ISSB and Scope 2 Misconceptions Create New Risks for Greenhouse Gas Accounting

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ISSB and Scope 2 Misconceptions Create New Risks for Greenhouse Gas Accounting

*Since the date of this news item’s publication, the organization ‘The International REC Standard Foundation’ has changed to ‘The International Tracking Standard Foundation: Founder of I-REC (I-TRACK Foundation).’


The International Financial Reporting Standard (IFRS) plays a critical role in supporting uniform financial market reporting in line with global leading practices. In 2021, the IFRS announced the formation of its International Sustainability Standards Board (ISSB) during COP 26, with the intention of supporting high-quality and standardized sustainability disclosure.

In June 2023, IFRS launched its inaugural sustainability standards—IFRS S1 and IFRS S2. The standards are set to provide useful guidance to the corporate reporting community. However, the design of IFRS S2 makes a significant departure from established practices, and in turn, creates significant risks for electricity consumers and the wider sustainability community.

Departure from Established Practices. IFRS S2 sets out climate-related principles, including for scope 2 reporting, and is generally aligned with the globally recognized Greenhouse Gas Protocol for Scope 2 Accounting (GHGP2). However, while the current GHGP2 requires that disclosing entities report emissions using both the “location-based method” and the “market-based method”, paragraph B30 of IFRS S2 considerably weakens these reporting requirements. It does so by only mandating that disclosing entities report based on the location-based method while allowing disclosure of market-based accounting at the discretion of the reporting entity. This seemingly minor adjustment threatens far-reaching impacts.

Overview of challenges with the IFRS S2 Approach. While the I-REC Standard Foundation supports IFRS’ efforts to improve and standardize sustainability reporting, it advocates for a balanced approach to reporting both market and locational emissions. Allowing disclosing entities to use only location-based accounting will (i) weaken corporate accountability and permit entities to selectively showcase market-based solutions; (ii) place unfair economic burdens on less developed nations, specifically those in the Global South; and (iii) create downstream issues aligning environmental policies such as the Carbon Border Adjustment Mechanism (CBAM) with fairness principles put forth by the World Trade Organization (WTO). In the following sections, each topic is considered in more detail.

Weakening corporate accountability. Mandating location-based accounting while removing market-based disclosure requirements diminishes corporate accountability. This is the case because location-based accounting, alone, groups all electricity consumers in a grid under the same average emissions factor—removing the need to account for and disclose individual electricity consumption activities. This means that if a given grid becomes “cleaner”, all entities can report progress against their scope 2 decarbonization.

While this approach encourages collective action to decarbonize grids, it removes individual action from the public eye. This move also allows an entity taking no action at all to receive the same recognition for “progress” as industry peers directly contributing new renewable capacity to the grid. This structure creates two problems. First, entities making genuine impacts are not individually recognized, and second, entities taking no action are not held accountable—rather, they are rewarded.

To be sure, the move to allow market-based reporting solves the first of these issues. It allows corporates to showcase their good work. However, failure to mandate market-based disclosure means that the entities doing no work can hide behind the positive actions of peers.

Creating economic burdens in less developed economies. Moreover, the emphasis on location-based accounting incentivizes large electricity buyers to move operations and foreign direct investment (FDI) to countries with cleaner grids—typically, the more developed economies. The logical temptation is to assume location-based accounting will incentivize countries with dirtier grids to decarbonize quickly to retain or attract FDI. However, the reality is more complex.

Upper-income economies simply have more financial resources and established systems to act swiftly and capitalize on this opportunity. Developing nations, particularly those in the Global South, face larger hurdles to decarbonization on a short time horizon—including bureaucratic inefficiency, limited access to finance, cumbersome energy sector policies, and capacity gaps that affect quick and effective implementation.

The move of IFRS S2 to require only location-based accounting will effectively redirect FDI out of the countries that need it most. Rather than encourage companies to build new renewable capacity and receive recognition for it—a structure made possible through market-based instruments, such as power purchase agreements—electricity buyers will instead be encouraged to move electricity consumption to grids that already provide cleaner electricity.

Misalignment with international trade principles. In addition to concerns surrounding accountability and equitability, it is important to consider the potential impacts of the IFRS standards against the backdrop of international trade and sustainability agreements such as the CBAM, which will need to be carefully aligned with WTO principles. For instance, while the WTO does allow for environmental barriers to trade, it also asserts fair trade and anti-exclusion principles. Removing the agency of end-users to improve the emissions profile of their products and forcing them only to report based on national emissions is, in fact, discriminatory. It embeds historical electricity generation profiles and removes incentives to change the electricity generation of the dirtiest grids. It will result in the divestment of economic activity from the places that need it the most instead of investment in renewable generation.

The I-REC Standard Foundation urges the ISSB to consider a balanced approach that strengthens both location and market-based accounting. Addressing the climate emergency requires robust corporate action and long-term collective efforts to decarbonize grids. Corporations need to be accountable, and nations must receive support in providing high-quality, transparent data.

To achieve a balance and create synergies between corporate action and national collaboration, an accounting system that addresses both market-based mechanisms and support at the national/regional level is vital. Softening one side of the accounting framework, as the IFRS S2 has done, threatens correspondingly weaker action.

We underscore the importance of engagement and input in this critical matter and encourage stakeholders to participate in the ISSB’s decision-making process.

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