Climate Change and emissions continue to be a focus for governments, regulators, and institutional investors. Emissions are a key reporting topic in the international sustainability disclosure standards, as well as the Canadian counterpart. This makes it imperative for companies to understand emissions terminology.
Scope 1 are the direct Greenhouse Gas (GHGs) emissions that occur from sources that are owned or controlled by an entity.
Scope 2 are the indirect GHGs from the generation of purchased or acquired electricity, steam, heating, or cooling consumed by an entity; these are emissions that occur at the facility where the electricity is generated.
Scope 3 are indirect GHGs (not included in Scope 2) that occur in the supply chain of an entity, including both upstream and downstream. Examples of Scope 3 emissions include employee commuting; business travel; transportation of goods to location; and combustion of oil and gas, including from use in vehicles.
Scope 3 emissions are the most complex for companies to calculate and have the highest likelihood of reporting errors because companies are required to report on the emissions from the end use of their product.
A practical example is oil and gas multinational Shell. Approximately 95 percent of their emissions are Scope 3 and are outside of their control, making it difficult to get data to report accurately.
The fourth category of emissions is not within the scope of ESG reporting frameworks and standards, but it is valuable to understand.
Scope 4 emissions are those that are avoided due to the use of more efficient goods and services that may offset higher emitting sources. This category is not well-defined, calculation methodologies are not standardized, and these emissions are not consistently measured or reported by companies.
This year, 2024, Canada’s financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), will require federally regulated financial institutions to publish climate disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) framework. Federally regulated entities in Canada include the country’s federally regulated banks, as well as insurance companies, and federally incorporated or registered trust and loan companies, among others.
Additionally, the international sustainability reporting standard’s climate-related standard, ISSB S2, requires financial institutions to disclose financed emissions.
These business-critical institutions are required to report their financed and facilitated emissions, which will require them to collect climate risks and emissions data from their clients. This means the companies they do business with will also have to make climate-related disclosures in order to access financing and other financial services. Private companies will be required to provide climate data, not only publicly traded companies.
Financed emissions are emissions that institutions finance through loans and investments.
Facilitated emissions are emissions from activities such as underwriting, securitization, and advisory services
Federally regulated banks or insurance companies that fail to meet the forthcoming disclosure requirements could face potential regulatory enforcement and possible litigation. Environment-related investor litigation and arbitration is on the rise in Europe and the US; expect to see the same in Canada.
Emissions remain a key reporting topic, but they are challenging to measure and calculate correctly. It is prudent to begin data collection early to be able to meet the future compliance requirements.
If you aren’t sure about your reporting obligations, we can help. At Equipois:ability Advisory we’re here to support you by simplifying sustainability disclosure requirements. Contact Deidra Garyk, 403-801-2608, dgaryk@equipoisability.com, www.equipoisability.com.
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