The International Sustainability Standards Board (ISSB), which is a part of the International Accounting Standards Board (IASB), the body which outlines the accounting rules that public companies across much of the world such as those located in the EU must follow, recently announced new norms that will clamp down on companies’ disclosure of climate change risks. It will be up to individual countries who follow IASB’s International Financial Reporting Standards (IFRS) whether or not to make companies follow the new IASB guidelines starting in 2024, but already, major players in the world economy including Canada, Britain, Japan, Singapore and many others are considering adopting the standards. 

Currently, about half of the world’s largest 4,000 companies do not report on any of their Scope 1 and 2 emissions. The new ISSB guidelines would bring new rigor to sustainability reporting, making public companies disclose material emissions, with checks by external auditors, in order to align climate disclosure more closely to traditional financial reporting.

In the guidelines, the ISSB states that “the objective of climate-related financial disclosures is to enable users of general purpose financial reports to understand an entity’s strategy for managing climate-related risks and opportunities”. Taking a closer look at the passed IFRS’s “Climate-related Disclosures” guidelines, a few points that stand out for public companies in applicable jurisdictions are as follows:

1. Climate-related risks and opportunities that could reasonably be expected to affect the company’s prospects. A company would have to not only disclose those risks and opportunities, but also describe them in detail, specify the time horizon in which the company expects those risks to materialize, and explain how they are being incorporated into strategic decision-making and planning.
2. Climate-related Metrics – Companies must disclose their absolute Scope 1, 2 and 3 greenhouse gas emissions generated over the reporting period in accordance with the Greenhouse Gas Protocol (2004). Additionally, companies must disclose the amount and percentage of assets or business activities vulnerable or aligned with climate-related risks or opportunities. Lastly, a company’s internal carbon prices - how a company is applying a price to their emissions and at what amount - when making decisions.
3. Information regarding current and anticipated climate risks and opportunities that affect a company’s Business Model and Value Chain must be disclosed. An entity will have to describe not just the risk itself, but where in the company’s operations these risks may perniciously manifest themselves. For example, a company would have to report specific geographical areas, types of assets, or facilities that might be harmed by a given risk that it is reporting.
4. Financial Position, Performance, and Cash Flows – Companies must report how they believe climate risks or opportunities might affect their cash flows across all time horizons. This guideline requires companies to disclose their expectations for how changes in operations due to climate risks or opportunities might affect their performance. They will have to disclose plans and sources of funding for CapEx, asset Acquisition & Divestment, joint ventures, business transformation, and innovation being driven by climate risk and opportunity. Anticipated associated changes in cash flows, such as “increased revenue from products or services aligned with a lower-carbon economy, costs arising from physical damage to assets from climate events (or) expenses associated with climate adaptation or mitigation”, must be explicitly specified and detailed.
5. Companies must conduct or obtain a range of Climate-related Scenario Analyses and determine their Climate Resilience. They must determine and disclose the appropriate approach to use when conducting or gathering a climate-related scenario analysis - inputs, exposure to climate risks and opportunities, and time horizons must all be relevant to the particular company. From there, the company must establish how resilient it is to the inputs selected, and how well it would be able to manage affects to the company because of climate risks.

While there is some vagueness in the new guidelines regarding scenario analysis and quantifying the effects of climate risks on cash flows, requiring Scope 1, 2 and 3 greenhouse gas emissions is a dramatic development in climate reporting. The ever growing need for companies to focus on accurate carbon accounting is only highlighted by the ISSB’s guidelines. 

These rules are not applicable to public companies located in the United States, but the SEC has shown indications that it will publish its own climate disclosure regulations for listed companies toward the end of this year, potentially taking effect as soon as 2024. The rules would standardize emissions reporting in the United States as the ISSB’s guidelines plan to do across the rest of the world. While some of the details for the expected rules are unclear (such as whether companies will have to report Scope 3 emissions), the trend toward and requirement for innovation is obvious. This is exactly why, through the lens of our investment thesis in Green Molecules,  Energy Capital Ventures is working toward and investing in the digital transformation of the natural gas industry, and why we look for entrepreneurs who are focused on such an important higher purpose as well.