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August 23, 2023

Preparing for Decarbonisation 2.0

 

Rahul Agarwal
Head of ESG Research Services, 
Crisil Global Research & Risk Solutions

 

Saravanan Sekar
Lead Sustainability SME
Crisil Global Research & Risk Solutions

 

Sustainability reporting is seeing a transformative wave as focus worldwide is sharpening on decarbonisation.

 

The momentum is being built by the new sustainability reporting regulations in the United Kingdom, the European Union and the United States, leading to the establishment of frameworks for an era characterised by elevated corporate sustainability and accountability standards. Organisations are not only under pressure to actively address their carbon emissions, but also required to transparently communicate the efforts and progress. 

 

Climate reporting serves as a pivotal bridge between the commitment to decarbonisation and the demonstration of tangible results, fostering accountability and encouraging a collective shift towards a more sustainable future.

 

Sustainability reporting poised for a seismic shift

 

In June 2023, the International Sustainability Standards Board (ISSB) introduced IFRS S1 and IFRS S2 inaugural standards, revolutionising global sustainability disclosures.  In July, the European Commission adopted the European Union Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive.

 

As these standards take effect, the landscape of sustainability reporting would transform, enabling succinct and precise disclosures. Both ISSB and ESRS stress transparent climate disclosures, emphasising sustainability risk materiality. They urge detailed reportage of greenhouse gas emissions and highlight the role of scenario analysis aligned with global climate goals.

Snapshot of Regulatory expectation from ISSB and ESRS

 

IFRS S1 and S2 focus on sustainability risks and climate disclosures, while ESRS covers the broader ESG pillars. ISSB uses the Sustainability Accounting Standards Bureau (SASB) guidance without sector mandates, but ESRS is developing sector-specific standards. Both value independent attestation, but ESRS offers clearer assurance progression. ISSB prioritises carbon credits for offsets, while ESRS highlights greenhouse gases removal via such credits.

 

Securities and Exchange Commission regulations coming up next

 

As awareness of climate-related disclosures increases, here is an overview of how the US markets regulator, the Securities and Exchange Commission (SEC) intends to strengthen climate-related disclosures:

Securities and Exchange Commission Regulations coming up next

 

The aim is to establish comprehensive guidelines for transparent and consistent climate disclosure by companies. The regulations will cover governance details, emissions reporting scope (including direct and indirect emissions), and quantifying financial impacts of climate risks. They could even promote setting of interim emissions reduction targets and focus on the significant sources of emission. Continuous improvement in Scope 3 emissions reporting, seeking external assurance and staying updated on evolving standards are also expected to be emphasised.

 

Companies in adopting jurisdictions must enhance data collection, reporting and governance to conform. These converging standards underscore the ongoing global move towards transparent, standardised sustainability reporting.

 

Differences in frameworks necessitate nuanced approaches, but the clear message is heightened business accountability in sustainability, affecting strategy, risk management and stakeholder engagement.

 

How to prepare for Decarbonisation 2.0

 

As climate-related disclosure requirements continue to take shape, companies are faced with the need to proactively ready themselves for the task of reporting in alignment with the forthcoming regulations.

 

Here are the key focus areas for companies to develop accurate and compliant climate disclosures:

How to prepare for Decarbonisation 2.0 under way

 

The initial stage in formulating your climate reporting approach involves assessing your company's level of maturity concerning climate change. The following discussion outlines how to prepare for climate disclosures based on varying degrees of readiness and maturity among companies.

 

Focus area #1: Reassessment of material climate risks

 

It is important for companies to identify pertinent climate risks and opportunities related to the company's operations, value chain, and stakeholders. This entails assessing potential financial effects and accounting for the concerns of investors, customers, employees, and other stakeholders.

 

Aspect

Beginners

Advanced

Stakeholder interaction

Engage with stakeholders for climate risk insights

Leverage past assessments for improved vulnerability insight

Risk evaluation

Examine susceptibility to climate hazards by evaluating geographical locations and inherent vulnerabilities

Leverage tools and data analytics to measure potential financial impacts of climate risks

Supply chain analysis

Analyse the supply chain to comprehend the possible impact of climate risks on suppliers and vendors

Employ advanced monitoring systems to monitor climate data, extreme events, supply chains, and regulations

Financial implications

Measure financial impacts of identified risks on revenue, costs, and market value

Integrate climate risk into strategic planning for organisation-wide consideration

 

Focus area #2: Setting targets and devising your decarbonisation pathway

 

Developing a decarbonisation strategy has become an imperative for companies. A well-structured decarbonisation strategy not only aligns a company with global sustainability goals but also ensures regulatory compliance and risk mitigation. Firms will need to focus on setting credible science-based targets supported by cost-effective decarbonisation levers. 

 

Aspect

Beginners

Advanced

Emissions identification

Gather direct (Scope 1) and indirect (Scope 2) emissions data from owned and third-party sources

Determine materiality of different Scope 3 emissions categories and define clear reporting boundaries

Inventory management

Begin to understand the company's operational footprint and consider software solutions for data collection

Establish robust processes for collecting, verifying and fine-tuning Scope 3 data

Target setting

Establish credible baseline and set interim emission goals, targeting major sources first and expanding as practices improve

Set ambitious reduction targets to achieve Net-Zero, considering abatement costs,return on investment (ROI),and soft benefits of different levers

Continuous improvement

View the development of carbon disclosures as a journey, gradually expanding their scope

Enhance Scope 3 emissions reporting, secure external validation, and stay current with evolving standards

 

Focus areas #3: Adopting precise and transparent reporting

 

Adopting accurate and transparent climate reporting is a crucial stride for organisations dedicated to sustainability. This involves not just precisely gauging and sharing carbon footprints but also guaranteeing that reporting methods comply with regulatory standards.

 

Aspect

Beginners

Advanced

Framework utilisation

Utilise established frameworks such as TCFD recommendations for structuring climate disclosures

Explain the rationale behind selected metrics and targets, and detail progress towards attaining them

Governance disclosure 

Disclose climate governance details, including management and supervisory roles

Outline the company's transition strategy, detailing actions to cut emissions and address climate risks

Emissions disclosure

Provide disclosures on scope emissions in both aggregated and disaggregated format

Ensure clarity on methods for calculating and reporting climate metrics, along with third-party verification

 

Conclusion

 

Evolving climate disclosure regulations are poised to usher in a new era of transparency and accountability for companies. By requiring comprehensive reporting of climate-related risks, opportunities and governance structures, these regulations will empower companies to navigate the complexities of a changing climate landscape. 

 

Companies can proactively prepare for these regulations by conducting comprehensive assessments of their climate-related risks and opportunities. This involves identifying emissions sources, quantifying potential financial impacts, and implementing robust governance structures.

 

By investing in accurate data collection, advanced monitoring systems, and external assurance, businesses can ensure their reporting meets regulatory standards. 

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