulation that we have in the UK is the Taskforce for Climate-related Financial Disclosure recommendations (TCFDs). These recommendations were made statutory for UK-listed companies, Public Interest companies and financial institutions in April 2022. The TCFD recommendations cover four main themes: Governance, strategy, risk management and metrics & targets. The ISSB standards replicate the TCFD themes as the basis for the reporting but are substantially more detailed and prescriptive in the information required to be compliant.
What will organisations need to do under the ISSB Standards?
Here we’ve set out a bit more detail around each of the main themes:
Organisations are required to disclose who is responsible in the company for overseeing sustainability and climate-related risks and opportunities. In addition, the frequency, training and process that both the board and management undertake to consider these risks also needs to be disclosed.
How organisations plan for sustainability and climate-related risks is important. The ISSB standards require organisations to disclose and quantify how the risks identified could impact their business models, strategy, cash flows, access to finance and cost of capital over the short, medium and long term. That includes an organisation’s value chain, decision-making and resilience.
To put this into context, imagine you’re a food manufacturer -what natural resources does your company use? Where do your ingredients come from? Are those locations likely to be impacted by drought or extreme weather events? How is that likely to impact the cost of your ingredients? If your product is meat-based, do you anticipate changing that or seeing reduced sales as a result of changing dietary habits in a low-carbon economy?
Quantifying the impact of these scenarios over the immediate, medium and long term is a key element of the ISSB standards, setting out what the material impacts are and why you have chosen certain scenarios to test resilience against.
3) Risk Management
The standards require disclosures that set out how sustainability and climate-related risks are identified and assessed, and whether those processes are consistent with the wider risk management process throughout the business.
Part of this disclosure is ensuring that sustainability and climate-related risks are not considered to be separate from the operations of the organisation, but are integrated with the entity’s overall management process.
4) Metrics and Targets
The standard requires an organisation to set out the KPIs (Key Performance Indicators) they are using to monitor their performance against sustainability and climate-related targets. Under the climate-related standard, this explicitly includes carbon emissions for scopes 1, 2 and 3, and unlike the current SECR requirements, the scope 3 emissions must include upstream and downstream emissions with a clear statement of the scope 3 emissions categories that have been estimated.
The organisation is also required to state what internal carbon pricing is used and whether targets are absolute or intensity based.
This is particularly pertinent, as recent greenwashing headlines have pointed out (quite correctly) that intensity ratios do not always provide a transparent source of information.
Within the target requirement is the requirement for a transition plan, demonstrating how the organisation plans to operate in a low-carbon economy. Example and best practice transition plans are currently being devised by a specialist UK government task force.
How can we help?
As larger companies are required to increase and tighten their sustainability and climate-related reporting, they will in turn require information from their supply chains, increasing the requirement on small and medium-sized organisations to understand their carbon footprints and provide transition plans for a low carbon economy to show that they will be a compatible partner in our Net Zero world.
At City Science, we can help organisations calculate their carbon footprints, or provide third-party verification of the carbon footprint calculated.
We can help you to build your transition plan (as required in the standards) setting out your organisation’s strategy for a low carbon economy and identifying key risks and opportunities.
Building on our team’s incredible modelling skills, we can provide you with a scenario analysis that will identify and quantify risks to your business as a result of climate change and resource constraints.
In the last few years, organisations have been dogged by unexpected risks, but climate change and sustainability doesn’t need to be one. Now is the time to understand what a low-carbon future could look like for your business and what you need to do to get there. If you’d like more information on anything discussed in this article, or to start understanding your sustainability and climate-related risks, you can contact me at firstname.lastname@example.org