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FRC’s Response to ISSB Exposure Draft Proposed Amendments to IFRS S2
FRC Financial Reporting Council
Emmanuel Faber Chair International Sustainability Standards Board Opernplatz 14 60313 Frankfurt am Main Germany
20 June 2025
Exposure Draft ISSB/ED/2025/1 Amendments to Greenhouse Gas Emissions Disclosures (Proposed amendments to IFRS S2)
Dear Emmanuel,
The Financial Reporting Council (FRC) welcomes the opportunity to provide comments on the International Sustainability Standards Board (ISSB) Exposure Draft Amendments to Greenhouse Gas Emissions Disclosures (Proposed amendments to IFRS S2). We strongly support the development of high-quality global standards for sustainability reporting.
The FRC commends the ISSB for its actions to reduce implementation complexity, address interpretation uncertainties and promote proportionality to ensure successful implementation of the IFRS Sustainability Disclosure Standards.
This letter highlights our key points for consideration and is followed by an Appendix which includes our detailed responses to the specific questions posed by the ISSB in the Exposure Draft.
The FRC has extensive experience in standard setting, including in issuing accounting, auditing, assurance and actuarial standards, in addition to setting the UK's Corporate Governance Code and Stewardship Code. We are responsible for the Guidance on the Strategic Report which provides an overarching guidance about the framework in the UK for the reporting of narrative information, including sustainability-related information. We provide the Secretariat for the UK Sustainability Disclosure Technical Advisory Committee (TAC), which provides recommendations to the Secretary of State for Business and Trade for endorsing the IFRS Sustainability Disclosure Standards for use in the UK.
The views in this letter are based on our experience in standard setting and developing guidance for narrative reporting requirements, and have been informed by input from UK stakeholders, including those engaged through the TAC. Therefore, this response reflects this stakeholder input, as well as the broader responsibilities of the FRC.
Scope 3 Category 15 greenhouse gas emissions
The FRC supports the proposed amendment in paragraph 29A(a), which would permit entities to limit disclosure of Scope 3 Category 15 greenhouse gas emissions to 'financed emissions' as defined in IFRS S2 Climate-related Disclosures, subject to it being monitored and reviewed as methodologies, data and technology evolve. We consider this to be a pragmatic approach that reflects current challenges in measuring and assuring greenhouse gas emissions other than financed emissions.
However, we do not support the proposed requirements in paragraphs 29A(b)(i) and 29A(b)(ii) to disclose 'amounts' of derivatives and other financial activities excluded from greenhouse gas emissions disclosure. These may be misleading or of limited relevance to users and is likely to introduce complexity without proportional benefit. Instead, we recommend a principles-based disclosure of qualitative and/ or quantitative information, as appropriate, about an entity's emissions exposure due to its derivatives or other financial activities.
Use of Global Industry Classification Standard
We do not support the proposed hierarchical approach that mandates the use of the Global Industry Classification Standard (GICS) in certain circumstances. We consider this approach inconsistent with core sustainability and financial reporting principles, introduces increased cost and operational burdens, raises concerns about reliance on a proprietary commercial system, particularly if it were modified or discontinued in the future and that the resulting global comparability benefits appear limited. This also creates inconsistencies with other ISSB considerations on jurisdictional reliefs.
We recommend that the ISSB uses option (d) of the hierarchy as the primary basis for determining classification systems, as it allows entities to use systems that underpin their strategic decision-making initiatives, such as transition planning and net zero targets, and that are aligned with their regulatory and financial reporting. We believe this approach results in more decision-useful information about an entity's emissions.
Jurisdictional reliefs - use of GHG Protocol Corporate Standard and applicability of global warming potential values
We support the clarification on the existing jurisdictional relief for the use of alternative greenhouse gas emissions measurement methods and the new relief for using alternative global warming potential (GWP) values by an entity, in whole or in part, when mandated by a jurisdictional authority or exchange on which it is listed. However, when alternative methods or GWP values significantly diverge from the GHG Protocol Corporate Standard or Intergovernmental Panel on Climate Change (IPCC) GWP values, an entity should disclose the divergence and identify affected business areas.
We welcome the opportunity to continue to work with the Board and Staff in the implementation of IFRS Sustainability Disclosure Standards and future standard setting initiatives.
If you have any queries or would like to discuss our comments in more detail, please do not hesitate to contact us.
Yours sincerely
Mark Babington Executive Director, Regulatory Standards Direct telephone line: 020 7492 2323 Email: [email protected]
Appendix
Exposure Draft ISSB/ED/2025/1: Amendment to Greenhouse Gas Emissions Disclosures (Proposed amendments to IFRS S2)
Question 1: Measurement and disclosure of Scope 3 Category 15 greenhouse gas emissions
(a) Do you agree with the proposal to add a new paragraph 29A(a) that would permit entities to limit disclosure of Scope 3 Category 15 greenhouse gas emissions to financed emissions (excluding derivatives-related, banking-facilitated, and insurance-associated emissions), while permitting voluntary disclosure of the excluded categories? Why or why not?
The FRC supports, the proposed relief in paragraph 29A(a), which would allow entities to limit the disclosure of Scope 3 Category 15 greenhouse gas emissions to 'financed emissions' as defined in IFRS S2 Climate-related Disclosures. This support is subject to the relief being proactively monitored and reviewed as methodologies, data and technology improve. For instance, the revision of the GHG Protocol Corporate Standard may provide an opportunity to review this relief in the near future.
This amendment aligns IFRS S2 with the Basis for Conclusions (paragraphs BC127 and BC129 of IFRS S2), which acknowledges the challenges in reliably measuring facilitated, insurance-associated and derivatives-related emissions. Key reporting challenges for preparers include the evolving but still less established measurement methodologies and issues with data availability and quality, particularly from small and medium enterprises in the financial institutions' value chain. These challenges result in reliance on significant judgements and estimates using sector averages which pose difficulties for both reporting and assurance processes. Ultimately, this limits the decision-usefulness of the information for users. As such, this relief offers flexibility and proportionality, with its optional nature allowing market practices to evolve.
However, we acknowledge concerns by investors and other users of sustainability-related financial information, who may not support the relief due to the importance of disclosing these emissions to facilitate effective assessment of systemic and climate-related risks, as well as support progress towards net zero targets.
We note that measurement methodologies have evolved since the ISSB issued IFRS S2, with some major UK financial institutions already adopting the Partnership for Carbon Accounting Financials (PCAF) standard for facilitated and insurance-associated emissions. We are concerned that the ISSB has not revisited its original technical analysis in light of the current rapid developments. Basing amendments on potentially outdated conclusions may result in important market developments and prevailing practices not being considered, thereby increasing the risk that the resulting disclosures provide less decision-useful information to users.
Therefore, the FRC supports this relief subject to it being proactively monitored and reviewed as methodologies, data availability and quality and technologies improve. The ongoing work of PCAF may help address some of the current methodology limitations, although we note its methodology for insurance-associated emissions does not yet cover all products, such as life and health insurance lines, nor does it fully address derivatives.
(b) Do you agree with the requirement for entities applying the above limitation to disclose the 'amount' of excluded derivatives alongside an explanation of what they treat as derivatives for the purpose of limiting disclosure of Scope 3 Category 15 greenhouse gas emissions, and also the 'amount' of other financial activities excluded? Why or why not?
The FRC does not support the proposed requirements in paragraphs 29A(b)(i) and 29A(b)(ii), which would require entities applying the relief under paragraph 29A(a) to disclose the 'amounts' of other financial activities and derivatives excluded from emissions reporting, along with an explanation of what it treats as a derivative.
The FRC questions the usefulness of the derivatives disclosure, as a material derivative amount may not necessarily correlate with significant emissions exposure and may be misleading. Additionally, because derivatives can alternate between asset and liability classifications from year to year, the contextual emissions informational value of such disclosure may be limited. The ambiguity in the proposal regarding whether the disclosed derivative 'amount' should include both assets and liabilities, and whether it should be reported at fair value or nominal value may prompt undue effort for entities. Moreover, the requirement to explain what has been treated as a derivative for this purpose may result in disclosures that are cluttered and necessitate additional effort to ensure connectivity with the financial statements.
In the case of other financial activities, while amounts can provide some indicative sense of the extent of emissions coverage in the disclosures, this is only effective in certain cases, and it is not clear which amounts should be reported. For instance, an entity may disclose that Scope 3 Category 15 greenhouse gas emissions have been reported for 90% of amounts reported in the financial statements for a certain business activity, and the remaining 10% of those amounts could provide an indicative sense of the extent of unreported emissions. However, this would only work if there is a clear measure of activity that is represented by amounts in the financial statements and those amounts correlate with emissions. For example, in the case of facilitated and insurance-associated emissions, revenues from these activities which are in the financial statements or notional values like deal amounts or underwritten insurance contract values (which might be outside the financial statements) could be considered representative amounts. However, if such amounts are reported inconsistently, they lead to non-comparable disclosures that do not provide users with decision-useful information across similar entities.
In addition, it is unclear whether the 'amount' is intended to be measured at nominal value, fair value or some other amount.
We understand that the ISSB's proposal to include the requirement to disclose 'amount' is to allow users to understand the potential magnitude of the emissions that had been excluded and thus the completeness of the entity's Scope 3 Category 15 information. In light of the above concerns, the FRC recommends that the ISSB could meet this need by requiring a principles-based disclosure requirement about an entity's emissions exposure to its derivatives or other financial activities that will replace the proposed 'quantitative only' disclosures in paragraphs 29A(b)(i) and 29A(b)(ii).
This will require entities to provide qualitative and/ or quantitative information, as appropriate, that would enable users to understand the completeness and potential magnitude of financial activities and derivatives not included in the disclosure or information about an entity's exposure to greenhouse gas emissions through derivatives and other financial activities. For example, an entity could provide an explanation of its sectoral and geographical emissions exposure through derivatives. This could include disclosing its involvement, via derivatives, in commodity markets associated with high emissions. Such disclosure, which could include quantitative data, such as an 'amount' of financial activities, provides users with more decision-useful information about the entity.
Question 2: Use of the Global Industry Classification Standards in applying specific requirements related to financed emissions
a) Do you agree with the proposal to permit the use of alternative industry classification systems to GICS, in specified circumstances, when disaggregating financed emissions? Why or why not?
We do not support the proposed amendment that introduces a hierarchical approach mandating the use of the Global Industry Classification Standard (GICS) in certain circumstances. We recommend that instead of applying the proposed hierarchy in the mandated order with options (a) to (c) potentially presenting challenges, the ISSB makes option (d) the primary basis. This approach allows entities to use classification systems that underpin their strategic decision-making initiatives, such as transition planning and net zero targets, and that are aligned with their regulatory and financial reporting. This approach provides users with more decision-useful information about the entity.
In our response to the Exposure Draft on Proposed Amendments to the IFRS Foundation Due Process Handbook we explained our concern about the IFRS Foundation's due process for third-party materials which are required to be used in applying IFRS Standards, but which the IFRS Foundation does not own. GICS is included as one of the examples of such materials. In that response we explained that the UK Sustainability Disclosure TAC recommended to the UK government in its endorsement advice, that the financed emissions requirements in IFRS S2 are amended so that entities are not required to use GICS when disaggregating gross financed emissions by sector/industry classification but might use GICS or a different classification system they use for existing regulatory or financial reporting purposes.
We set out below, in order of significance, our key concerns regarding the proposed amendment relating to the use of GICS.
Conflict with existing core sustainability and financial reporting principles
The FRC does not support the proposed hierarchy for selecting classification systems to disaggregate counterparties' greenhouse gas emissions, which is structured as a rigid decision tree from options (a) to (d).
Option (a), which mandates the use of the GICS in certain circumstances, raises several significant concerns. These include misalignment with core sustainability and financial reporting principles, increased cost and operational burdens for preparers, and the risks associated with reliance on a commercial classification system, particularly if that system were to be modified or discontinued in the future. Additionally, the requirement to use GICS creates inconsistencies with other ISSB considerations.
Options (b) and (c), which defer to climate-related or financial reporting classification systems mandated by a jurisdiction or stock exchange where GICS is not used in any part of the entity, also present challenges. Multinational groups may be subject to different classification requirements across jurisdictions. For example, some large UK financial institutions have multiple primary listings in jurisdictions with different classification mandates. It remains unclear which mandated jurisdiction's requirements would take precedence in such cases.
Under paragraph B38 of IFRS S1, in a group context the 'reporting entity' for sustainability-related information is the entity that prepares the consolidated financial statements under IFRS Accounting Standards. A well-established principle of financial reporting is that consistent policies must be applied across the group. Accordingly, any differences in subsidiary accounts must be adjusted to align with the parent's policies during consolidation. In this context, if a subsidiary, regardless of its materiality, uses the GICS classification system while the parent and other material subsidiaries use a different system, applying GICS to the consolidated sustainability-related information solely due to that subsidiary's practice would create an inconsistent reporting approach in which a subsidiary's policy overrides the group's established sustainability reporting policy.
GICS was not developed for climate-related reporting. Therefore, requiring GICS-based classification across the group could conflict with classification systems used for other financial reporting purposes, such as those that underpin expected credit losses (ECL) calculations. For example, if ECLs (including those driven by climate factors) are based on a non-GICS classification system, applying GICS to sustainability disclosures could impair connectivity and consistency of financial information reported.
While we recognise that the ISSB's proposed hierarchy seeks to promote comparability, a quality that contributes to useful information in sustainability-related reporting, we are also concerned about the challenges associated with options (a) to (c) of the hierarchy. These challenges may ultimately undermine, rather than support, the objective of paragraph 1 of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information, which requires entities to disclose information about sustainability-related risks and opportunities that is useful to primary users of general-purpose financial reports.
In light of these concerns, the FRC recommends that the ISSB makes option (d) the primary basis for determining classification systems. This option permits entities to classify counterparties by industry using classification systems that underpin their strategic decision-making initiatives, such as transition planning and net zero targets, and that are aligned with their regulatory and financial reporting. We believe this approach is principles-based and more closely aligned with the intent of paragraph 1 of IFRS S1 to provide users with decision-useful information.
Costs burdens and operational challenges
GICS is a proprietary system and requires licensing fees, which may vary depending on the entity size and use case. Mandating its use increases costs for UK financial institutions required to apply it across their groups.
The requirement to use GICS throughout the group, simply because one part of the entity applies it, would result in parallel classification systems. This imposes undue cost on entities due to duplicative reporting, significant reconciliation demands and maintenance of fragmented internal systems.
Moreover, GICS does not provide classification codes to unquoted companies thereby limiting its applicability to private companies.
Commercial classification system concerns
Industry classification systems are either public, activity-based systems for economic purposes or proprietary, market-based systems that are commercially licensed for investment analysis.
Given the wide range of existing market-based systems, the FRC is concerned about mandating the use of a single commercial classification system in certain circumstances, specifically GICS, as proposed in the ISSB's hierarchy. If the system was no longer maintained or supported in the future, the ISSB would need to consider amending this requirement. Also, it could restrict product choice and stifle innovation in classification systems.
Inconsistency with other ISSB's considerations
Jurisdictional authorities and exchanges may require specific classification systems. While the ISSB has applied jurisdictional reliefs in other contexts (e.g., GHG Protocol Corporate Standard and global warming potential values), this principle is not consistently applied in the case of GICS as an entity would still be mandated to use GICS if a small part of it uses it despite the jurisdictional rules elsewhere requiring an alternative classification system.
Questionable comparability benefit
Jurisdictional relief related to the use of GHG Protocol Corporate Standard and the application of GWP values, which the FRC supports, already impact the comparability of financed emissions disclosures. In this context, it is questionable whether mandating GICS to a large group on the basis that an insignificant part of such a group uses it (even if used for non-core purposes) would meaningfully enhance global comparability, given the variability introduced by jurisdictional reliefs associated with these emissions.
We understand that the ISSB considers that use of GICS would not result in significant interoperability issues with the ESRS E1 Climate change as the statistical classification of economic activities in the EU (NACE) can be mapped into GICS easily. However, this raises questions about the necessity of mandating GICS if it can yield comparable outcomes with other classification systems.
b) Do you agree that entities not using GICS should be required to disclose the industry-classification system used to disaggregate their financed emissions information and explain the basis for their industry-classification system selection? Why or why not?
We support the requirement for entities not using GICS to disclose the industry system used and explain the basis for their industry-classification system selection. This enhances transparency and provides users with the necessary context for understanding reported emissions.
Question 3: Jurisdictional relief from using the GHG Protocol Corporate Standard
Do you agree with the proposed clarification that the existing jurisdictional relief from using the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) is permitted to an entity in whole or in part if a jurisdictional authority or an exchange on which it is listed mandates an alternative method? Why or why not?
We support the clarification to the existing jurisdictional relief as it resolves interpretation uncertainty and mitigates the potential for inconsistent reporting practices that could affect comparability. It also reduces duplicative reporting if local regulations mandate alternative measurement methods.
However, we recommend that the ISSB considers enhancing the disclosure requirements under this relief such that if an entity uses an alternative measurement method that significantly diverges from the GHG Corporate Standard it should clearly explain this and specify the parts of the entity that are affected.
Question 4: Applicability of jurisdictional relief for global warming potential values
Do you agree with the proposal to extend the jurisdictional relief that would allow an entity in whole or in part to use global warming potential (GWP) values that are mandated by a jurisdictional authority or an exchange on which it is listed? Why or why not?
We support the proposal to allow an entity in whole or in part to use GWP values mandated by a jurisdictional authority or exchange on which it is listed. This approach aligns with the relief provided under the GHG Protocol Corporate Standard and prevents duplicative calculations, particularly in multi-jurisdictional contexts.
Similar to the GHG Protocol Corporate Standard relief, we recommend that the ISSB considers enhancing the disclosure requirements under this relief to require an entity that uses alternative GWP values that significantly diverge from the Intergovernmental Panel on Climate Change (IPCC) GWP values to clearly explain this and specify the parts of the entity that are affected.
Question 5: Effective date
Do you agree with the proposed approach for setting the effective date of the amendments and permitting early application? Why or why not?
We support the proposed approach for setting an effective date that applies as soon as possible, with the option for early application. This would align with the ongoing implementation of IFRS S2 and streamline the process.
Question 6: Other comments
Do you have any other comments on the proposals set out in the Exposure Draft?
We have no further comments on the proposals set out in the Exposure Draft.