You’ll probably see 100 posts about the new ISSB standards, but let’s do a quick breakdown for context:
- There’s a not-for-profit called the IFRS Foundation that was set up to develop high-quality, understandable, enforceable and globally accepted accounting and sustainability disclosure standards.
- They have a standards setting board called the ISSB, they were tasked with setting standards that will result in a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets (basically what should this company be disclosing about its emissions, exposure to climate risk etc and how, so its apples to apples globally).
- Now they have just released two inaugural standards, IFSR S1 and IFSR S2.
- Each jurisdiction will then adopt these at which time they will become normal accounting standards - so, in a nutshell, carbon accounting is on the way to just being “accounting”, sumday has come sooner than you may have expected.
Speaking of Sumday, we provide accounting software designed by and for accountants to support businesses with carbon accounting. The ISSB standards say a lot of things (we’ll break those down over the coming weeks) but as it relates to carbon accounting - here’s some of the key points you need to know.
In a nutshell: Materiality judgements are specific to individual organisations. An organisation should work with stakeholders to understand what topics are material to them in terms of sustainability related topics. For most organisations Climate and Greenhouse Gas emissions will be a material topic.
How Sumday helps: Sumday provides the carbon accounting platform for a business to understand its GHG emissions as well as the assumptions and source data associated with the calculation of emissions. By providing transparency to stakeholders the organisation can ensure climate is adequately understood as part of the materiality assessment.
What it actually says:
B13 Paragraph 17 requires an entity to disclose material information about the sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. Materiality of information is judged in relation to whether omitting, misstating or obscuring that information could reasonably be expected to influence decisions of primary users of general purpose financial reports, which provide information about a specific reporting entity.
B14 The decisions of primary users relate to providing resources to the entity and involve decisions about: (a) buying, selling or holding equity and debt instruments; (b) providing or selling loans and other forms of credit; or (c) exercising rights to vote on, or otherwise influence, the entity’s management’s actions that affect the use of the entity’s economic resources.
B15 The decisions described in paragraph B14 depend on primary users’ expectations about returns, for example, dividends, principal and interest payments or market price increases. Those expectations depend on primary users’ assessment of the amount, timing and uncertainty of future net cash inflows to the entity and on their assessment of stewardship of the entity’s economic resources by the entity’s management and its governing body(s) or individual(s).
B16 Assessing whether information could reasonably be expected to influence the decisions made by primary users requires consideration of the characteristics of those users and of the entity’s own circumstances.
B17 Sustainability-related financial disclosures are prepared for primary users who have reasonable knowledge of business and economic activities and who review and analyse information diligently. At times, even well-informed and diligent users may need to seek the aid of an adviser to understand sustainability-related financial information.
B18 Individual primary users may have different, and sometimes even conflicting, information needs and desires. Information needs of primary users may also evolve over time. Sustainability-related financial disclosures are intended to meet common information needs of primary users
Topic: Measurement Uncertainty
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In a nutshell: You need to disclose enough information so that people reading your report will know where major uncertainties lie in your footprint (that’ll be scope 3 if you haven’t got any primary data from your supply chain for example).
How Sumday helps: Sumday is fully transparent as to the source of your emissions factors. It also clearly shows whether spend or activity based emissions factors were used. Soon, you’ll see an uncertainty % in your platform as well, with details on how this was calculated.
What it actually says:
77 An entity shall disclose information to enable users of general purpose financial reports to understand the most significant uncertainties affecting the amounts reported in its sustainability-related financial disclosures.
An entity shall: (a) identify the amounts that it has disclosed that are subject to a high level of measurement uncertainty; and (b) in relation to each amount identified in paragraph 78(a), disclose information about: (i) the sources of measurement uncertainty—for example, the dependence of the amount on the outcome of a future event, on a measurement technique or on the availability and quality of data from the entity’s value chain; and (ii) the assumptions, approximations and judgements the entity has made in measuring the amount.
81 The type and extent of the information an entity might need to disclose vary according to the nature of the amount reported in the sustainability-related financial disclosures—the sources of and the factors contributing to the uncertainty and other circumstances. Examples of the type of information an entity might need to disclose are:
(a) the nature of the assumption or other source of measurement uncertainty; (b) the sensitivity of the disclosed amount to the methods, assumptions and estimates underlying its calculation, including the reasons for the sensitivity; (c) the expected resolution of an uncertainty and the range of reasonably possible outcomes for the disclosed amount; and (d) an explanation of changes made to past assumptions concerning the disclosed amount, if the uncertainty remains unresolved.
Topic: Climate-related metrics
In a nutshell: The standards say you need to disclose scope 1, 2 and 3 greenhouse gases in accordance with the GHG Protocol.
How Sumday helps: That’s exactly what Sumday helps you do, in line with the GHG Protocol. There’s also an 18 part course on how to measure emissions in line with the GHG Protocol.
What it actually says:
29 An entity shall disclose information relevant to the cross-industry metric categories of: (a) greenhouse gases—the entity shall: (i) disclose its absolute gross greenhouse gas emissions generated during the reporting period, expressed as metric tonnes of CO2equivalent (see paragraphs B19–B22), classified as:(1) Scope 1 greenhouse gas emissions; (2) Scope 2 greenhouse gas emissions; and (3) Scope 3 greenhouse gas emissions; (ii) measure its greenhouse gas emissions in accordance with theGreenhouse Gas Protocol: A Corporate Accounting andReporting Standard (2004) unless required by a jurisdictional authority or an exchange on which the entity is listed to use a different method for measuring its greenhouse gas emissions (see paragraphs B23–B25);
Topic: The measurement approach set out in the Greenhouse GasProtocol
In a nutshell: You have to disclose the measurement approach used under the GHG Protocol and the reason.
How Sumday helps: Sumday’s practical course walks you through each of the possible methods and how to go about making decisions so you can disclose that. Keep an eye out for new reports being released that will also confirm the method you chose.
What it actually says:
The Greenhouse Gas Protocol: A Corporate Accounting and ReportingStandard (2004) includes different measurement approaches that an entity might use when measuring its greenhouse gas emissions. In disclosing information in accordance with paragraph 29(a)(iii), the entity is required to disclose information about the measurement approach it uses. For example, when the entity discloses its greenhouse gas emissions measured in accordance with the Greenhouse Gas Protocol: A Corporate Accounting andReporting Standard (2004), the entity is required to use the equity share or control approach. Specifically, the entity shall disclose: (a) the approach it uses to determine its greenhouse gas emissions (for example, the equity share or control approach in the Greenhouse GasProtocol: A Corporate Accounting and Reporting Standard (2004)); and (b) the reason, or reasons, for the entity’s choice of measurement approach and how that approach relates to the disclosure objective in paragraph 27.
Other methods and measurement approachesWhen an entity discloses its greenhouse gas emissions measured in accordance with another method, applying paragraphs 29(a)(ii), B24–B25 or C4(a), the entity shall disclose: (a) the applicable method and measurement approach the entity uses to determine its greenhouse gas emissions; and (b) the reason, or reasons, for the entity’s choice of method and measurement approach and how that approach relates to the disclosure objective in paragraph 27.
Topic: Emissions Factors
In a nutshell: You have to disclose the emission factors used to calculate emissions.
How Sumday helps: Use the carbon general ledger report to see the source of every emissions factor used in your calculations in one easy spot.
What it actually says:
B29 As part of an entity’s disclosure of the measurement approach, inputs and assumptions, the entity shall disclose information to enable users of general purpose financial reports to understand which emission factors the entity uses in its measurement of its greenhouse gas emissions. This Standard does not specify emission factors an entity is required to use in its measurement of its greenhouse gas emissions. Instead, this Standard requires an entity to use emission factors that best represent the entity’s activity as its basis for measuring its greenhouse gas emissions.
Topic: Data from specific activities within the entity’s value chain
In a nutshell: Where available, primary data from an organisation’s value chain should be used. It won’t always be available though so in these instances other data sources can be used and disclosed appropriately.
How Sumday helps: Engage with your value chain through Sumday’s engagement tools and where where your suppliers are carbon accounting properly incorporate this data into your GHG inventory seamlessly.
What it actually says:
An entity’s measurement of its Scope 3 greenhouse gas emissions will be based on data obtained directly from specific activities within the entity’s value chain (primary data), data not obtained directly from activities within the entity’s value chain (secondary data), or a combination of both.In measuring an entity’s Scope 3 greenhouse gas emissions, primary data is more likely to be representative of the entity’s value chain activity and its greenhouse gas emissions than secondary data. Therefore, the entity shall prioritise—with all else being equal—the use of primary data
Topic: Verified data
In a nutshell: Prioritise Scope 3 data that is verified (i.e. sending a form and asking a supplier to enter their emission data with no confirmation as to the audibility of this or whether it has been verified is less than ideal) - basically, it’s saying businesses should get their accountant or trained consultant to verify their carbon accounting and reporting is complete and accurate. Activity data vs. spend data and verified vs. unverified emissions should also be disclosed.
How Sumday helps: If only there was accounting software built for and by accountants and advisors to deliver this service, in a way that allows them to verify the data…Sumday also specifically highlights where scope 3 data is primary and verified and where it is activity based v spend based.
What it actually says:
B53 An entity shall prioritise Scope 3 greenhouse gas emissions data that is verified. Verification can provide users of general purpose financial reports with confidence that the information is complete, neutral and accurate.
B54 Verified data might include data that has been internally or externally verified. Verification can take place in several ways, including on-site checking, reviewing calculations, or cross-checking of data against other sources. However, in some cases an entity might be unable to verify its Scope 3 greenhouse gas emissions without undue cost or effort. For example, the entity might be prevented from obtaining a complete set of verified data due to the volume of data or because the data is obtained from entities in the value chain that are separated by many tiers from the reporting entity, that is, entities that the reporting entity does not interact with directly. In such cases, an entity might need to use unverified data.
B56 As part of the requirement in paragraph 29(a)(iii), and to reflect how an entity prioritises Scope 3 data in accordance with the measurement framework set out in paragraphs B40–B54, the entity shall disclose information that enables users of general purpose financial reports to understand:
(a) the extent to which the entity’s Scope 3 greenhouse gas emissions are measured using inputs from specific activities within the entity’s value chain; and
(b) the extent to which the entity’s Scope 3 greenhouse gas emissions are measured using inputs that are verified.
Topic: Financed emissions
In a nutshell: Asset managers, banks and insurers need to get onto their scope 3 emissions, which means they need to get verified data from their value chain.
How Sumday helps: Sumday has a comprehensive course on how to calculate financed emissions. Sumday also supports you to empower your value chain to deliver verified data by providing free access to the accounting software, support and training to every customer or portfolio company.
What it actually says:
B58 Entities participating in financial activities face risks and opportunities related to the greenhouse gas emissions associated with those activities. Counter parties, borrowers or investees with higher greenhouse gas emissions might be susceptible to risks associated with technological changes, shifts in supply and demand and policy change, which in turn can affect the financial institution that is providing financial services to these entities. These risks and opportunities can arise in the form of credit risk, market risk, reputational risk and other financial and operational risks. For example, credit risk might arise in relation to financing clients affected by increasingly stringent carbon taxes, fuel efficiency regulations or other policies; credit risk might also arise through technological shifts. Reputational risk might arise from financing fossil-fuel projects. Entities participating in financial activities, including commercial and investment banks, asset managers and insurance entities, are increasingly monitoring and managing such risks by measuring their financed emissions. This measurement serves as an indicator of an entity’s exposure to climate-related risks and opportunities and how the entity might need to adapt its financial activities over time.
B59 Paragraph 29 (a)(i)(3) requires an entity to disclose its absolute gross Scope 3greenhouse gas emissions generated during the reporting period, including upstream and downstream emissions. An entity that participates in one or more of the following financial activities is required to disclose additional and specific information about its Category 15 emissions or those emissions associated with its investments which is also known as ‘financed emissions’: (a) asset management (see paragraph B61);(b) commercial banking (see paragraph B62); and (c) insurance (see paragraph B63).
Topic: Effective date and transition
In a nutshell: The standard comes into effect for reporting periods starting 1 January 2024. The ISSB recognises however this is all pretty new for many organisation and as such have allowed a 12 month grace period for the following points:
- If an organisation is using a method other than the GHG Protocol it can continue doing this for the first year
- Organisations can choose not to disclose Scope 3 emissions for the first year
How Sumday helps: Sumday provides organisations with guidance around emerging standards and requirements in individual jurisdictions. It also provides organisations with the learning materials to report in line with the GHG Protocol and enables business and their advisors to prepare GHG inventories incorporating Scope 1, 2 and 3.
What it actually says:
C1 An entity shall apply this Standard for annual reporting periods beginning on or after 1 January 2024. Earlier application is permitted. If an entity applies this Standard earlier, it shall disclose that fact and apply IFRS S1 GeneralRequirements for Disclosure of Sustainability-related Financial Information at the same time.
C2 For the purposes of applying paragraphs C3–C5, the date of initial application is the beginning of the annual reporting period in which an entity first applies this Standard.
C3 An entity is not required to provide the disclosures specified in this Standard for any period before the date of initial application. Accordingly, an entity is not required to disclose comparative information in the first annual reporting period in which it applies this Standard.
C4 In the first annual reporting period in which an entity applies this Standard, the entity is permitted to use one or both of these reliefs:
(a) if, in the annual reporting period immediately preceding the date of initial application of this Standard, the entity used a method for measuring its greenhouse gas emissions other than the GreenhouseGas Protocol: A Corporate Accounting and Reporting Standard (2004), the entity is permitted to continue using that other method; and
(b) an entity is not required to disclose its Scope 3 greenhouse gas emissions (see paragraph 29(a)) which includes, if the entity participates in asset management, commercial banking or insurance activities, the additional information about its financed emissions (see paragraph 29(a)(vi)(2) and paragraphs B58–B63).
C5 If an entity uses the relief in paragraph C4(a) or paragraph C4(b), the entity is permitted to continue to use that relief for the purposes of presenting that information as comparative information in subsequent reporting periods.