Reporting on Scope 3 emissions – those originating in a company’s value chain and beyond its direct control – will be included as part of required company disclosures under new standards being developed by the International Sustainability Standards Board (ISSB) of the IFRS Foundation, according to a statement Friday by the ISSB.

The decision marks a significant milestone in the development of climate and sustainability-related reporting standards for companies, as investors and other stakeholders increasingly demand information on companies’ management of climate risks and impact.

Regulators in major jurisdictions around the world including Europe, the UK and the U.S., among others, have introduced or are preparing mandatory sustainability reporting requirements for companies, and most will be heavily influenced by the ISSB standards.

Reporting requirements around Scope 3 emissions are one of the most controversial aspects of the emerging disclosure regimes. These emissions very often account for the vast majority of many companies’ carbon footprints, but are typically the hardest to track and calculate, occurring outside of the direct control of companies, in areas such as supply chains, or in their customers’ use of their products.

Following the release by the U.S. Securities and Exchange Commission’s (SEC) proposed climate-related disclosure rules in March 2022, for example, the Commission received significant pushback on its proposals for Scope 3 reporting, which were generally even less prescriptive than other emerging standards. Investment manager BlackRock, for example, one of the most outspoken advocates for corporate climate reporting, called for a more flexible ‘comply-or-explain’ approach from the SEC on Scope 3, rather than mandatory reporting, noting that the methodological complexity involved in tracking the emissions and the lack of direct company control impact the usefulness of Scope 3 disclosure.

The IFRS said that the ISSB voted unanimously to require company disclosures on Scope 1, Scope 2 and Scope 3 greenhouse gas emissions at its October meeting, while also announcing that it will develop “relief provisions” in order to help companies apply the Scope 3 requirements. These provisions, to be decided at a later meeting, could include giving companies more time to provide Scope 3 disclosures, and working with jurisdictions to provide “safe harbor” provisions, giving companies protection or reduced liability on disclosed Scope 3 information. These provisions are similar to those included in the SEC’s initial proposal.

The ISSB is aiming to complete deliberations on its first 2 proposed standards for company sustainability and climate related disclosures around the end of this year, and to issue the final standards as early as possible in 2023.

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