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Scope 1, Scope 2, and Scope 3 GHG emissions is one of the main required reporting metrics across the three reporting standards, CSRD/ESRS, GRI and ISSB. Is there a high level of inter-operability in the reporting requirements of this important metric across the published standards? We look into this particular reporting requirement.
The primary reporting requirement on GHG emissions in CSRD and ESRS is Disclosure Requirement E1-6 Gross Scope 1, 2, 3 and Total GHG emissions. The objectives of this disclosure is to provide an understanding of the reporting entity’s GHG emissions and the proportion of its emissions regulated under emissions trading schemes. It is also a critical input into a reporting entity’s climate transition risks. The reporting entities are required to disclosure GHG intensity based on net revenue. In Disclosure Requirement E1-8 Internal Carbon Pricing, the reporting entity is asked to disclose whether internal carbon pricing schemes are applied and how they affect decision making and incentive schemes. The principle reference guidance for the calculation of GHG emissions is the GHG Protocol Corporate Standard (version 2004, and expect to be updated in 2024) and EN ISO 14064-2018.
On certain specifics of the disclosure requirements, there is complete alignment across all three standards. They include the list of 7 GHG gases to be included (CO2, CH4, N2O, HFCs, PFCs, SF6, and NF3) as Greenhouses Gases, and the unit of disclosure of the emissions (in metric tonnes of CO2eq). To calculate and report the CO2eq emissions of non-CO2 gases, the standards refer to the most recent Global Warming Potential (GWP) values published by the IPCC based on a 100-year time horizon. The reference to the use of Global Warming Potential (GWP) as the conversion factor between CO2 and CO2eq is also aligned across the three standards (ESRS, GRI and IFRS S2).
The GRI standard that details reporting requirements on GHG emissions is GRI 305: Emissions (version 2016). GRI does not mandate the use of a specific GHG emissions standard for the calculation. However, the GHG Protocol standards including the Corporate Standard (version 2004, and expect to be updated in 2024) and GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (version 2011) forms the basis of GRI standards. Thus, referencing GHG Protocol for the method of calculation meets the reporting requirements of GRI.
Both ESRS and GRI requirements separate biogenic emissions of CO2 from the combustion or bio-degradation of biomass separately from the Scope 1 GHG emissions. GRI also requires reporting entities to exclude biogenic emissions of other types of GHG (such as CH4 and N2O), and biogenic emissions of CO2 that occur in the life cycle of biomass other than from combustion or biodegradation (such as GHG emissions from processing or transporting biomass) while ESRS requires reporting entities to include emissions of other types of GHG (in particular CH4 and N2O). This difference on the reporting of biogenic emissions of other types of GHG also applies to Scope 2 and Scope 3 emissions.
While GRI requires only that Scope 1 emissions “exclude any GHG trades from the calculation of gross direct (Scope 1) GHG emissions”, ESRS is more explicit to exclude “any removals, or any purchased, sold or transferred carbon credits or GHG allowances in the calculation of Scope 1 GHG emissions”. Furthermore, ESRS requires the reporting on Scope 1 emissions to follow the EU ETS methodology for those activities covered under the EU ETS and to activities in geographies and sectors that are not covered by the EU ETS. While GRI does not require the disclosure of the percentage of Scope 1 emissions from regulated emission trading schemes, this is an additional requirement of the ESRS.
While GRI standards (version 2016) requests the disclosure of market-based Scope 2 emissions if a reporting entity has “operations in markets providing product or supplier-specific data in the form of contractual instruments”, this disclosure, along with location-based Scope 2 emissions, is a requirement under ESRS. The primary reference for ESRS for the calculation and reporting of Scope 2 emissions is the GHG Protocol Scope 2 Guidance (version 2015, in particular the Scope 2 quality criteria in chapter 7.1 relating to contractual instruments). In light of the Scope 2 guidance by the GHG Protocol which provided further clarifying explanation to the quantification of market-based Scope 2 emissions, ESRS requires reporting entities to “provide information on the share and types of contractual instruments”, including the “share of market-based scope 2 GHG emissions linked to purchased electricity bundled with instruments such as Guarantee of Origins or Renewable Energy Certificates” and the “share and types of contractual instruments used for the sale and purchase of energy bundled with attributes about the energy generation or for unbundled energy attribute claims”.
Both GRI and ESRS make references to the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (Version 2011) and its 15 categories of upstream and downstream activities as an appropriate categorisation of potential Scope 3 activities. ESRS provides another source of reference to Commission Recommendation (EU) 2021/2279 or EN ISO 14064-1:2018. When identifying categories that requires disclosure, GRI provides a list of potential considerations, of which ESRS broadly aligns and describes as “based on the magnitude of their estimated GHG emissions and other criteria…such as financial spend, influence, related transition risks and opportunities or stakeholder views”
In addition the the reporting of Scope 3 emissions of the reporting year, ESRS further requires updates of each significant category every year, and update of the full Scope 3 GHG inventory every 3 years or on the occurrence of a significant event or a significant change in circumstances. ESRS also asks the reporting entity to disclose “the extent to which the undertaking’s Scope 3 GHG emissions are measured using inputs from specific activities within the entity’s upstream and downstream value chain, and disclose the percentage of emissions calculated using primary data obtained from suppliers or other value chain partners.” If a Scope 3 category is excluded from the inventory, the ESRS requires a justification for the exclusion. For financial institutions, ESRS includes the additional guidance to consider the GHG Accounting and Reporting Standard for the Financial Industry from the Partnership for Carbon Accounting Financial (PCAF) part A Financed Emissions (version December 2022).
The requirement on the disclosure of GHG emissions intensity from GRI is organisation specific. The reporting entities can report emissions intensity for Scope 1, Scope 2, or Scope 3. The Scope 3 intensities are requested to be separated from Scope 1 and Scope 2. The organisation can also choose a metric as the denominator, and this metric could be units of products, production volume (such as metric tons, liters, or MWh), size (such as m2 floor space), number of full-time employees, or monetary units (such as revenue or sales).
On the contrary, the requirement from ESRS is designed to be comparable across organisations. The numerator of the intensity ratio is the sum of the reported gross Scope 1, Scope 2, and Scope 3 emissions with a separate location-based and market-based calculation. The denominator of the intensity ratio is the net revenue expressed in monetary units (e.g., Euros). The net revenue should be calculated in line with the requirements in accounting standards for financial statements, i.e., IFRS 15 or local GAAP, and should be cross-referenced with the financial statements.
IFRS S2 - Climate Related Disclosures 29 Climate-related metrics outlines the requirement for the disclosure of Scope 1, Scope 2, and Scope 3 GHG emissions. While the standard places priority on the use of the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) as the primary reference for GHG emissions, it allows reporting entities to apply the requirements in the GHG Protocol only to the extent that they do not conflict with the requirements in IFRS S2. It also allows for exceptions if a jurisdictional authority or an exchange on which the reporting organisation is listed uses a different method for measuring its GHG emissions.
While ESRS requires the disclosure of both location- and market-based Scope 2 emissions, the ISSB requires only the disclosure of location-based emissions and “information about any contractual instruments the entity has entered into that could inform users’ understanding of the entity’s Scope 2 greenhouse gas emissions…only if such instruments exist and information about them informs users’ understanding of an entity’s Scope 2 greenhouse gas emissions.”
The IFRS S2 standard does not mandate an update of the full Scope 3 inventory every 3 years, however, it requests a reassessment of Scope 3 activities if a significant event or a significant change in circumstances occur. The IFRS S2 devotes an entire section to Scope 3 measurement framework, which provides specific guidance on the use of direct measurement and the practice of estimation when reporting on Scope 3 emissions, with the aim of providing guidance for the use of a measurement approach, inputs and assumptions that result in a “faithful representation” of this disclosure. Application guidances B38 to B57 provide a set of guidelines for the data for direct measurement, data from specific activities within the value chain, timeliness and faithful representation, verified data, and the disclosure of inputs to the Scope 3 emissions. Application guidances B58 to B63 provide separate guidance on Financed Emissions, which is category 15 of Scope 3 emission, for asset management, commercial banking, and insurance.
Similar to ESRS, IFRS S2 requires the disclosure of the internal carbon price which includes an explanation of “whether and how the entity is applying a carbon price in decision-making…and the price for each metric tonne of greenhouse gas emissions the entity uses to assess the costs of its greenhouse gas emissions.”
The disclosure requirement in ESRS on the internal carbon price schemes is more extensive, requiring information on whether and how the carbon prices used in the internal carbon pricing schemes are consistent with financial statements. It separates carbon pricing schemes into different types (e.g., CapEx shadow price, R&D investment shadow price, internal carbon fees/funds, etc.) and requires reporting entities to report volume of GHG emissions covered under each type of carbon pricing, and the price applied.