Last month, the International Sustainability Standards Board (ISSB) released an Exposure Draft proposing amendments to IFRS S2 Climate-related Disclosures. These changes aim to address practical challenges in measuring and reporting greenhouse gas (GHG) emissions, particularly Scope 3 emissions, and to enhance flexibility for companies operating across multiple jurisdictions and regulatory environments.

Streamlining reporting

One of the central proposals is to refine the reporting requirements for Scope 3 Category 15 emissions, which relate to the financial activities of banks and insurers. The ISSB proposes limiting mandatory disclosures to “financed emissions” – the portion of GHG emissions from investees or counterparties attributable to loans and investments made by an entity. 

This approach would exclude certain activities from mandatory reporting, including:

• derivatives;
• investment banking activities (facilitated emissions); and
• insurance and reinsurance underwriting (insurance-associated emissions).

However, companies would still be required to disclose the categories of emissions they have excluded and provide explanations for these exclusions. 

This targeted relief is designed to reduce reporting complexity while maintaining transparency. The ISSB notes that this relief is not time-bound, but may be reconsidered if standards such as the GHG Protocol Corporate Standard evolve.

The relief being offered reflects the limited development to date of robust and complete methodologies for appropriately measuring the Scope 3 emissions of certain financial activities. 

Take insurance-associated emissions: some general insurance products have established standards such as the Partnership for Carbon Accounting Financials (PCAF) for certain products such as motor insurance. Unfortunately, the same cannot be said for life insurance products such as term or whole-life insurance, where risk coverage and insurance payouts are less directly linked to an activity that generates carbon emissions.

For certain types of activity, obtaining third-party data has also proved challenging for banks and insurers, and can be dependent on whether counterparties in the supply chain measure and publicly disclose their carbon footprint. 

It is interesting to note that the ISSB proposals do not define “derivatives” and according to the proposals, this will be left to the judgement of individual firms. Some stakeholders have suggested that aligning the definition with classification under financial reporting standards would make the most sense. 

Bearing in mind the change in requirements to report on supply chain emissions, the sector will need to consider alternative ways to understand the full impact of supply chains and their role in the climate transition for these key activities in the financial services sector. One example would be the metrics and KPIs that measure the level and nature of interaction financial institutions are undertaking with counterparties to support any net zero ambitions. 

Flexibility in classification systems

Currently, IFRS S2 mandates the use of the Global Industry Classification Standard (GICS) for disaggregating financed emissions by industry. Recognising that some jurisdictions require alternative classification systems, the ISSB proposes the following hierarchical approach:

1. If a company uses GICS in any part of its operations, it should apply GICS across the group.
2. If GICS is not used, but another classification system is mandated by a local regulator or stock exchange, that system should be used.
3. If neither applies, the company may choose an industry classification system that provides useful information to investors.

Companies must disclose the classification system used and, if it’s not GICS, explain the rationale behind their choice. This flexibility aims to reduce the reporting burden for multinational entities and those operating in jurisdictions with specific regulatory requirements.

Accommodating jurisdictional measurement methods

IFRS S2 currently requires GHG emissions to be measured using the GHG Protocol Corporate Standard (2004). However, some jurisdictions mandate different measurement methods. The ISSB proposes allowing entities to use alternative methods if required by a jurisdictional authority or stock exchange. This amendment acknowledges the diverse regulatory landscapes companies operate within and seeks to prevent duplicative reporting efforts.

Use of alternative Global Warming Potential (GWP) values

Under existing standards, companies must use GWP values based on a 100-year time horizon from the latest Intergovernmental Panel on Climate Change (IPCC) assessment. The ISSB proposes permitting the use of alternative GWP values if mandated by a jurisdictional authority or stock exchange. Entities would need to disclose the GWP values used and explain the reasons for any deviations from the IPCC’s latest assessment. This change aims to harmonise reporting requirements with local regulations and reduce inconsistencies.

The ICAEW will be responding to the ISSB’s proposals. If you have any views, please reach out to reuben.wales@icaew.com. The deadline for comments to the ISSB is 27 June 2025.

Reuben Wales, Head of Financial Services, ICAEW