The Taiwan Banker

The Taiwan Banker

Climate reporting: Is transparency the answer to imperfection?

Climate

2023.02 The Taiwan Banker NO.158 / By Neil Hodge

Climate reporting: Is transparency the answer to imperfection?Banker's Digest
The measurement and reporting of greenhouse gas (GHG) emissions within supply chains (so-called ‘Scope 3’ emissions) is a fundamental component of plans to address climate change. However, for those expecting more clarity on how these emissions should be measured and reported, the recent COP27 may have been a missed opportunity. Indeed, the Sharm el-Sheikh Implementation Plan, the final document to come out of the conference, does not contain any reference to Scope 3 emissions, or supply chains at all, despite the fact that they account for upwards of 60 percent annual global emissions.[1] However, Scope 3 reporting was not ignored altogether. The Report from the United Nations’ High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities, released on 8 November, does state that companies need to disclose details on Scopes 1,2 and 3 of their emissions if they are to understand the environmental impact of their value chains properly, as well as be up front about what steps they are taking to fill in the gaps where data is missing. Larger companies should also help smaller firms in their supply chains decarbonise their operations, the report said.[2] Taking responsibility Also, much of the discussion around Scope 3 reporting at COP27 was in relation to ‘carbon insetting’ – the use of projects to sequester emissions by implementing nature-based solutions such as reforestation and renewable energies within the companies’ own value chains. Carbon insets are seen as an important tool to help address Scope 3 emissions because they ensure that businesses take direct responsibility for the emissions in their own supply chain. Some companies are already grasping the nettle. On 16 November major banks Itaú, Santander and Rabobank, along with large agribusiness players Marfrig and Suzano, announced the creation of Biomas, a new company focused entirely on the restoration, conservation and preservation, by 2025, of forests in Brazil that have been impacted by the production of meat, soy and palm oil. As part of the scheme, all companies involved are committed to disclosing their Scope 3 emissions by June 2024.[3] Emerging standards and requirements More widely, announcements made in the run-up and alongside the conference suggest that improving Scope 3 emissions reporting and disclosure is still a priority and that there is little doubt that governments, regulators, standard-setters, NGOs, and investors expect organisations to continue to push for better reporting, data gathering, and more transparency. For example, on 25 October the UK’s Financial Conduct Authority (FCA) proposed new rules to prevent ‘greenwashing’ by financial services firms, focusing in particular on how terms terms such as ‘ESG’, ‘green’ and ‘sustainable’ are used to sell products and services that in practice do not measure up to such claims. The FCA plans to introduce different categories of sustainable investment product labels, including one for products improving their sustainability over time, as well as imposing limits on the future use of sustainability terms so that only products that qualify under the FCA’s definitions can use them.[4] A final version of the rules will be published by the end of June 2023. On 8 November standard setter the International Sustainability Standards Board (ISSB) announced that it will include Scope 3 emissions in its sustainability standards. On 21 October it voted unanimously to require company disclosures on Scope 1, Scope 2 and Scope 3 greenhouse gas (GHG) emissions, applying the current version of the GHG Protocol Corporate Standard, widely regarded as the key standard to measure against.[5] Elsewhere, on 1 November the Glasgow Financial Alliance for Net Zero (GFANZ), a coalition of financial services firms and institutions, including the London Stock Exchange, released its recommended pan-sector framework for Financial Institution Net-Zero Transition Planning and guidance on measuring portfolio alignment, which states that firms need to strive towards better Scope 3 reporting.[6] On 17 November 19 countries, including the US, UK, Germany, France, and Australia, committed to achieve a zero-carbon public sector by 2050. By implication, improving Scope 3 reporting will have to be part of the equation for suppliers who want to win large government contracts.[7] Momentum is gathering Experts believe momentum is gathering for better Scope 3 reporting, as well as greater clarity and consistency in regulatory requirements. According to Bridget Beals, Partner and Co-Head of Climate Risk and Strategy at professional services firm KPMG in the UK, ‘integration of the ISSB’s climate-related disclosures standard into the CDP [a key benchmark developed by green NGO the Carbon Disclosure Project] means we are starting to see greater cohesion on climate and emissions reporting more generally. This is going to lead to big improvements in the consistency and quality of reported data and reduce overall burden.’[8] ‘For more than a decade, companies have relied on voluntary programmes like CDP to transparently interpret the GHG Protocol to enhance their disclosures, but we are beginning to see growing calls to make full Scope 3 disclosure mandatory gather speed,’ says Beals. ‘The key issue for most is getting started on that journey and striving for continual improvement. The emerging recommendations make a start on closing the gap on Scope 3 emissions reporting and build a good foundation for potential mandatory reporting in the future.’ Daniel Usifoh, Co-Founder of tech firm Axiom Sustainability Software, says that ‘the consensus is that, if we are to deliver on key environmental goals, mandatory reporting should replace voluntary reporting when it comes to Scope 3.’ However, he adds, ‘It’s impossible to cut emissions without measuring them. Having access to clear, tangible emissions data is essential, but Scope 3 emissions are notoriously tricky to measure.’ Collaboration Scope 3 quantification can be notoriously difficult, say experts, as very few companies have a good understanding and visibility of the carbon emissions across their supply chain. While world-class standards, such as the GHG Protocol, offer guidance on how to measure Scope 3 emissions, companies complain they do not take into account the practical difficulties of trying to locate, compile, and interrogate the data sufficiently to provide any meaningful – or accurate – insight. Leonardo Marques, Associate Professor in the Information Systems and Supply Chain Management department at France’s Audencia Business School, says that countries will only reach their targets of cutting carbon emissions by 50% by 2030 and 100% by 2050 if companies get their Scope 3 reporting right. Most companies, however, have ignored the need: of the 5,900 firms carrying out reporting in line with CDP only around 300 included their supply chain members and disclosed specific targets and progress made under Scopes 1, 2, and 3. To move forward, says Prof Marques, ‘companies need to invest simultaneously in governance to engage with their supply chain members and jointly develop carbon reduction projects, and technology to implement solutions to trace Scope 3 emissions and disclose structured reports that include both targets and progress against those targets.’ A risk-based approach Simon Geale, Executive Vice President, Procurement at Proxima, a procurement supply chain consultancy, says ‘companies should remember that the ultimate goal is to achieve net-zero, not merely to report on it’. He recommends that companies take a measured, risk-based approach to measuring Scope 3 emissions rather than trying to attempt to tackle the entire supply chain from the outset. ‘Say a company has 10,000 suppliers. Around 200 of these will be responsible for most of the company’s supplies, as well as emissions. The company would do better concentrating on measuring and reporting on emissions created by those 200 companies and explaining why they were targeted, while also committing to disclose how it is intends to provide more detailed information on the remaining 9,800 suppliers in the future,’ he says. Beals agrees that the key issue is for companies to be transparent about their progress, as well as their lack of it. ‘Despite complexities, companies should not let perfection be a blocker to action,’ she says. ‘The answer to imperfection is transparency. Companies should be transparent about gaps, identify areas where progress is needed and have a clear plan in place with assigned responsibilities and realistic timescales. Key to all of this is viewing Scope 3 as an iterative process that prioritises data collection where material but not at the expense of actual decarbonisation.’This article was first published by The International Compliance Association (ICA), the leading professional body for the global regulatory and financial crime compliance community, www.int-comp.org Neil Hodge is a freelance business journalist and photographer based in Nottingham, United Kingdom. He writes on insurance and risk management, corporate governance, internal audit, compliance, and legal issues. [1] UNFCC, Sharm el-Sheik Implementation Plan: https://unfccc.int/sites/default/files/resource/cop27_auv_2_cover%20decision.pdf – accessed November 2022 [2] United Nations, Integrity Matters: Net Zero Commitments By Businesses, Financial Institutions, Cities, Region: https://www.un.org/sites/un2.un.org/files/high-level_expert_group_n7b.pdf – accessed November 2022 [3] Suzano, ‘Itaú Unibanco, Marfrig, Rabobank, Santander, Suzano and Vale unite to restore, conserve and preserve 4 million hectares of native forest in Brazil’, 16 November 2022: https://www.suzano.com.br/en/itau-unibanco-marfrig-rabobank-santander-suzano-and-vale-unite-to-restore-conserve-and-preserve-4-million-hectares-of-native-forest-in-brazil/ – accessed November 2022 [4] Financial Conduct Authority, Sustainability Disclosure Requirements (SDR) and investment labels, October 2022: https://www.fca.org.uk/publication/consultation/cp22-20.pdf – accessed November 2022 [5] IFRS, ‘ISSB at COP27: CDP to incorporate ISSB Climate-related Disclosures Standard into global environmental disclosure platform’, 8 November 2022: https://www.ifrs.org/news-and-events/news/2022/11/cdp-to-incorporate-issb-climate-related-disclosure-standard-into-global-environmental-disclosure-platform/ and IFRS, ‘ISSB unanimously confirms Scope 3 GHG emissions disclosure requirements with strong application support, among key decisions’, 21 October 2022: https://www.ifrs.org/news-and-events/news/2022/10/issb-unanimously-confirms-scope-3-ghg-emissions-disclosure-requirements-with-strong-application-support-among-key-decisions/ – both accessed November 2022 [6] GFANZ, ‘GFANZ Launches Critical Resources for Financial Institutions to Convert Net-Zero Ambitions to Actions, Calls on G20 Governments to Close Climate Policy Gap’: https://www.gfanzero.com/press/gfanz-launches-critical-resources-for-financial-institutions-to-convert-their-net-zero-ambition-into-action/ – accessed November 2022 [7] The White House, ‘CEQ Launches Global Net-Zero Government Initiative, Announces 18 Countries Joining U.S. TO Slash Emissions From Government Operations’, 17 November 2022: https://www.whitehouse.gov/ceq/news-updates/2022/11/17/ceq-launches-global-net-zero-government-initiative-announces-18-countries-joining-u-s-to-slash-emissions-from-government-operations/ – accessed November 2022 [8] United Nations, Integrity Matters: Net Zero Commitments By Businesses, Financial Institutions, Cities, Region