As companies get to grips with the practicalities of their carbon emissions reporting requirements, the enormity of the task is tempting some to retreat from their commitments.
The trend towards mandatory ESG regulations across the globe, coupled with technological advancements and a rising focus on transparency across supply chains, underscores the urgency for companies of all sizes to adapt and engage proactively with sustainability principles.
Corporate governance pressure means the larger corporates are already actively involved in carbon reporting; allocating budget and resources. For everyone else it's a balancing act between doing some reporting or not at all. In Asia, most companies are barely getting started.
Following the formalised ISSB standards, some countries of the region are introducing their own mandatory sustainability reporting requirements. In this way, the standards are becoming clearer, allowing local jurisdictions to better structure their reporting requirements.
Australia has already announced that from July 2024, mandatory reporting will begin. The MAS in Singapore has been a leader in coming up with transition finance taxonomies, sustainable finance frameworks - a proper structured report, no longer just a statement, but a format conforming to ISSB - which allows the rest of the finance sector to safely proceed. New regulations in Hong Kong and the Philippines will be operative in 2025. Malaysia and Indonesia are catching up and are expected to act on this at the latest in 2026.
Until recently, companies have focused their attention on emissions from their own operations that fall within the GHG protocol’s scope 1 and 2 framework. They now need to account for GHG emissions along their value chains and product portfolios, which is covered by scope 3 of the protocol.
The launch of the ISSB standards in 2023 made scope 3 mandatory, with a transitional period. Companies will now have to start factoring to collect scope 3 value chain data, engaging their suppliers. Investors must deal with the companies upstream, to collect the data directly at source and attribute data to disclosures made by the companies themselves.
There are points of resistance at every turn. One common complaint is how far up the value chain constitutes realistic and meaningful reporting. But as the process develops and becomes more widespread, we will see the emergence of an ecosystem of third party verifiers, including companies that are focused on sustainability audit. Data quality and transparency will improve to facilitate progress tracking.
Technological assistance
Before 2023 there was confusion about what to report. Last year it became clearer because of the ISSB standards and this year it’s about getting the work done. Technology, particularly artificial intelligence, has a key role in the transition towards a more environmentally-friendly economy. AI's ability to aggregate and harmonise ESG data, optimise resource usage and enhance energy efficiency shows its potential in reducing environmental impacts.
Most people struggle with understanding this new concept of carbon accounting. Targeted software will allow carbon emissions reporting to conform to an ISO standard format, with a methodology verified by a third party. Digital tools and resources are no longer confined to large corporations and financial institutions. ESG reporting regulations are now increasingly extending to non-listed companies and SMEs. A plethora of new digital tools and resources are emerging to serve this need and pricing is becoming more competitive, making the process affordable for smaller firms.
The path to decarbonisation will not be smooth, however. New regulations - the EU’s Corporate Sustainability Reporting Directive, for example - are driving global institutions to reconfigure their operations to minimise their climate commitment liabilities.
For investors, there are challenges in that a high proportion of their portfolio holdings are incorporated in other countries not subject to local regulation. This creates several layers of complication for globally invested institutions, having to meet reporting requirements in many different jurisdictions with varying levels of due diligence.
Over time, standardisation of reporting should make the process easier and more affordable as the eco-system develops.
Posted 28 March 2024
