IFRS S2 requires an entity to disclose its gross greenhouse gas emissions—that is, its greenhouse gas emissions before taking into consideration any removal efforts (for example, from an entity’s intended use of carbon credits). The gross greenhouse gas emissions disclosure helps users of general purpose financial reports determine whether the entity is reducing its own greenhouse gas emissions or those in its value chain and, if it is, the extent to which it is doing so.

The Exposure Draft also proposed that an entity be required to disclose its emissions intensity separately for Scope 1, Scope 2 and Scope 3. Emissions intensity is expressed as metric tonnes of CO₂e per unit of physical or economic output. The ISSB acknowledged that emissions intensity metrics are helpful to users of general purpose financial reports because these metrics normalise an entity’s greenhouse gas emissions, enabling users to compare greenhouse gas emissions between different entities. Together with absolute greenhouse gas emissions, emissions intensity metrics help provide a complete picture of an entity’s greenhouse gas emissions profile over time. For example, an entity’s absolute greenhouse gas emissions could increase if the entity expands its operations, but, at the same time, the emissions intensity could fall because the entity is becoming more efficient. In this example, the disclosure of the entity’s absolute greenhouse gas emissions alone might not communicate the greenhouse gas emissions reduction the entity has achieved in its business operations.

Although emissions intensity metrics are useful, users of general purpose financial reports would be able to compare disclosures between entities only if the entities use the same denominator to calculate emissions intensity. The ISSB observed that it is not appropriate to prescribe a single standardised approach to calculating intensity metrics because the relevant denominator often depends on several factors, including an entity’s industry and business model and users’ preferences. Therefore, the ISSB decided that although emissions intensity information is useful, IFRS S2 should not explicitly require an entity to disclose its emissions intensity. This decision was informed by the current practice of users, who either calculate an entity’s emissions intensity themselves or obtain a calculation from a third-party provider. An entity’s disclosure of absolute greenhouse gas emissions in accordance with IFRS S2 would enable users to calculate emissions intensity themselves if this disclosure were combined with other information (including financial data already available in an entity’s financial statements).

The ISSB also confirmed that disclosure of emissions intensity metrics would be required if these metrics are judged to be useful to users of general purpose financial reports, in accordance with paragraph 15(b) of IFRS S1. This provision requires an entity ‘to disclose additional information if compliance with the specifically applicable requirements in IFRS Sustainability Disclosure Standards is insufficient to enable users of general purpose financial reports to understand the effects of sustainability-related risks and opportunities on the entity’s cash flows, its access to finance and cost of capital over the short, medium and long term’. IFRS S2 also requires an entity to disclose metrics used by its governance body or management to measure progress towards any targets. Therefore, an entity is required to disclose an emissions intensity metric if that information is material (in accordance with paragraph 15(b) of IFRS S1) or if the entity’s governance body or management uses such a metric to manage the entity’s climate-related risks and opportunities (in accordance with paragraph 28(c) of IFRS S2) or both.

The ISSB also noted that the Industry-based Guidance that accompanies IFRS S2 includes industry-based activity metrics that might help users of general purpose financial reports calculate emissions intensity. For example, an entity in the cruise lines industry might include activity metrics for available lower berth kilometres (ALB-KM) or average passenger cruise days (APCD) as described in Volume 65—Cruise Lines. In determining appropriate industry-specific disclosures, IFRS S2 refers entities to this guidance.

The ISSB decided that an entity is required to measure its Scope 1, Scope 2 and Scope 3 greenhouse gas emissions in accordance with the GHG Protocol Corporate Standard. Most respondents to the Exposure Draft agreed with the proposed use of the GHG Protocol Corporate Standard. However, some respondents commented that other methods for measuring greenhouse gas emissions are more commonly used in some jurisdictions (see paragraph BC88). The ISSB decided to reference the GHG Protocol Corporate Standard in IFRS S2 to provide a common basis for measurement. Although various measurement approaches are available within the GHG Protocol Corporate Standard, the ISSB concluded that using this single reference would improve the comparability of entities’ disclosures by narrowing the range of permitted measurement approaches. This decision was also informed by the ISSB’s understanding that the GHG Protocol Corporate Standard is the predominant method used by entities around the world and in most jurisdictions.

The requirements in IFRS S2 for measuring greenhouse gas emissions are largely based on the GHG Protocol Corporate Standard because the use of this method for measuring greenhouse gas emissions provides common approaches and principles that:

Although IFRS S2 refers to the GHG Protocol Corporate Standard as a basis for measurement of greenhouse gas emissions, IFRS S2 also sets out additional requirements, such as the categories that an entity is required to include in its measurement of Scope 3 greenhouse gas emissions and the inputs it is required to use to measure those emissions. The ISSB noted that the specific requirements in IFRS S2 must be applied in the event of any inconsistency with the GHG Protocol Corporate Standard.

The GHG Protocol Corporate Standard is the most commonly used standard globally for measuring greenhouse gas emissions, and is directly referenced in many jurisdictions, including Brazil, India, Mexico, the Philippines and the UK. However, some jurisdictions require entities to report their emissions in accordance with national measurement schemes. These jurisdictions include Australia, China, France, Japan, South Korea and Taiwan. Entities in these jurisdictions—and other jurisdictions that require an entity to use other approaches for measuring greenhouse gas emissions—could incur additional costs in meeting the requirements in IFRS S2. To respond to this issue, the ISSB confirmed that if an entity is required by a jurisdictional authority or an exchange on which the entity is listed to use a method of measuring greenhouse gas emissions that differs from the GHG Protocol Corporate Standard, the entity is permitted to use that method. The ISSB agreed to this relief to avoid duplicative reporting and agreed that it only applies if an entity would otherwise be required to use both the GHG Protocol Corporate Standard and another method to measure its greenhouse gas emissions as a result of applying IFRS S2.

Some entities choose to use other methods for measuring greenhouse gas emissions. Some respondents to the Exposure Draft raised concerns about the cost for these entities if they are required to change the methods they currently use and instead use the GHG Protocol Corporate Standard. These respondents argued that such entities should be allowed to choose their own method for measuring their greenhouse gas emissions. As stated in paragraph BC86, the ISSB concluded that referencing a common framework for measuring greenhouse gas emissions will improve the comparability between entities’ disclosures. However, to allay these respondents' concerns, the ISSB has provided relief for a limited period. This relief permits an entity that has used other methods in the annual reporting period immediately preceding the date of its initial application of IFRS S2 to continue using that method in the first year of its application of IFRS S2 (see paragraphs BC166⁠–⁠BC169).

Some respondents to the Exposure Draft raised concerns about the requirement in IFRS S2 for an entity to use a third-party method, observing that any changes to the method would be outside the ISSB’s control and not subject to the IFRS Foundation’s due process. The GHG Protocol Corporate Standard was first published in 2001 and is expected to be updated periodically to clarify the method for measuring greenhouse gas emissions. The ISSB considered these respondents’ concerns and decided that IFRS S2 refers to the 2004 version of the GHG Protocol Corporate Standard, which was the latest version available when the Exposure Draft was published (31 March 2022). If the GHG Protocol Corporate Standard were to be updated, the ISSB will assess the likely effects of those changes before proposing any changes to IFRS S2 to reflect those updates. The ISSB will update IFRS S2 to include a reference to a modified version of the GHG Protocol Corporate Standard only after it has made this assessment and sought feedback on any proposed change in accordance with the IFRS Foundation’s due process.

The Exposure Draft did not specify the inputs an entity would be required to use to calculate greenhouse gas emissions. Several respondents to the Exposure Draft commented that although the GHG Protocol Corporate Standard is a common basis for measuring greenhouse gas emissions, it allows an entity to choose particular inputs and make specific assumptions when calculating its greenhouse gas emissions. These variables include global warming potential (GWP) values and emission factors. Variations in entities’ use of GWP values and emission factors could compromise the comparability of entities’ disclosures.

GWP values are multipliers applied to seven constituent greenhouse gases (listed in paragraph BC98) to convert them into a standardised metric (CO₂e), which enables an entity to convert and aggregate various greenhouse gases into absolute greenhouse gas emissions data. The most frequently used GWP values are defined by the Intergovernmental Panel on Climate Change (IPCC). These values are refined in periodically published IPCC assessment reports. As of June 2023, the latest GWP values are defined in the IPCC Sixth Assessment Report.2 The ISSB decided to introduce a requirement in IFRS S2 for an entity to use GWP values based on the latest IPCC assessment report when converting the constituent greenhouse gases into CO₂e. This requirement is intended to enhance the comparability of entities’ greenhouse gas emissions disclosures, and to ensure greenhouse gas emissions data reflects the latest scientific knowledge. This approach is consistent with the GHG Protocol Corporate Standard, which recommends the use of the most recent GWP values.

Although the ISSB requires an entity to use the latest updated GWP values to convert greenhouse gases into CO₂e, the ISSB also recognises that in some cases the GWP values used by an entity might differ depending on the jurisdictions in which the entity operates and the sources of data the entity uses to measure its greenhouse gas emissions. For example, emission factors—used by an entity to convert activity data into greenhouse gas emissions information—often already have the information converted into CO₂e using GWP values that might or might not align with the most recently updated GWP values from the IPCC. If an entity has identified the emission factors that best represent the entity’s activities, and these are only available in CO₂e and not based on the most recent GWP values, then the entity is required to use those emission factors. Additionally, an entity is required to disclose information that enables users of general purpose financial reports to understand the measurement approach, inputs and assumptions the entity has used to measure its greenhouse gas emissions and why these measurement approaches, inputs and assumptions are relevant to its greenhouse gas emissions (see paragraph BC95). As part of this disclosure requirement, an entity is required to explain which GWP values it uses and, if necessary, why it has not used the updated GWP values from the latest IPCC report.

An emission factor is a coefficient that enables an entity to convert quantitative activity data into a measurement of the greenhouse gas emissions resulting from those activities. For example, if an entity is assessing the Scope 1 greenhouse gas emissions from its delivery fleet, the entity might select fuel consumption or the distance travelled by the fleet as the activity data. This data is then converted to greenhouse gas emissions data using emission factors. Emission factors can be estimated from several published sources, such as the International Energy Agency or national sources in jurisdictions where greenhouse gas emissions disclosure is mandatory. The emission factors an entity uses to measure its greenhouse gas emissions are specific to its circumstances. Therefore, the ISSB decided that IFRS S2 would not prescribe or attempt to standardise emission factors. Instead, IFRS S2 requires an entity to select and use the most appropriate emission factors that most specifically represent the activity that is generating the greenhouse gas emissions. To help an entity select the appropriate emission factors to use for measuring its Scope 3 greenhouse gas emissions, IFRS S2 provides a measurement framework. This framework requires an entity to prioritise inputs and assumptions with particular characteristics designed to improve the representational faithfulness of the entity’s greenhouse gas emission measurement (paragraphs B38⁠–⁠B54 in IFRS S2).

Respondents to the Exposure Draft said that, to minimise variation, the ISSB could require an entity to use a standardised measurement approach, inputs and assumptions. Alternatively, respondents suggested that the ISSB could require an entity to disclose the measurement approach, inputs and assumptions that it uses in measuring greenhouse gas emissions. The ISSB decided to introduce a requirement in IFRS S2 to ensure that the inputs and assumptions an entity has used to calculate its greenhouse gas emissions are disclosed to users of general purpose financial reports, especially if those inputs are not prescribed in IFRS S2. An entity is required to disclose information that enables users to understand the measurement approach, inputs and assumptions it has used to measure its greenhouse gas emissions. The entity is also required to disclose its reasoning for why it has chosen the measurement approach, inputs and assumptions it has used to measure its greenhouse gas emissions. The disclosure of this information is required to enable users to understand the emission factors and activity data, and the measurement uncertainty associated with these inputs. For activity data, this disclosure includes information such as whether the data is based on economic or physical outputs and what the data represents (for example, for Scope 3 greenhouse gas emissions Category 1, the data might represent quantities of goods or services bought by the entity). For emission factors, this disclosure includes information such as the source of the data (for example, direct measurement, supplier-specific data or industry-average data) or the level of the data (for example, facility-level or corporate level).

The requirement for an entity to disclose the measurement approach, inputs and assumptions it has used to measure its greenhouse gas emissions could result in very detailed information, some of which could be immaterial and therefore risk obscuring material information. However, the ISSB observed that this disclosure requirement is subject to paragraphs B29⁠–⁠B30 of IFRS S1, which establishes requirements on the aggregation and disaggregation of information. Rather than disclosing information about every input, an entity is required to disclose information at a sufficient level of detail and aggregation to result in the disclosure of material information. For example, when an entity measures its Scope 3 greenhouse gas emissions, it might use different emission factors and activity data inputs to capture greenhouse gas emissions for different parts of its value chain. In this circumstance, the entity would be required to only disclose information about inputs that are helpful to users of general purpose financial reports to understand how the entity has measured its greenhouse gas emissions.

An entity might change its assumptions and inputs over time. The ISSB decided to require an entity to disclose information about, and the reasons for, any changes the entity makes during the reporting period to the measurement approach, inputs or assumptions it uses to measure its greenhouse gas emissions. This requirement is particularly important for Scope 3 greenhouse gas emissions disclosures because measurement techniques are rapidly evolving and therefore the approaches an entity uses are likely to change over time.

IFRS S2 requires an entity to disclose its Scope 1, Scope 2 and Scope 3 greenhouse gas emissions. In disclosing its greenhouse gas emissions, an entity is required to include all seven greenhouse gases identified in the United Nations Framework Convention on Climate Change (UNFCCC) and agreed upon as part of the Kyoto Protocol: carbon dioxide (CO₂), methane (CH₄), nitrous oxide (N₂O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulphur hexafluoride (SF₆) and nitrogen trifluoride (NF₃). Each gas contributes to climate change in different ways, and each has a different lifespan. When presenting data on these gases, it is common to convert the data on each gas to a standardised metric, CO₂e, to enable comparison and to determine the gases’ individual and total contributions to global warming. An entity uses GWP values to make these conversions and then aggregates all these gases into a single greenhouse gas data point (see paragraph BC92).

Some respondents to the Exposure Draft suggested that the disaggregation of greenhouse gas emissions by the seven constituent greenhouse gases might provide useful information, especially when information about an entity’s non-CO₂ emissions (for example, methane emissions) provides insight into a particular climate-related risk or opportunity. The ISSB observed that although there might be specific situations in which disaggregation by the constituent gases could be important, disaggregation is not relevant in all circumstances. Therefore, the ISSB confirmed that IFRS S2 does not explicitly require an entity to disaggregate its greenhouse gas emissions disclosures by the constituent gases. The ISSB noted that paragraph B30 of IFRS S1 includes requirements on disaggregation that would result in the disclosure of the constituent gases being required if such disaggregation provides material information that would otherwise be obscured if aggregated. The Illustrative Examples that accompany IFRS S2 provides some examples that illustrate some considerations in determining whether it is necessary to disaggregate greenhouse gas emissions disclosure.

The ISSB observed that the Industry-based Guidance that accompanies IFRS S2 might help an entity determine whether greenhouse gas emissions should be disaggregated by constituent gas. For example, for entities in the oil and gas exploration and production industry, the Industry-based Guidance specifies information about methane emissions (Volume 11—Oil & Gas—Exploration & Production), noting that with ‘… natural gas production from shale resources expanding, the management of the emission of methane, a highly potent greenhouse gas … has emerged as a major operational, reputational, and regulatory risk for companies’ in this industry. In this instance, the disaggregation of methane emissions is highlighted as being likely to provide material information.

The Exposure Draft proposed that an entity be required to disaggregate its Scope 1 and Scope 2 greenhouse gas emissions into those referable to the consolidated accounting group and those referable to other investees excluded from the consolidated accounting group. This disclosure was proposed in the Exposure Draft to facilitate comparability because the GHG Protocol Corporate Standard allows entities to take different measurement approaches to determine which emissions are included in the calculation of Scope 1, Scope 2 and Scope 3 greenhouse gas emissions. For example, an entity can include the emissions of unconsolidated investees using an equity share approach or control approach. These different approaches mean that the way information is provided in an entity’s financial statements about its investments in other entities might not align with how its greenhouse gas emissions are calculated. It also means that two entities with identical investments in other entities could report different greenhouse gas emissions in relation to those investments by virtue of choices made in applying the GHG Corporate Protocol Standard.

Most respondents to the Exposure Draft agreed with this proposal. However, some respondents questioned whether this proposed requirement would override the choices an entity is permitted to make in accordance with the GHG Protocol Corporate Standard. The ISSB clarified the wording of the requirement to confirm that an entity is required to disclose its greenhouse gas emissions measured in accordance with the GHG Protocol Corporate Standard, but the entity is not required to use a particular approach to measure its greenhouse gas emissions (that is, IFRS S2 does not require an entity to use the equity share approach, or either control approach). Rather, IFRS S2 only requires an entity to disaggregate the amount it has measured using its chosen approach. The ISSB confirmed that an entity is required to disaggregate its Scope 1 and Scope 2 greenhouse gas emissions into those referable to the consolidated accounting group and those referable to other investees excluded from the consolidated accounting group. The ISSB also confirmed that an entity is required to disclose the approach it has used to measure its greenhouse gas emissions.

The ISSB considered how this requirement would be applied by an entity applying IFRS Accounting Standards to a joint arrangement. Applying IFRS 11 Joint Arrangements, an entity classifies a joint arrangement as either a joint venture or a joint operation. An entity generally accounts for an investment in a joint venture using the equity method in accordance with IAS 28 Investments in Associates and Joint Ventures. The ISSB noted that an equity method investee is not part of the consolidated accounting group in accordance with IFRS Accounting Standards. Therefore, in relation to a joint venture, paragraph 29(a)(iv)(2) of IFRS S2 applies to any Scope 1 or Scope 2 greenhouse gas emissions. In contrast, in a joint operation, an entity has rights to the assets and obligations for the liabilities related to the arrangement. In accordance with IFRS 11, the entity recognises, in relation to its interest in a joint operation, its share of those assets, liabilities, revenues and expenses, and accounts for each item in accordance with the applicable IFRS Accounting Standard. In other words, the assets, liabilities, revenues and expenses in relation to an interest in a joint operation are accounted for as part of the consolidated accounting group. Consequently, the ISSB noted that paragraph 29(a)(iv)(1) of IFRS S2 applies to any Scope 1 or Scope 2 greenhouse gas emissions in relation to a joint operation.

In addition, the ISSB observed that, in accordance with other generally accepted accounting principles (GAAP), an entity is permitted to account for an investee by applying proportionate consolidation. In relation to such investees, paragraph 29(a)(iv)(1) of IFRS S2 applies to any Scope 1 or Scope 2 greenhouse gas emissions.

Respondents to the Exposure Draft asked the ISSB to clarify whether an entity is required to disclose its Scope 2 greenhouse gas emissions using a market-based approach, a location-based approach or both approaches. These respondents favoured an entity disclosing its Scope 2 greenhouse gas emissions using both approaches.

A market-based approach involves an entity measuring the emissions from purchased electricity using source- or supplier-specific emission factors. Electricity suppliers and contractual instruments vary in the greenhouse gas emissions they produce depending on the energy source or technology used. An entity using a location-based approach measures the average emissions intensity of the grids on which energy consumption occurs (most commonly using grid-average emission factor data).

The ISSB agreed that each approach serves a useful purpose. A location-based approach enables users of general purpose financial reports to understand the risks and opportunities associated with local grid resources and greenhouse gas emissions. A market-based approach enables users to understand the risks and opportunities created by contractual relationships and an entity’s procurement actions. In some circumstances, the information provided by the two approaches could differ significantly, for example, if an entity has entered into contractual relationships to source electricity from renewable sources.

The ISSB agreed that allowing an entity to choose which approach to use would reduce comparability and might result in disclosures weighted towards more positive data that might not faithfully represent the entity’s greenhouse gas emissions. This issue could have been addressed by requiring all entities to disclose both market-based and location-based approaches. However, the ISSB noted that for some entities and jurisdictions such a requirement would introduce a significant change to current practice and it might not always be necessary for both sets of information to be provided. The ISSB decided that an entity is required to disclose Scope 2 greenhouse gas emissions using the location-based approach and provide disclosures to help users of general purpose financial reports understand the contractual instruments into which it has entered.

The ISSB noted that more detailed information about an entity’s contractual instruments could help users of general purpose financial reports better understand the entity’s efforts to reduce its Scope 2 greenhouse gas emissions. However, the ISSB decided not to require a market-based approach to measuring Scope 2 greenhouse gas emissions due to the significant variation in mechanisms that an entity could use and depending on the maturity of the market in which it operates and is located. To reflect the challenges associated with a market-based approach, the ISSB decided that an entity is required to disclose information to help users understand any contractual instruments the entity has entered into for the sale and purchase of energy. In fulfilling this requirement, the ISSB noted that information about an entity’s market-based Scope 2 greenhouse gas emissions might be included as part of this disclosure.

The ISSB confirmed that IFRS S2 requires all entities to disclose information about their Scope 3 greenhouse gas emissions. This disclosure includes information about which of the 15 categories defined in the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011) (GHG Protocol Value Chain Standard) are included in an entity’s emissions measurement. The GHG Protocol Value Chain Standard supplements the GHG Protocol Corporate Standard. The ISSB noted that the categories included in an entity’s Scope 3 measurement will depend on the entity’s facts and circumstances. An entity is required to consider the relevance of all 15 categories, but might determine that not all categories are applicable to the entity and therefore do not need to be included in the measurement of its Scope 3 greenhouse gas emissions. The ISSB also agreed that for entities engaged in financial activities associated with some industries, information about financed emissions is important. Citing particular considerations associated with the measurement and disclosure of Scope 3 greenhouse gas emissions, the ISSB decided to provide related application guidance in IFRS S2 (see paragraphs BC122⁠–⁠BC129).

Respondents to the Exposure Draft had mixed views on the proposed requirement for an entity to disclose Scope 3 greenhouse gas emissions. Most users of general purpose financial reports who responded to the Exposure Draft agreed that entities should be required to disclose absolute gross Scope 3 greenhouse gas emissions. These users argued that an entity is exposed to transition risks associated with its greenhouse gas emissions, including those greenhouse gas emissions within its value chain. For example, an increase in carbon price or the introduction of stricter greenhouse gas emissions regulations could lead to higher costs or decreased availability of resources within an entity’s value chain. Users also commented that Scope 3 greenhouse gas emissions disclosures provide them with more complete and comparable information about an entity’s greenhouse gas emissions. For example, these disclosures would enable users to understand whether an entity’s Scope 1 and Scope 2 greenhouse gas emissions have decreased as a result of structural changes in the entity’s operations or the outsourcing of greenhouse gas emissions (thereby increasing its Scope 3 greenhouse gas emissions).

Many preparers who responded to the Exposure Draft agreed with the proposed disclosure requirement for absolute gross Scope 3 greenhouse gas emissions. However, these preparers also expressed concerns about particular aspects of the requirements, including challenges related to the availability of data, use of estimates, calculation methodologies and other sources of uncertainty. Although greenhouse gas emissions, including Scope 3 greenhouse gas emissions, are well defined in the GHG Protocol Corporate Standard, calculating Scope 3 greenhouse gas emissions is a process that involves data and methodological challenges and is still being refined. Scope 3 greenhouse gas emissions include those arising from activities not under the direct ownership or control of an entity. Therefore, the entity might face challenges related to data availability and quality as well as the associated cost of data collection. These challenges contribute to uncertainty in the measurement of Scope 3 greenhouse gas emissions. Some respondents argued that because of such challenges, IFRS S2 should not require the disclosure of Scope 3 greenhouse gas emissions.

The ISSB made a number of decisions intended to address the challenges with Scope 3 greenhouse gas emissions that were raised by respondents. Those decisions included:

The ISSB acknowledged that if a reporting entity has entities in its value chain with reporting periods that differ from the entity’s reporting period, it might be difficult to collect greenhouse gas emissions information that aligns with the timing of the entity’s reporting. To provide relief in such circumstances, the ISSB agreed that the entity can use greenhouse gas emissions information from entities in its value chain for a reporting period different from the entity’s as long as:

The ISSB initially agreed that the relief permitting an entity to use greenhouse gas emissions information from a reporting period that is not aligned with its own reporting period would be available for the measurement of Scope 3 greenhouse gas emissions. However, the ISSB ultimately decided that this relief would also be available for the measurement of Scope 1 and Scope 2 greenhouse gas emissions. The ISSB noted that this relief might also be relevant in other circumstances beyond greenhouse gas emissions disclosures and the ISSB will monitor whether there is a need to expand this relief. The ISSB observed that information about the greenhouse gas emissions referable to an entity’s investees might be categorised as Scope 1, Scope 2 or Scope 3 greenhouse gas emissions depending on the measurement approach that the entity uses in applying the GHG Protocol Corporate Standard.

The ISSB acknowledged the concerns raised by respondents about the measurement of Scope 3 greenhouse gas emissions (see paragraph BC112) and confirmed that these measurements are expected to be imperfect and to rely on estimation. However, the ISSB observed that requiring entities to prioritise the use of measurement approaches, inputs and assumptions that possess particular characteristics would enable entities to faithfully represent their Scope 3 greenhouse gas emissions. Therefore, the ISSB introduced a Scope 3 measurement framework that categorises and prioritises the inputs used to measure Scope 3 greenhouse gas emissions (paragraphs B38⁠–⁠B54 of IFRS S2). This framework is part of the application guidance that accompanies IFRS S2 and is intended to assist entities in measuring Scope 3 greenhouse gas emissions. The guidance is also intended to improve the consistency and comparability of Scope 3 greenhouse gas emissions disclosures, and to reduce measurement uncertainty in the estimation of Scope 3 greenhouse gas emissions.

Building on the GHG Protocol Value Chain Standard, the measurement framework requires an entity to prioritise particular types of data used to measure Scope 3 greenhouse gas emissions, namely:

In addition to the measurement framework, the ISSB decided that an entity is required to use ‘all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort’ to measure its Scope 3 greenhouse gas emissions (see paragraph B39 of IFRS S2). The ISSB notes that for the purposes of this measurement framework, reasonable and supportable information might need to include information about past events, current conditions and forecasts of future conditions, depending on the sources of the Scope 3 greenhouse gas emissions.

The ISSB confirmed that the characteristics in paragraph BC117 are not listed in order of priority. Instead, these are desired characteristics required to be considered when an entity determines which combination of measurement approaches, inputs and assumptions is most appropriate to faithfully represent its value chain activities and greenhouse gas emissions. The ISSB decided that if an entity estimates greenhouse gas emissions rather than using direct measurement information, the entity is required to prioritise information that is as specific as possible and consistent with the activities that occur in the value chain. For example, an entity is required to prioritise information that faithfully represents the technology used for the activity in the value chain and its associated emissions. The ISSB noted that when an entity considers the characteristics set out in the measurement framework, it is required to consider the trade-offs between the characteristics described to determine the best approach to measuring the entity’s Scope 3 greenhouse gas emissions. For example, an entity that is estimating its greenhouse gas emissions for the year ending 2023 might use an emission factor that is not timely (for example, the emission factor might be from a research project in 2017). However, this emission factor might best represent the greenhouse gas emissions associated with the technology used in the entity’s value chain as at the reporting date.

As part of the Scope 3 measurement framework, an entity is required to prioritise Scope 3 greenhouse gas emissions data that is verified. The ISSB recognised that verification might be challenging for Scope 3 greenhouse gas emissions data, but also that verification might take place in several ways (for example, internally or externally). Therefore, IFRS S2 does not specify how the information is verified, but requires an entity to disclose the extent to which the entity’s Scope 3 greenhouse gas emissions are measured using inputs that are verified (see paragraphs B53⁠–⁠B54 of IFRS S2).

In addition to applying the requirements in the measurement framework, an entity is required to provide the accompanying disclosures specified in paragraph B56 of IFRS S2. These disclosures are intended to help users of general purpose financial reports understand the characteristics of the data the entity has prioritised in its calculation of Scope 3 greenhouse gas emissions, and therefore to understand the quality of the data that an entity used and the basis for the entity’s measurement of these emissions. These disclosures also help an entity communicate to users how the various data sources are used to estimate its Scope 3 greenhouse gas emissions. Users who responded to the Exposure Draft said that measurement that relies on estimates is preferable to having no information about Scope 3 greenhouse gas emissions at all. These users said estimates are preferable even if that information is subject to considerable measurement uncertainty, provided that entities are transparent about the inputs used and the measurement uncertainties associated with the amount disclosed.

If an entity determines that it is impracticable to estimate and disclose its Scope 3 greenhouse gas emissions, the entity is required by paragraph B57 of IFRS S2 to disclose information that enables users of general purpose financial reports to understand how it is managing its Scope 3 greenhouse gas emissions. IFRS S2 uses the same definition of ‘impracticable’ as IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and thus sets a high threshold for how an entity determines whether it is impracticable to meet the requirements. As described in paragraph B57 of IFRS S2, a requirement is impracticable only if the entity cannot apply it after making every reasonable effort to do so. For the avoidance of doubt, this threshold is higher than a cost-benefit threshold.3 The ISSB noted the non-mandatory guidance on ‘impracticable’ published by the SME Implementation Group in April 2012,4 which clarifies that ‘impracticable’ refers to effort, not cost. In agreeing to include an exemption based on impracticability, the ISSB noted that in practice it expects entities to rarely use the exemption because the measurement framework for Scope 3 greenhouse gas emissions has been designed to be applied by entities with a range of resources and circumstances. The framework also permits the use of estimation, which can be based on third-party information (for example, industry-average information).

Financial organisations, including commercial banks, asset managers and insurance companies, are increasingly being asked to disclose the extent of their investment and lending activity associated with sustainability-related risks and opportunities. In relation to climate-related risks and opportunities, such disclosure involves an entity disclosing the greenhouse gas emissions associated with its financial activities. The term ‘financed emissions’ is often used to refer to the absolute greenhouse gas emissions that banks and investors finance through their loans and investments. IFRS S2 requires entities that engage in such activities to disclose information about financed emissions as an extension of the requirement in paragraph 29(a)(vi) of IFRS S2 for an entity to disclose its Scope 3 greenhouse gas emissions, including Category 15 (investments).

The application guidance in paragraphs B58⁠–⁠B63 of IFRS S2 sets out requirements for the disclosure of financed emissions by entities engaged in financial activities associated with asset management, commercial banking and insurance. The guidance is based on the proposals for financed emissions that were included in Appendix B to the Exposure Draft.

The ISSB decided to provide the other industry-based materials as guidance accompanying IFRS S2 (see paragraphs BC134⁠–⁠BC138). However, the ISSB determined that requiring entities with activities in asset management, commercial banking and insurance to disclose additional information about financed emissions was appropriate.

The application guidance is intended to enhance consistent and comparable disclosure of financed emissions information while allowing for innovation. It is also intended to enable the market to converge on measurement methodologies for different asset classes as they emerge and gain acceptance, such as those developed by the Partnership for Carbon Accounting Financials. Although the requirements support the use of different measurement approaches, they also provide users of general purpose financial reports with the information necessary to understand an entity’s exposures and the approaches the entity has used to measure its financed emissions.

The ISSB decided to make targeted amendments to the proposed requirements on financed emissions to improve their clarity. In particular, the ISSB agreed not to proceed with the proposals for entities with activities in commercial banking and insurance to disclose information about the carbon-related industries to which they are exposed. The proposed requirements were intended to help users of general purpose financial reports understand where climate-related transition risk is likely to be concentrated in the entity’s portfolio. Although respondents to the Exposure Draft generally agreed with this approach, their feedback suggested a high level of subjectivity surrounding the industries that are—or are not—considered to be carbon-related. The ISSB agreed and concluded that the requirement to disclose information more generally about the industries to which an entity is exposed would enable users to make their own determinations regarding ‘carbon-related industries’.

The ISSB decided to confirm and clarify the proposed requirements for an entity engaged in financial activities associated with commercial banking or insurance to disclose information about its undrawn loan commitments. That is, the entity would be required to disclose separately its financial exposures and its emissions related to those undrawn loan commitments. The ISSB also decided to confirm and clarify the proposed requirement for an entity engaged in financial activities associated with commercial banking to provide disclosures on a gross basis. That is, the entity would be required to provide these disclosures without considering risk mitigation, which the ISSB noted would not affect the greenhouse gas emissions associated with a loan. Additionally, for all financial activities, the ISSB decided to remove the proposal for an entity to include derivatives when calculating its financed emissions, citing the lack of an established methodology for the asset class.

For entities engaged in financial activities associated with asset management, the ISSB decided to require disclosure at the level of total assets under management (AUM). The ISSB made this decision because the revenue and reputation of these entities would be affected by the fees from and performance of all client portfolios, and also because financed emissions are an indicator of exposure to climate-related risks that can impact investment performance and fees. The ISSB acknowledged that, in many cases, a more detailed disaggregation of the disclosure—such as by strategy or product—might be likely to provide users of general purpose financial reports with more decision-useful information. The ISSB noted that, in such cases, paragraph B30 of IFRS S1 requires that ‘an entity shall not aggregate information if doing so would obscure information that is material’. Therefore, the ISSB emphasised that if an entity determines that disaggregation by strategy, asset class or any other characteristic is necessary to ensure that material information is not obscured, such disaggregation is required. The ISSB stressed that, in such a case, information should be disaggregated if it reveals information that is material in relation to the reporting entity rather than to the underlying investment or portfolio of investments. Finally, the ISSB decided to require the disclosure of AUM for Scope 1, Scope 2 and Scope 3 greenhouse gas emissions because it is likely that some entities will be unable to obtain information about all three scopes of greenhouse gas emissions for every investment.

The ISSB confirmed that IFRS S2 requires financed emissions disclosure only for insurance-related financial activities associated with an insurer’s assets. In other words, IFRS S2 does not require disclosure of the ‘associated emissions’ of underwriting portfolios in the insurance and reinsurance industries. Similarly, the ISSB decided not to proceed with the proposed requirements for an entity engaged in financial activities associated with investment banking to disclose information about its ‘facilitated emissions’, citing the lack of established methodology in relation to such emissions.

Paragraph 33(h) of IFRS S2 requires an entity to explain how the latest international agreement on climate change, including jurisdictional commitments that arise from that agreement, has informed any climate-related targets. This requirement is intended to help users of general purpose financial reports understand how an entity is considering its exposure to risks and opportunities associated with the latest international agreement on climate change, including its exposure to risks and opportunities associated with jurisdictional commitments that arise from that agreement. Additionally, this requirement is designed to help users understand whether the entity’s planned activities are consistent with the most up-to-date scientific consensus. For example, an entity might set a target to halve its Scope 1, Scope 2 and Scope 3 greenhouse gas emissions by a particular date because this reflects what the latest climate science deems necessary to meet the goals of the Paris Agreement, which the entity must meet to comply with the local laws and regulations set out by the jurisdiction in which the entity is based. In this example, the latest international agreement on climate change, including jurisdictional commitments that arise from that agreement, has informed the amount by which the entity aims to reduce its greenhouse gas emissions, the emissions scopes included in the greenhouse gas emissions target and the time frame over which the target applies.

The Exposure Draft proposed a requirement for an entity to disclose how its climate-related targets compare with the latest international agreement on climate change. The word ‘compare’ was intended to avoid a simple binary response that the target aligns with, or does not align with, the latest international agreement on climate change. However, some respondents to the Exposure Draft suggested that many entities would in fact be likely to respond to the wording by disclosing a binary response. Respondents were also unclear about what disclosure was required in determining how a target ‘compares’ with the latest international agreement on climate change. Finally, users of general purpose financial reports questioned whether a binary response would result in useful information about how a climate-related target compares with the latest international agreement on climate change. Therefore, the ISSB agreed to amend the wording of the requirement so that an entity is required to describe how any climate-related target is informed by the latest international agreement on climate change, including jurisdictional commitments that arise from that agreement.

IFRS S2 does not require an entity to align its climate-related targets with the latest international agreement on climate change, including with the jurisdictional commitments that arise from that agreement. Rather, IFRS S2 requires an entity to disclose information about how the target is informed by the latest international agreement on climate change, including jurisdictional commitments that arise from that agreement. This information helps users of general purpose financial reports understand whether and why the entity’s climate-related targets deviate from international consensus. For example, entities in particular sectors might not be able to align their climate-related targets with the latest international agreement. In this example, it would be helpful to users to understand why the climate-related targets deviate from the latest international agreement on climate change. In contrast, if an entity has established targets consistent with the latest international agreement on climate change (for example, as a result of regulations that apply to the entity’s operations) the disclosures provided would reflect that alignment.

The ‘latest international agreement on climate change’ is defined as the latest agreement between members of the UNFCCC, which sets norms and targets for a reduction in greenhouse gases. At the time IFRS S2 was issued, the latest such agreement was the Paris Agreement (April 2016) according to which signatories agreed to limit the increase in the global average temperature to well below 2 degrees Celsius above pre-industrial levels, and to pursue efforts to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels.

The ISSB confirmed that when an entity discloses how its climate-related targets are informed by the latest international agreement, that description is also required to include consideration of applicable jurisdictional commitments that arise from that agreement. For example, an entity would consider nationally determined contributions (NDCs), which are a central element of the Paris Agreement. NDCs represent efforts by each country to reduce national greenhouse gas emissions and adapt to the effects of climate change.

Until the Paris Agreement is replaced, an entity is required to reference the objectives set out in the Paris Agreement when disclosing how the entity’s own targets are informed by the latest international agreement on climate change, including jurisdictional commitments that arise from that agreement. However, if the Paris Agreement is replaced, an entity would be required to disclose information about how its targets are informed by that new international agreement.

The requirement to explain how the latest international agreement on climate change has informed any climate-related targets applies to all relevant climate-related targets, not only greenhouse gas emissions targets. Although the latest international agreement on climate change—the Paris Agreement—primarily focuses on greenhouse gas emissions reduction, it also includes other objectives related to climate change that support greenhouse gas emissions reduction targets. For example, it includes goals related to adaptation to the adverse impacts of climate change and goals to increase finance flows consistent with a pathway towards lower greenhouse gas emissions. An entity might set climate-related targets that are informed by different aspects of the international agreement on climate change, which should be described in the entity’s disclosures. For example, an entity in the agriculture sector might have specific climate-related targets (for example, intermittent aeration) that are informed by its jurisdiction’s NDC measures for its agriculture sector.

Paragraph 34(a) of IFRS S2 requires an entity to explain whether a third party has validated the climate-related target it has set, or is required to meet by law or regulation, and the methodology for setting the target. The ISSB noted that ‘validation’ is a common term used in disclosing climate-related targets, especially in referring to whether the climate-related target is ‘science-based’. In other words, whether the climate-related target is in line with what the latest climate science says is necessary to meet the goals of the Paris Agreement. For example, the Science-based Targets Initiative (SBTi) provides a ‘target validation service’ for an entity to validate its greenhouse gas emissions reduction targets, as described in the SBTi’s Target Validation Protocol for Near-term Targets (Version 3.0, 2021). However, the ISSB recognised that ‘validation’ is a technical term in some industries and has a number of different meanings. For example, in the banking industry, validation relates to models and to specific procedures or applications, often carried out by third parties. For the avoidance of doubt, the ISSB confirmed that the use of the term ‘validation’ in IFRS S2 is only in reference to whether and how a climate-related target has been tested and confirmed—by a third party—in relation to the latest climate science. Additionally, IFRS S2 does not require an entity to obtain third-party validation for its climate-related targets. Instead, IFRS S2 requires the entity to disclose whether its climate-related targets have been validated by a third party.

Paragraph 36(d) of IFRS S2 requires an entity to disclose whether a climate-related target was derived using a sectoral decarbonisation approach. A sectoral decarbonisation approach, which is used by initiatives such as the SBTi, recognises that entities in different sectors will have specific challenges associated with the transition to a lower-carbon economy (for example, where greenhouse gas emissions are concentrated in the value chain will vary by sector). Therefore, a sectoral decarbonisation approach to setting greenhouse gas emissions targets takes a sector-by-sector approach to translate greenhouse gas emissions targets made at the international level (for example, established through the latest international agreement on climate change) into sector-based benchmarks, against which the performance of individual entities can be compared.

Stakeholders are increasingly focusing on entities’ transition plans and greenhouse gas emissions targets. Many entities set net greenhouse gas emissions targets and use carbon credits to fulfil their commitments. IFRS S2 is not designed to express a view on whether it is appropriate for an entity to use carbon credits in setting its greenhouse gas emissions targets or as part of its transition plans. The requirements set out in IFRS S2 are designed to provide transparency about an entity’s planned use of carbon credits and information about those carbon credits.

The Exposure Draft used the term ‘carbon offset’ which has been amended to ‘carbon credit’. The ISSB decided to use the term ‘carbon credit’ in IFRS S2 in the context of offsetting greenhouse gas emissions. A carbon credit is an instrument generated or bought by an entity to offset its greenhouse gas emissions. The ISSB noted that this term was more consistent with the language used by others, including in jurisdictional standards, and therefore agreed that changing the term would facilitate interoperability.

Many respondents to the Exposure Draft agreed that an entity should be required to disclose its intended use of carbon credits if that disclosure does not obscure information about the entity’s planned efforts to reduce greenhouse gas emissions. Therefore, many respondents requested that an entity’s planned use of carbon credits, as part of meeting any net greenhouse gas emissions target, is clearly distinguished from efforts to achieve the entity’s gross greenhouse gas emissions targets. The requirements in paragraph 36(e) of IFRS S2 reflect users’ need to gain insight into an entity’s approach to reducing greenhouse gas emissions and the role of carbon credits in the entity’s net greenhouse gas emissions targets.

Users of general purpose financial reports said that they need information about an entity’s reliance on carbon credits, its approach to generating credits, and the credibility and integrity of the scheme from which the entity obtains the credits. This information is important to users because additional climate-related risks and opportunities arise from uncertainty about the suitability of some schemes, the available technology and future prices of carbon credits. For example, carbon capture and storage technology might prove ineffective, or regulations might change to discourage or ban entities from using specified carbon credit schemes in response to associated food shortage issues, regime changes or climate activism efforts. Therefore, IFRS S2 includes requirements that enable users to understand an entity’s plan for reducing greenhouse gas emissions, whether and how the entity plans to use carbon credits and the quality of those credits.

If an entity discloses information about its planned use of carbon credits, IFRS S2 requires the entity to provide information about the type of credit, including whether the credit is nature-based or based on technological carbon removals. Disclosure about which method is associated with the carbon credit helps users of general purpose financial reports understand an entity’s risk profile. For example, many technological solutions are currently uneconomical at commercial scales and will likely require substantial investment to be viable in the future. In contrast, nature-based approaches aim to enhance natural carbon sinks, such as through afforestation, soil-based carbon sequestration and the use of other biomass stores. Nature-based approaches are often more cost-effective than technological solutions, but might prompt concerns about ‘permanence’ and ‘additionality’ (these terms are explained in paragraph BC156), and about their secondary effects on other social and environmental issues, such as food production.

Stakeholder feedback identified ‘permanence’ and ‘additionality’ as two essential features for assessing the quality of carbon offset schemes. ‘Permanence’ refers to how long the greenhouse gas emissions will be safely removed from the atmosphere, and ‘additionality’ refers to whether any new climate benefits have been brought about by a particular investment that would not have occurred anyway. Although these metrics can be useful, assessing permanence and additionality is complex. Therefore, instead of requiring an entity to disclose its assessment of permanence and additionality, IFRS S2 requires the entity to disclose information about any other factors necessary for users of general purpose financial reports to understand the credibility and integrity of the credits the entity plans to use. This requirement was included to elicit information to enable users to assess additionality and permanence.