ISSB Confirms Scope 3 Included in IFRS’ Climate Disclosure Standard: How CFOs & Heads of Sustainability Can Prepare
A number of challenges are inherent with Scope 3 emission reporting—measuring and tracking CO2 for what is outside of an organization’s control—but it is becoming more necessary to invest in a strategy for reporting and reducing these carbon emissions. The ISSB recently announced Scope 3 emissions would be part of the IFRS’ climate disclosure standard. This will bring a new wave of effort into Scope 3 emissions as companies follow the direction of the ISSB. CFOs and Heads of Sustainability should prepare now to meet Scope 3 disclosure standards and navigate the challenges often found with carbon accounting.
What is the ISSB and IFRS Climate Disclosure?
The ISSB is the International Sustainability Standards Board, founded in November 2021 by the IFRS Foundation. IFRS refers to the International Financial Reporting Standards that bring consistency to the accounting of publicly traded companies around the globe. The IFRS Foundation covers general subject matters of accounting and reporting financial position and performance. At the same time, the ISSB works specifically with sustainability disclosure standards, including general sustainability financial information and climate-related sustainability information, which each help determine the enterprise value of an entity.
The ISSB deciding that Scope 3 greenhouse gas emissions are to be included in the IFRS Foundation’s climate-related disclosure standards means many companies must now assess their Scope 3 reporting methodologies. On the global stage, over time, more focus on Scope 3 emissions will help to improve the quality of data and reporting as more public companies invest in carbon accounting and even private companies that use the IFRS standards. This will increase awareness of carbon accounting practices and help sustainability to be a forefront priority for more enterprises.
We can expect the ISSB to finalize the new standards in early 2023. Until then, many companies will want to start preparing for this Scope 3 reporting.
What are Scope 3 GHG emissions?
Scope 3 includes the greenhouse gas emissions that result from activity within the value chain but are not directly controlled by the organization—for example, purchased goods and services, including outsourced logistics. Scope 1 covers direct emissions of the organization from their own processes, like manufacturing and company-owned transportation, and Scope 2 covers indirect emissions from purchased electricity, steam, heating, and cooling. For many companies, anywhere from 65 to 95% of their total CO2 footprint can be attributed to Scope 3 emissions. It’s important to note that while the Scope 3 emissions of one organization are the Scope 1 emissions of another, one of the biggest challenges is getting adequate data from those not keeping pace with the demands for CO2 reporting.
What is Carbon Accounting, and What are the Current Challenges?
Carbon accounting, or greenhouse gas accounting, is how organizations measure the greenhouse gasses they emit. Heads of Sustainability use this vital data to manage efforts to reduce carbon emissions, starting with their baseline and tracking progress. Stakeholders are also interested in carbon accounting, for example, investors who will benefit from the IFRS’ climate disclosure standard.
The problem with carbon accounting is it’s not a simple science. Companies don’t have a way to collect primary data for each and every source of greenhouse gasses, like measuring an engine’s output. One of the reasons is the sheer number of individual sources that must be measured. Another is that organizations rely on other companies for their Scope 3 emissions data. There are emissions upstream and downstream of the company’s position in the value chain. Upstream emissions depend on their suppliers, and downstream emissions come down to each customer they sell to. For both, the company must consider each tier of supplier and customer.
Rather than attempt the impossible of collecting primary data for every Scope 3 emissions source, organizations turn to alternative methodologies—default data and modeled data. However, default data presents its own difficulty—a lack of precision. Default data is generic, averaged data that organizations use when they cannot access more precise data. If their data is not exact, it would be impossible for an organization to have a solid understanding of its carbon footprint and to take the right action to reduce it.
The Problem of Default Data and Averages
When default data is used in place of primary data for Scope 3 emissions, there are drawbacks for the organization—namely that imprecision creates problems measuring and understanding their carbon emissions and plan of action. However, wider consequences also impact the entire industry using default data.
Default data, being averages, changes as individual organizations evolve. If one organization takes steps to reduce carbon emissions, its primary data reflects the decrease, as does the industry’s default data. This makes it possible for any organization to ride the coattails of others. That organization’s reporting of their Scope 3 emissions could show a reduction in carbon emissions, even if they took no action. On paper, they would benefit from the sustainability efforts of those around them—even their competitors.
If this were a matter of primary data, an organization would rightly benefit from the sustainability efforts made by those upstream and downstream of them, even without any direct action taken on their own part. However, when dealing with default data, the industry average may be so disconnected from a particular organization that it does not reveal any truth about the sustainability progress of that organization using the data.
With Scope 3 reporting becoming more standard, as with the IFRS’ climate disclosure standard, more organizations are likely to lean on default data because using it doesn’t require any research or investment.
However, there is an alternative—modeled data—that does not use averages as default data does. Modeled data brings accuracy and precision back to the equation. It uses a high degree of specificity that distinguishes it from low-quality averages. It takes into account identifiers for ships and aircraft, carriers, services, equipment types, actual distances, and actual speeds to get the closest value possible to the actual CO2 emission instead of a number heavily rounded by averages.
How CFOs, Head of Sustainability, and Logistics Teams Can Work Together to Meet Carbon Footprint & ESG Goals
CFOs recently have more to think about with ESG and sustainability goals, in addition to finance, and they must approach these priorities with a high-level strategy from the onset. Working with the Head of Sustainability and logistics teams, the key is first to establish the strategy for reporting, followed by how to take real action based on the priorities. Despite being reliant on outside organizations for Scope 3 emissions, getting on the same page internally can be more effective when educating and collaborating with their suppliers and customers on carbon accounting.
With a plan for approaching the reporting process, leadership must then have a plan for how to make educated decisions, as informed by the data. How is the decision made if the choice is between cost, delivery speed, and carbon emissions for a shipment? At what point do the other factors outweigh the top priority? For example, if a greener shipment is only slightly more costly, it may be an easy decision. However, if the cost is significantly more to save on emissions, decision-makers must determine the inflection point. There are many variables in these decisions, and the organization must have data visibility and internal clarity on choosing based on what they need.
How to Get Accurate & Precise Reporting
The first step to quality reporting is starting with a baseline. The organization must fully understand where most of its emissions come from and where it can target its efforts. The baseline can be established using the methodologies discussed, with modeled data as the highly preferred option over default data. This methodology can continue to support the organization’s reporting as they take action to reduce its carbon footprint and track its progress.
Accuracy is clearly the goal in reporting, and organizations must be careful not to sacrifice precision by using averages. With a methodology as Searoutes employs, using modeled data, organizations can be sure they are getting both accuracy and precision. The challenges of carbon accounting make it crucial to have modeled data and, as the most detail-driven methodology, to have supporting technology to make the reporting process easier.
As a technology-first company and the only such provider of freight shipping emissions data, Searoutes gives organizations an easy-to-use API that integrates with existing systems. Searoutes also offers planning capabilities, allowing shippers to determine the optimal shipping route for their needs. To learn more about Searoutes and the tools provided to ensure quality carbon accounting, reach out to us today to schedule a demo.