TOKYO -- The corporate sector's impact on the climate will come under greater scrutiny as the International Financial Reporting Standards Foundation is set to establish a global standard for companies' disclosure of such risks by June.
Environment-related disclosure standards have been difficult to implement because of a lack of consistency across jurisdictions. But if the disclosure of greenhouse gas emissions and other information is now required under a global framework, investors will be able to compare companies more easily. It is thought that such a framework will push companies to take climate change more seriously.
As a first step, the IFRS Foundation announced the establishment of a new organization responsible for creating these standards -- the International Sustainability Standards Board -- on Wednesday during the 26th U.N. Climate Change Conference of the Parties in Glasgow.
Private organizations had been creating their own environmental, social and corporate governance standards, an area that includes the disclosure of companies' activities that impact on the climate and the environment. Some of these standards are implemented in Europe, under which information is disclosed to stakeholders, while rules in the U.S. focus on numerical information and indicators to shareholders.
The new standards will be based on the recommendations of the Task Force on Climate-related Financial Disclosure, which was established by the world's financial authorities.
The task force had previously defined the concept of disclosure but left it to companies to determine scenarios to be used for analysis and apply their own methods. As a result, while the framework had been widely used around the world, the level of disclosure by companies had varied considerably and quantitative information had been limited.
Companies already use accounting standards set by the IFRS Foundation to prepare their financial statements. It is expected that its climate change information disclosure framework will be widely adopted.
One of the key areas where there could be more clarity for companies and investors is in the disclosure of different categories of emissions. Greenhouse gas emissions are split into three categories -- Scopes 1 to 3 -- based on a range of corporate activity that is taken into account when calculating emissions.
The disclosure of Scope 1 emissions, which come directly from the company's own activities such as fuel combustion in factories, and Scope 2 emissions that include indirect sources such as the generation of electricity supplied by other companies, may become mandatory under the new rules. For example, Honda produced Scope 1 and 2 emissions equivalent to 4.5 million tons of carbon dioxide in fiscal year 2020.
It may also become mandatory to report Scope 3 emissions, which refer to greenhouse gases produced in the entire process of manufacturing a product that were not accounted for in Scopes 1 and 2.
For example, a manufacturer may be required to disclose the emissions from the procurement of parts and the use of the products it sells. It may also be necessary to calculate emissions when employees travel by air on business.
As an illustration, Honda's Scope 3 emissions, mainly from driving of the cars and motorcycles it sold, are 249.98 million tons, or about 220 times its Scope 1 emissions in fiscal 2020.
Some have called for executive salaries to be linked to climate risk responses. The U.K.'s Royal Dutch Shell, for one, has said it will link 20% of its executives' long-term remuneration to their achievement of environmental management, including carbon dioxide reduction.
Countries and regions are also hoping to have a say in creating those standards. The European Union is likely to demand more detailed disclosure. A report on climate change standards issued in September by an EU advisory body included actual and target emissions, including Scope 3, as well as energy use and power supply composition.
From April, companies listed on the prime market of the Tokyo Stock Exchange will be required to reveal information based on recommendations by the Task Force on Climate-related Financial Disclosure or an equivalent framework.
Under the new rules, Japanese companies will be forced to take additional measures. Particularly worrying for Japan is the impact of disclosure on energy usage by power source, given the country's high dependence on coal-fired power generation.
China and Canada are also hoping to have a seat in the International Sustainability Standards Board, while the U.S. is expected to submit its own draft rules by the end of this year.