ISSB's Sue Lloyd reveals carbon offset was most debated point internally in designing the IFRS' ISS
The users of sustainability disclosures under ESRS or IFRS sustainability standards, will have to clearly understand where the standards come from, the philosophy behind them, and not take the standards at face value, according to Finance Watch chief economist Thierry Philipponnat.
At the heart of the question is double versus single materiality. Philipponnat takes scoop 3 emissions as an example.
"On the face of it, ISSB and EFRAG are saying the same thing: 'consider scope 3 emissions if they are material'," he says. "Seems like a good logic and one with which everyone agrees. Yes, but no! No, because material doesn't mean the same thing for ISSB and EFRAG, in one case it will be financial materiality and on the other hand it will be double materiality."
For example, are the emissions from driving a car financially material to the carmaker who sold the car, he continues. "Today, the answer is clearly no. But if you consider ESRS logic, the fact that you and I might be driving this afternoon and therefore emitting CO2, will have an impact on the broader economy in the medium to long run and therefore it will have a financial impact. When for ISSB this is not material, for the ESRS it is."
There are several other examples where differences in approaches will result in different outcomes in the reporting, like: intensity versus absolute emissions, carbon dioxide removal, offsetting.
Philipponnat used the example of accounting for carbon offsets, which is allowed in the ISSB standards and not in the ESRS, as an example during a recent webinar hosted by the CFA Institute. Sue Lloyd, vice chair of the ISSB, replied during the webinar that offsets had been the most debated point in designing the standards (see box out).
"We need to make clear what standards we are using if we want to know what lies behind the words," Philipponnat tells Corporate Disclosures. "Difficult debates come from ill-defined words and concepts, and we need to define precisely what we're talking about. We need to make clear, and we need to make sure that we're talking about the same thing. If we're not talking about the same thing. There's just no chance of achieving anything."
Financial Watch takes the view that you need the double materiality approach to have a clear vision of the situation, he clarifies. "It's not about good or bad, it's not a religious debate, it is a technical one, and from a technical standpoint, financial materiality has a source and that source is impact materiality."
"So if you are only looking at financial materiality in your reporting then you are missing something essential," he continues. "I don't think it is sufficient to look only at one side of the coin [it leads to] making decisions on weak grounds."
Philipponnat hears the voice of issuers and investors on the challenge of having two sets of standards: "It's obvious, it's going to be very difficult for them. Now, once you said that, when you look very closely at the ISSB's building blocks approach - it's a very nice concept. But does it work in practice? I'm not so sure."
He concludes: "There's clearly a need and on both sides, and I repeat on both sides, for goodwill of people to work together and try to construct something together."
In a webinar hosted by the CFA Institute in June, Philipponnat took the example of carbon offsets to demonstrate that the outcome of reporting under ESRS or ISSB standards would give a very different picture to the users of the information.
The ISSB allows to account for carbon offsets in its standards, while EFRAG argued they are too weak to be included in the reporting.
Sue Lloyd also part of the webinar responded: "What we should do with carbon offsets, was the one proposal in our exposure draft, where we had the biggest debate internally."
The use of carbon offsets "gives rise to diverse reactions", she said.
"What we decided to do on balance was to be as neutral as possible," Lloyd explained. "[A company says] that [it has] got this particular carbon emission strategy, what the heck does it actually involve? How [is it] getting there and what techniques [is it] using?"
"Our exposure draft actually before it went into didn't allow the use of carbon offsets so we changed it and that was because we thought it was better actually for the company sort of to confess if you like that that was how they would [meet these] grand targets."
Lloyd added that by including carbon offsets in the reporting it gives investors "as much information as possible to disagree" and "go to the company and say this isn't good enough".
She concluded: "It was designed for transparency purposes to actually open up these conversations [...] it was an example of neutrality. But for policy reasons, I can see why you might take a different approach."
