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TAC Public Meeting September 2024 Paper 4: GHG emissions financed emissions
Executive summary
| Date | 03 September 2024 |
|---|---|
| Paper reference | 2024-TAC-015 |
| Project | Technical assessment of IFRS S1 and IFRS S2 |
| Topic | Financed emissions |
Objective of the paper
This paper presents an analysis for consideration by the TAC of the financed emissions provisions set out in IFRS S2 Climate-related Disclosures. This paper sets out the challenges in relation to disclosing financed emissions in accordance with IFRS S2.
Summary of staff recommendations
The TAC is asked to tentatively decide to:
- maintain the requirements in IFRS S2 in relation to financed emissions;
- recommend that the ISSB consider the expected level of coverage of emissions included in financed emissions disclosures as part of industry-based standards as they are developed; and
- that the advice to the Secretary of State includes the following points:
- consistent with IFRS S1 paragraph B29, entities shall not reduce the understandability of the disclosures by aggregating information that are dissimilar, which suggests that entities should disaggregate their assets under management financed emissions disclosures by assets that are owned and controlled by the entity and assets are not owned and controlled by the entity.
- UK stakeholders have suggested that the development of frameworks for the calculation of financed emissions for different financial products should be an area for continued monitoring as practice is established.
- the use of the 'Global Industry Classification Standard (GICS) should be an area for continued monitoring to provide feedback to the ISSB when they conduct the post-implementation review of IFRS S2.
- in accordance with IFRS S2 paragraph 29(a)(iii) entities should disclose appropriate explanation as to why financed emissions figures are disaggregated.
- the September 2024 TIG discussion on financed emissions related to undrawn facilities should be followed and that the application of this technical area should be monitored.
Appendices
There are no appendices to this paper.
This paper has been prepared by the Secretariat for the UK Sustainability Disclosure Technical Advisory Committee (TAC) to discuss in a public meeting. This paper does not represent the views of the TAC or any individual TAC member.
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Context
1IFRS S2 Climate-related Disclosures (IFRS S2) sets out the requirements for entities engaged in asset management, commercial banking and insurance activities to disclose the financed emissions associated with those activities as part of the entity's disclosure of its Scope 3 greenhouse gas emissions. As defined in IFRS S2 Appendix A, financed emissions are the portion of gross greenhouse gas emissions of an investee or counterparty attributed to the loans and investments made by an entity to the investee or counterparty. These greenhouse gas emissions are part of Scope 3 Category 15 (investments) as defined in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011).
2The relevant references to the requirements in IFRS S2 are as follows:
- Paragraph 29(a)(vi) Greenhouse gas emissions
- Appendix B Application Guidance, paragraphs B38-B68 Financed emissions
The basis for conclusions of the provisions related to financed emissions are set out in IFRS S2 Basis for Conclusions on Climate-related Disclosures (IFRS S2 Basis for Conclusions) paragraphs BC122–BC129.
3When the International Sustainability Standards Board (ISSB) originally consulted on the Exposure Draft of IFRS S2, the financed emissions requirements were included in Appendix B Industry-based disclosure requirements (Appendix B). In its December 2022 meeting, the ISSB agreed to move these requirements from Appendix B to become part of the IFRS S2 Accompanying Guidance, except for the financed emissions requirements which were retained as part of the IFRS S2 Application Guidance. It is expected that the financed emissions requirements will be moved from IFRS S2 Application Guidance into the Industry-based Guidance on implementing Climate-related Disclosures once it has been through full due process and is incorporated into IFRS S2.
Endorsement criteria
4The endorsement criteria applied in the analysis of this technical area include whether:
- use of the IFRS Sustainability Disclosure Standard is likely to result in an improvement in the international comparability of sustainability-related reporting in the UK.
- use of the IFRS Sustainability Disclosure Standard is likely to support companies in making disclosures that are understandable, relevant, reliable and comparable.
- use of the IFRS Sustainability Disclosure Standard is likely to improve the quality of corporate reporting within the UK in the long term.
- companies are likely to be able to provide the disclosures required by the IFRS Sustainability Disclosure Standard within the timeframes that a company normally reports without undue cost or effort.
- use of the IFRS Sustainability Disclosure Standard is likely to be conducive to the UK’s economic growth and international competitiveness, taking into account the costs and benefits of compliance.
- the IFRS Sustainability Disclosure Standard is likely to be coherent with, and suitable for inclusion in, UK domestic legislation and regulation.
Analysis
5In relation to financed emissions, there are a number of matters for the TAC to discuss, including:
5.1the level of coverage expected to be included in the financed emissions data. Paragraph 6 addresses the expected level of coverage to be achieved in order to disclose ‘absolute’ figures and whether there is a need for further clarity in this area.
5.2the scope of financed emissions disclosures. Paragraphs 7–11 consider financed emissions related to asset management activities where the financial institution neither owns nor controls the asset and how this fits with the definition of financed emissions.
5.3calculation of financed emissions. Paragraphs 12–15 consider industry practices related to financed emissions disclosures acknowledging that measurement frameworks have not yet been established for certain products. Paragraph 15 addresses stakeholder feedback on the use of counterparty categorisation standards to disaggregate financed emissions disclosures.
5.4disaggregation of financed emissions by Scope 1, Scope 2, and Scope 3. Paragraphs 16–19 considers how to ensure the disaggregation of emissions is clearly understood as being the breakdown of the Scope 3 emissions figure of the financial institution.
5.5disaggregation of financed emissions by drawn and undrawn facilities. Paragraph 20 considers the challenge of disclosing this information for some entities given the lack of current industry practice in this area.
5.6challenges associated with data collection including the permission to use data from a different reporting period. Paragraphs 21–24 consider the permission that allows entities to use data from different reporting periods of entities in their value chain under certain conditions, and the data collection challenges associated with disclosing financed emissions information.
Challenges in making disclosures
Level of coverage
6IFRS S2 paragraph 29(a)(i)(3) requires an entity to disclose its absolute gross Scope 3 greenhouse gas emissions generated during the reporting period, including upstream and downstream emissions. The term ‘absolute’ requires entities to disclose the total amount of emissions, but 100% coverage is unlikely to be achieved—especially for financed emissions—in part due to data challenges but also because of the assumptions used in the measurement approach. However, some stakeholders may interpret the term ‘absolute’ gross emissions to mean 100% of the total amount of gross emissions which may be impracticable. When updating the Industry-based Guidance on implementing Climate-related Disclosures, the ISSB could provide industry-specific guidance that supports entities in understanding how to collect financed emissions data, including the expected level of coverage of emissions included in the absolute gross figure. The TAC may consider recommending to the ISSB that the expected level of coverage of emissions included in financed emissions disclosures be considered as part of industry-based standards as they are developed.
Scope of financed emissions disclosures
7IFRS S2 paragraph B61 requires the disclosure of an entity's gross financed emissions related to its ‘asset management activities,' a term which is not defined in IFRS S2. However, the Industry-based Guidance on implementing Climate-related Disclosures defines asset management and custody activities as being where ‘entities manage investment portfolios on a commission or fee basis for institutional, retail and high net-worth investors.’ The emissions associated with a financial institution's asset management activities are not technically part of an entity's own financed emissions as they are not attributable to loans and investments made by the entity itself, which is the definition set out in IFRS S2. Notwithstanding, IFRS S2 requires disclosure of these emissions, referring to them as the entity's own ‘absolute gross financed emissions’ even though technically this descriptor is not correct.
8This apparent inconsistency was raised during the consultation process as set out in a September 2022 ISSB paper which noted that ‘some respondents, although generally supportive of the proposed metrics, said that the use of the term ‘financed emissions’ could be misleading because asset managers do not directly finance the emissions but instead manage the emissions being financed on behalf of their clients.’ The ISSB staff response was that ‘the staff acknowledge that the term ‘financed emissions’ could be misinterpreted and therefore will evaluate whether other labels such as ‘managed emissions’ or ‘emissions from investment portfolios’ would be more appropriate.’ However alternative labels were not included in IFRS S2 and so the potential for confusion and misinterpretation remains.
9In June 2024, the Transition Implementation Group on IFRS S1 and IFRS S2 (TIG) published its ‘Submissions log’ which noted that the following query may be discussed at the September 2024 TIG meeting:
Are assets managed by an asset management entity, but not consolidated due to the absence of ‘control’ over the entity in which the assets are held, considered as part of the asset management entity’s value chain.
The TIG meeting takes place 19–20 September 2024 and as the papers have not yet been published it is not yet clear if, and how, this matter will be addressed.
10The Greenhouse Gas (GHG) Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard notes that ‘investments managed by the reporting company on behalf of clients (using clients' capital) or services provided by the reporting company to clients’ may be accounted for as emissions in Scope 3 Category 15, but states that disclosure is optional.
11IFRS S1 paragraph B29 states that 'the entity shall not reduce the understandability of its sustainability-related financial disclosures by obscuring material information with immaterial information or by aggregating material items of information that are dissimilar to each other.' It is not suggested that financed emissions disclosures related to assets under management that are owned by the financial institution's clients should be excluded. However, to ensure that these disclosures are not misinterpreted, reporting entities should provide appropriate context to these disclosures. Additional clarification should ensure that investors understand that these emissions are not attributable to loans and investments made by the financial institution itself, but to assets owned by its clients that are managed by the reporting entity. The TAC may consider following the outcome of the TIG discussion on this technical area and to note in its advice to the Secretary of State that, in accordance with IFRS S1 paragraph B29, entities should disaggregate their assets under management financed emissions disclosures so that it is clear which disclosures relate to assets that are owned and controlled by the entity and which assets are not owned or controlled by the entity.
Calculation of financed emissions
12IFRS S2 does not prescribe the methodology that should be used to calculate the reporting entity’s financed emissions, or the method of allocation the entity should use to attribute its share of emissions in relation to the size of investments.
13An industry-led initiative, the Partnership for Carbon Accounting Financials (PCAF) has developed an approach to assessing and disclosing financed emissions. According to PCAF, over 450 financial institutions, with total financial assets of USD$86 trillion have formally committed to measure and disclose under the PCAF framework. However, the PCAF framework does not address all relevant financial products. For example, derivatives and municipal bonds are not currently addressed in the framework.
14The current flexibility for reporting entities in determining their approach appears appropriate. It also allows market practice to develop and new approaches to emerge and innovate. UK stakeholders have referenced PCAF as a useful framework and some stakeholders have requested that more explicit references to the PCAF guidance be made as part of UK implementation. Given the nascent nature of financed emissions and the continuing development of the PCAF framework, it may not be appropriate or necessary to make specific reference to this framework in IFRS S2 for UK reporting entities. It may be more appropriate to retain the flexibility that current exists for financial institutions to use PCAF if they find it useful and appropriate, but also to explore other approaches that may develop over time. The TAC may consider noting in its advice that UK stakeholders have suggested that the development of frameworks for financed emissions should be an area for continued monitoring as practice is established to provide feedback to the ISSB during their post-implementation review of IFRS S2.
15IFRS S2 paragraphs B62 and B63 require commercial banks and insurers to use the ‘Global Industry Classification Standard (GICS),’ when disaggregating gross financed emissions. GICS is an international 6-digit industry-level code for classifying counterparties. For UK entities that are not already using GICS there is likely to be an increase in burden in applying this framework to their financed emissions disclosures. The TAC may consider recommending that the use of the GICS should be an area for continued monitoring to provide feedback to the ISSB during their post-implementation review of IFRS S2.
Disaggregation of financed emissions – Scope 1, Scope 2, and Scope 3
16Scope 1 emissions are direct emissions from owned or controlled sources and Scope 2 emissions are indirect emissions from the generation of purchased energy. Investments not included in the entity's Scope 1 or Scope 2 emissions calculations are included in the Scope 3 emissions. A reporting entity's Scope 3 emissions from investments are the Scope 1 and Scope 2 emissions of its investees and lending counterparties. These emissions from investments should be allocated to the reporting entity based on the reporting entity's proportional share of investment in the investee. The GHG Corporate Value Chain (Scope 3) Accounting and Reporting Standard also notes that ‘where relevant, companies should also account for the Scope 3 emissions of the investee or project...when Scope 3 emissions are significant compared to other source of emissions or otherwise relevant.’
17IFRS S2 requires the disclosure of financed emissions disaggregated by Scope 1, Scope 2 and Scope 3 emissions. This breakdown is intended to show how the calculation of the Scope 3 financed emissions figure is calculated—namely the proportion of Scope 1, Scope 2 and Scope 3 emissions of investees and lending counterparties attributable to the reporting entity. While this breakdown is intended to provide more granular information to investors, if appropriate context and explanation is not provided with the disclosure, it may not be clear that the Scope 1 and Scope 2 figures being disclosed are not the Scope 1 and Scope 2 figures of the reporting entity itself. Furthermore, reported data from investees and counterparties may not always be sufficiently granular to allow for this breakdown, and in the case of general purpose financing there may not always be sufficient detail to allow for an accurate breakdown of spending. Stakeholders have specifically raised the challenge of acquiring the Scope 3 emissions data from entities in the value chain.
18IFRS S2 paragraph 29(a)(iii) requires entities to disclose the measurement approach, inputs and assumptions used to measure greenhouse gas emissions, including the reasons why these approaches, inputs and assumptions have been chosen by the entity. To ensure that the disaggregation of financed emissions into Scope 1, Scope 2 and Scope 3 emissions is clearly understood, UK reporting entities could be encouraged to provide additional context to their disclosures. This could clarify that the Scope 1 and Scope 2 emissions are not those of the entity itself but relate to investees’ and lending counterparties’ emissions which form part of the reporting entity’s Scope 3 emissions. The TAC may consider noting in its advice that in accordance with IFRS S2 paragraph 29(a)(iii) entities should disclose appropriate explanation and context as to why disaggregated financed emissions figures are disclosed.
19Where the data provided by investees and lending counterparties is not sufficiently granular to allow for disaggregation into Scope 1, Scope 2 and Scope 3 greenhouse gas emissions, entities should clearly disclose the limitations of the data provided and clearly set out how they have incorporated the data received. This may challenge the comparability of the disclosures but it is hoped that over time the quality of data will improve. Data quality issues are also discussed in paper 2024-TAC-014 on Scope 3 greenhouse gas emissions.
Disaggregation of financed emissions – drawn and undrawn facilities
20IFRS S2 paragraph B62(c) requires an entity to report the percentage of the entity’s gross exposure included in the financed emissions calculation, and as part of that to separately disclose the percentage of its undrawn loan commitments included in the financed emissions calculation. Stakeholders have indicated that many entities currently only calculate financed emissions based on drawn facilities. The PCAF methodology also only requires the calculation of financed emissions on ‘outstanding’ or drawn loan amounts. Therefore, there may be an additional burden and cost on entities making these disclosures for the first time, and as there is no standard methodology for calculating financed emissions on undrawn loan facilities the comparability and consistency of these disclosures may be compromised. It should be noted that the calculation of absolute gross financed emissions for undrawn loan commitments is planned to be discussed at the September 2024 TIG meeting. The TAC may consider monitoring the outcome of this discussion at the TIG in its September 2024 meeting. The TAC may also consider monitoring the application of this requirement to provide feedback to the ISSB during their post-implementation review of IFRS S2.
Data collection – permission and challenges
21Financial institutions may have extensive value chains and this is likely to present significant challenges in collecting the quantity and quality of data needed for the financed emissions disclosures. IFRS S2 paragraph C4 includes a transitional relief for reporting entities allowing them an exemption for the first year of reporting from disclosing their financed emissions information. Transition reliefs will be discussed in a future TAC meeting.
22Additionally, IFRS S2 paragraph B19 permits a reporting entity to include information that is not aligned with its reporting period, when that information is obtained from entities in its value chain with a different reporting period. The length of the reporting period must be the same, the data must be the most recent available, and significant events and changes that have occurred since the value chain entity’s reporting period must be disclosed. Stakeholders have raised a concern that, for financed emissions disclosures, if entities in the value chain have a different ‘reporting period’ then they may not be able to benefit from this permission. However, it is the TAC Secretariat’s view that the term ‘reporting period’ allows for the use of data from an entity in the value chain that covers different dates to the reporting entity, so long as it is the most recently available data and covers the same length of time.
23Stakeholders have noted that on an ongoing basis, there are likely to be delays in acquiring the appropriate data from entities in the value chain. For example, stakeholders advise that financial institutions need to wait for entities in their value chain to report before those entities’ data is made available and then aggregators typically need a further 6–12 months to collect and standardise the data before it can be provided to the financial institution. This can often mean an up to two-year delay in reporting this data and is likely to continue beyond the early years of implementation.
24It may be hoped that many of the challenges associated with data collection and quality will improve with time. The challenges are also well understood by investors and other stakeholders, not just for financial institutions but for all reporting entities. These challenges do not in themselves seem to justify any form of non-disclosure.
Endorsement recommendations
Alternative options considered but not recommended
25In considering the TAC’s endorsement recommendations on financed emissions, the Secretariat considered alternative options that have been disregarded. The criteria for amending the standards—notably that changes are considered necessary for the effective application within the UK and failure to amend the standard would be of detriment to the long-term public good—have not been met in this instance.
26The TAC Secretariat considered and disregarded these alternative options, including:
26.1amending the scope of financed emissions to exclude asset management. In order to ensure that all financed emissions disclosures are attributable to loans and investments made by an entity to the investee or counterparty, asset management relating to client assets could be excluded from the financed emissions disclosures under IFRS S2. However, removing this requirement could affect international comparability and therefore was not pursued.
26.2explicitly referencing the PCAF guidance. Although some UK stakeholders requested that explicit reference to the PCAF guidance be included in IFRS S2 as part of UK implementation, it is not considered necessary. Entities are able use the PCAF guidance if they find it helpful without explicitly referencing or requiring it in IFRS S2. Furthermore, the PCAF guidance continues to be developed and is not subject to the same due process as IFRS standards. Maintaining flexibility in the requirements and not specifying the use of the PCAF guidance will allow for continued monitoring as market practice is established. However, it should be noted that allowing entities to use different methodologies may lead to a lack of consistency and comparability.
Suggested endorsement recommendation
27On balance, and based on the analysis provided in this paper, the TAC is asked to tentatively recommend:
27.1to maintain the requirements in IFRS S2 in relation to financed emissions.
27.2that the ISSB consider the expected level of coverage of emissions included in financed emissions disclosures be considered as part of industry-based standards as they are developed. This could support an improvement in the international comparability of sustainability-related reporting.
27.3that the advice to the Secretary of State notes that:
- consistent with IFRS S1 paragraph B29, entities shall not reduce the understandability of the disclosures by aggregating information that are dissimilar, which suggests that entities should disaggregate their assets under management financed emissions disclosures by assets that are owned and controlled by the entity and by assets are not owned or controlled by the entity. This would help to support entities in making disclosures that are understandable, relevant, reliable and comparable.
- UK stakeholders have suggested that the development of frameworks for the calculation of financed emissions for different financial products should be an area for continued monitoring as practice is established. This could contribute to an improvement in the quality of corporate reporting, and to assist in disclosures being coherent with, and suitable for inclusion in, UK domestic legislation and regulation.
- the use of the GICS should be an area for continued monitoring to provide feedback to the ISSB when they conduct the post-implementation review of IFRS S2. This relates to the ability of UK entities to disclose within the timeframes that a company normally reports without undue cost or effort.
- in accordance with IFRS S2 paragraph 29(a)(iii) entities should disclose appropriate explanation and context as to why disaggregated financed emissions figures are disclosed. This would help to support entities in making disclosures that are understandable, relevant, reliable and comparable.
- the September 2024 TIG discussion on financed emissions related to undrawn facilities should be followed and that the application of the requirement should be monitored. This relates to the ability of UK entities to disclose within the timeframes that a company normally reports without undue cost or effort, and also contribute to ensuring that entities are making disclosures that are understandable, relevant, reliable and comparable.
Questions for the TAC
- Does the TAC agree with the analysis in this paper in relation to the financed emissions provisions in IFRS S2?
- Does the TAC tentatively agree to maintain the provisions related to financed emissions in IFRS S2?
- Does the TAC tentatively agree to recommend to the ISSB that the expected level of coverage of emissions included in financed emissions disclosures be considered as part of industry-based standards as they are developed?
- Does the TAC tentatively agree to note in its advice that consistent with IFRS S1 paragraph B29 entities should disaggregate their assets under management financed emissions disclosures by assets that are owned and controlled by the entity and by assets are not owned or controlled by the entity?
- Does the TAC tentatively agree to note in it is advice that UK stakeholders have suggested that the development of frameworks for the calculation of financed emissions for different financial products should be an area for continued monitoring as practice is established?
- Does the TAC tentatively agree to note in its advice that the use of the GICS should be an area for continued monitoring to provide feedback to the ISSB when they conduct the post-implementation review of IFRS S2?
- Does the TAC tentatively agree to note in its advice that in accordance with IFRS S2 paragraph 29(a)(iii) entities should disclose appropriate explanation and context as to why disaggregated financed emissions figures are disclosed?
- Does the TAC tentatively agree to note in its advice the September 2024 TIG discussion on financed emissions related to undrawn facilities should be followed and that the application of requirement should be monitored?