Scope 3 reporting: Where things stand with standard-setters

No discussion of sustainability reporting would be complete without a mention of Scope 3 greenhouse gas emissions.

During an AICPA webcast earlier this week, the co-author of recently finalized climate regulations in California and a leader heavily involved in global standards that could influence pending U.S. standards stressed the importance of Scope 3 disclosures while vowing to help organizations meet the requirements.

While Scope 1 and 2 emissions cover activities under control of reporting organizations, Scope 3 emissions primarily cover the emissions of their business partners up and down the supply chain.

“Supply chain was probably the most controversial part of the bill,” California state Sen. Scott Wiener said in prerecorded remarks about California S.B. 253, the Climate Corporate Data Accountability Act. The remarks were presented during “Sustainability Disclosure Priorities for 2024,” a webcast in partnership with the Center for Audit Quality, CPA Canada, and the IFRS Foundation.

“It is important because for many corporations, their supply chain — their Scope 3 — is 90% or more of their entire carbon footprint,” said Wiener, who estimated that 5,500 large companies would be affected by the legislation. “So without Scope 3, without the supply chain, corporations could then just contract out their carbon emissions and move them off of their books.”

Scope 3 disclosures are a controversial topic — and were at the heart of many of an unprecedented number of comment letters on the SEC’s long-awaited climate rule — in part because of the burden they could place on companies to compile climate data from a plethora of partners.

But Sue Lloyd, vice chair of the International Sustainability Standards Board (ISSB), which recently finalized a global baseline for sustainability reporting, said the ISSB is committed to helping companies apply Scope 3 without “undue cost and effort.”

Lloyd, in her first presentation since IFRS S1 and IFRS S2 officially went into effect Jan. 1, pointed to the ISSB’s flexible timeline as well as its expectation that estimates realistically will be a part of the equation as reporting gets off the ground.

“In our standards, we do ask for information about a company’s Scope 3 greenhouse gas emissions when it’s material for investors looking at that company,” Lloyd said. “Now we know this is a big change in reporting, and the time that the board made that very important decision to require this reporting when it’s material, it did so subject to a condition: that there be a realistic approach to this reporting in the standard. That’s why, in the first year that you report on climate (in accordance with IFRS S2), Scope 3 emissions disclosure is not required, to allow additional time to get ready.

“Also we don’t require perfect measurement of Scope 3 greenhouse gas emissions. We of course want you to have a good basis for that reporting, so you need reasonable and supportable information, but we don’t ask that you do an exhaustive search for information. We say that the information used should be that which is available to you without undue cost and effort, so we’ve brought proportionality into the approach to measuring Scope 3 greenhouse gas emissions. We want it to be possible for everybody to get started, knowing that reporting will improve over time.”

Lloyd said last year that, before IFRS S1 and IFRS S2 were finalized, the ISSB was “working with our friends at the SEC” to assure consistency between regulations whenver possible. Scope 3 disclosures were included in the SEC’s first climate-related reporting rule proposed nearly two years ago, although SEC Chair Gary Gensler told the U.S. Senate Banking Committee in September that an enormous amount of feedback on Scope 3 has slowed the process.

At the second annual AICPA and CPA.com ESG Symposium in September, AICPA & CIMA CEO Barry Melancon used the term “matrix” to describe the evolving ESG regulatory landscape but said that compared to the path that financial reporting regulations took in terms of global interoperability, ESG could develop a level of consistency more quickly.

While California’s regulations could complicate that journey for U.S. companies, they also might prove to pave a path toward regulations from different regulators working in concert.

“We worked closely with our corporate partners to make sure that S.B. 253 is as implementable as possible and that we’re not imposing unnecessary burdens on corporations,” said Wiener, who added that Scope 3 reporting in California also will allow for estimates. “We made sure that if corporations are already disclosing their carbon footprint in other jurisdictions — for example, the EU — they won’t have to re-create the wheel here.”

The auditor’s role

Assurance plays a vital role in the corporate reporting landscape, and a new global baseline for assurance of sustainability reporting should be available by the end of the year.

In prerecorded remarks shared during the webcast, Tom Seidenstein, chair of the International Auditing and Assurance Standards Board (IAASB), confirmed the timeline for the issuance of International Standard on Sustainability Assurance (ISSA) 5000, General Requirements for Sustainability Assurance Engagements.

Seidenstein said the IAASB is currently wading through comment letters on the exposure draft of the standard, including one submitted by the AICPA that — like many received — asked for further attention to the topic of materiality.

Seidenstein said that while the IAASB is “heartened” by widespread support of ISSA 5000 as a new global baseline, the board also is listening to calls for “significant guidance to help with the application of the standard. And we at the IAASB stand ready to provide it.”

In response to the established time frame for ISSA 5000, the AICPA Auditing Standards Board is targeting the end of 2024 for an ED of changes to the AICPA attestation standards for the purposes of global consistency.

— To comment on this article or to suggest an idea for another article, contact Bryan Strickland at Bryan.Strickland@aicpa-cima.com.