Performing scenario analysis will help companies better understand the resilience of their strategy and business model to climate-related changes, developments or uncertainties. The results of that scenario analysis will, in turn, give companies deeper insight into how they can fine-tune their overall strategy and business model in order to enhance risk management procedures that are fit to tackle the climate change challenges. In practice, this will likely be an iterative process, the success of which requires appropriate oversight as well as collaboration across multiple different business functions.
Focus on the value chain to reduce greenhouse gas emissions
The reduction of greenhouse gas (GHG) emissions into the atmosphere, including those from carbon dioxide and other gases, is a critical component of climate change mitigation efforts. IFRS S2 specifically requires companies to disclose the absolute gross GHG emissions they generated during the reporting period. The GHG emissions are generally measured in accordance with the Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard (2004) (the GHG Protocol). However, in recognition of the scale of this undertaking for all companies required to comply, IFRS S2 does give some flexibility the use of the GHG Protocol when it comes to aligning the GHG measurement approach with it. For example, if a jurisdictional authority requires companies to use a different method to measure its GHG emissions, IFRS S2 will allow to use this alternative method. Moreover, during the first annual reporting period in which a company applies IFRS S2, it can continue using a measurement method other than the GHG Protocol to measure its greenhouse gas emissions, if it had used an alternative approach in the annual reporting period immediately preceding the date of initial application of the standard.
A closer look at the scope of the GHG disclosure requirements shows that they cover different types of emissions, including:
- Scope 1 direct greenhouse gas emissions that occur from sources that are owned or controlled by a company;
- Scope 2 indirect greenhouse gas emissions that occur from the generation of purchased electricity, heat or steam consumed by a company ; and
- Scope 3 indirect emissions outside Scope 2 GHG emissions that occur in the value chain of a company, including both upstream and downstream emissions.
Given that the complexity of the Scope 3 disclosure which captures GHG emissions along a company’s value chain which, historically, has presented a number of challenges for companies in terms of data quality and its collection, the standard provides a temporary transition relief. The relief permits companies not to disclose Scope 3 GHG emissions in the first year that they apply the standard. The ISSB acknowledges that companies may not always be able to effectively influence their Scope 3 emissions, especially in the short term.