GHG Emissions: Past, Present and Future

One of my last speeches as Co-Vice Chair of the Trustees of the IFRS Foundation was on GHG emissions, which arguably is the hardest bit in sustainability reporting. To make this palatable, I started by sharing a few stories. 

As a member of the task force set up by the IFRS Foundation three years ago to explore tackling sustainability reporting, I was privileged to consult with a number of experts, including Dr. Ma Jun from China. He advised us that we had to get governments, regulators, and policymakers behind this initiative. We listened and delivered on this advice when the establishment of the ISSB was announced at COP26 in November 2022, amidst fanfare and with the support of the G7, G20, IOSCO, the Financial Stability Board, and ministers and central bank governors from more than 40 jurisdictions! We need all their continuing support.

Another person we spoke to was Mary Schapiro, who made a very strong impression on me as she was almost shouting over the Zoom call when we spoke to her, saying, “Our world is on fire, and you need to act urgently!”

On 25 October 2024, China Daily published an article with a very timely title for us all – “Global target unmet, what next?” 

Acting urgently, we did. ISSB’s inaugural set of two standards, S1 and S2, took only 18 months, while IASB insurance standard (IAS 17) took 10 years (or 120 months - which sounded even longer!). We said climate first (so S2 is our climate related standard), but not climate only. ISSB is also working hard on research projects on biodiversity and human capital.

As part of the mission to develop a global baseline and provide global comparability to investors on climate related disclosures, ISSB S2 standard requires reporting on Scope 1, 2 and 3 emissions. Simply put, Scope 1 is what you burn (fuel you pay for or use to power equipment), Scope 2 is what you buy (whether it is heat, electricity, steam or cooling like air conditioning), and Scope 3 is upstream and downstream activities throughout the value chain, each measured in accordance with the GHG Protocol Corporate Standard.

S2 also asks for disclosure of how and why a company has used specific inputs, assumptions, estimation techniques, and changes to this information.

Scope 3, which is known to be the most challenging, is required across 15 categories but only when the information is material - something many don't know or forget! 

So, why follow GHG protocol?

Well, ISSB didn’t want to reinvent wheels. We wanted to hit the ground running and build on all the great work others have done in the field. Our focus was to consolidate, streamline, harmonise, not to fragment and definitely not to compete in what is already a complex global landscape. The GHG Protocol was created 26 years ago, in 1998, by the World Resources Institute and the World Business Council for Sustainable Development to develop a standard for estimating carbon footprints at an organisational scale. It provided a universal language for companies to measure and manage GHG emissions under voluntary frameworks.

Specifically, Scope 3 Corporate Value Chain Standards were published in 2011 and Scope 2 guidance took effect in 2015. Today, I understand that 90% of Fortune 500 companies use the GHG Protocol directly or indirectly through GHG Protocol-based programs. However, after extensive outreach, consultation, and feedback, ISSB now allows the use of national emission protocols if an entity is required by a jurisdictional authority to use an alternative method of measuring greenhouse gas emissions. So, ISSB listened, and its standard S2 reduces duplicative reporting.

Yes, there is a concept of financed emissions now in S2. This term, “financed emissions”, was actually first popularised by a group of bankers, investors, and fund managers from different continents, who subsequently came together to form the Partnership for Carbon Accounting Financials (PCAF) in 2019. 

The concept of “financed emissions” requires asset managers, commercial and investment banks, and insurance companies to report on the emissions of their investments, underwriting, and lending activities. Their carbon footprint is essentially the footprint of their customers to the extent they engage with them in these activities - it is as the word “financed emissions” mean naturally. 

Why do investors care? Investors who invest in, say, a bank want to understand the risk profile of their customers. If all the bank does is to lend money to businesses which are highly exposed to physical risks, such as operating in areas prone to severe flooding, investors should know. 

We know scope 3 is not easy. This is particularly challenging when developing a transitional plan or disclosing financed emissions, as companies need to rely on their clients and counterparties’ data and information to come up with an accurate calculation of Scope 3 emissions and work out their strategies and plans for the future. Therefore, a range of reliefs, guidance, and supports have been made available by ISSB to help everyone get started on this journey. 

It is almost like in life - we are all works in progress. So, with any project, the key is to start, and you are allowed to make your best estimation.  I was told by investors that it is better for companies to make estimates based on what is reasonable and supportable without undue cost and effort than to have analysts guess the data, or information for you. 

Something that has been around for a quarter of a century has stood the test of time, but I believe that the leadership and team at GHG Protocol are not resting on their laurels and are not deaf to criticism. These criticisms range from data measurement and quality, data reliability, and their independence (are they too close to the oil industries?), to funding sources, due process, double counting of the same emissions, and too much reliance on industry and regional averages, to name a few. The GHG Protocol collected feedback from the public between November 2022 and March 2023, and anticipates publishing draft standards or guidance for public consultation in 2025, with a view to having updated standards ready in 2026. 

There has been further coordination between the IFRS foundation and the GHG Protocol. An MOU was signed in June 2024 to put in place governance arrangements so that ISSB is actively engaged in updates and decisions made in relation to the GHG protocol standards and guidance. 

So, when comments and feedback on the GHG Protocol are discussed, ISSB will have a seat at the table. I hope that the updated GHG Protocol will facilitate the disclosure of high-quality data and year by year comparison for investors, especially by corporates in supply and value chains in emerging markets, including China. 

I also hope that the disclosure of GHG emission, in accordance with GHG Protocol, will help to reinforce the global baseline that ISSB is continuing to work very hard (together with all of you) to adopt, implement, and encourage all corporates to use.