By: John McCalla-Leacy, Head of Global ESG at KPMG

As the future of global sustainability reporting takes shape, the long-established Greenhouse Gas (GHG) Protocol looks set to play an integral role. And its decision to solicit input to understand user needs and improve the standards and guidance is timely. As examples, the draft IFRS® Sustainability Disclosure Standards, the EU’s draft European Sustainability Reporting Standards and the US SEC’s proposed rule on climate-related risk disclosure all reference the protocol in regard to measuring GHG emissions.

This level of cross-reference underscores the importance of the GHG Protocol in measuring and reporting GHG emissions, which is in effect acting as a standard setter in this area. But to play a full part, it needs to review how its standards are created and implemented, and to ensure its governance is ready to meet the demands of these new reporting frameworks moving forwards.

For nearly 20 years, the GHG Protocol has provided companies around the world with a firm basis for measuring and reporting the GHG emissions from their operations. The Protocol’s Standards and guidance are widely recognized and universally respected, which is why they are fundamental to the three major sets of sustainability disclosure requirements that are set to land in the coming months.

As we look to the future of global sustainability reporting, there are three key objectives the Protocol’s steering group could instill now to ensure it is fit for the future:

• adopting an interdisciplinary organizational structure and robust due process that provides continued confidence in the quality of the standards and guidance;
• a principles-based approach that allows a degree of flexibility and adaptation in this fast-evolving area, which is important to the interoperability of requirements that refer to the GHG Protocol; and
• an approach to organizational boundaries that aligns or facilitates alignment with the ‘reporting entity’ concept used for financial reporting.

In addressing these objectives, we recommend active engagement with the ISSB, EFRAG and the SEC in addition to the scientists and engineers who will be involved from a technical measurement perspective. Essentially, the update of the GHG Protocol requires a cross-functional team.

Interdisciplinary organizational structure and robust due process

While the GHG Protocol pioneered the accounting and reporting of emissions, formal standard setters and regulatory bodies are establishing reporting and disclosure requirements for nonfinancial sustainability information with authority. These bodies establish standards for reporting that are intended to address the information needs of investors and a broad range of stakeholders.

To maintain its role as perhaps the preeminent body issuing guidance on how to measure GHG emissions, we believe the GHG Protocol requires a governance body comprising a range of stakeholders, with a constitution process that includes transparency and allows for stakeholder input. For example, the GHG Protocol could draw inspiration from the structure and due process of the IFRS Foundation in setting IFRS Accounting Standards and now IFRS Sustainability Disclosure Standards.

Principles-based approach for flexibility and adaptation

Although an update to the GHG Protocol will undoubtedly result in improvements to the accounting and reporting of GHG emissions, inevitably users will need interpretive guidance. Currently, organizations such as the Partnership for Carbon Accounting Financials (PCAF) and the Science Based Targets initiative (SBTi) build on the GHG Protocol to develop supplementary guidance for companies.

Financial reporting standard setters use authoritative bodies tasked with interpreting the standards and developing guidance that supports the objectives of consistency and comparability between companies. For example, the IFRS Interpretations Committee is the interpretive body of the International Accounting Standards Board. An interpretations body would allow the standards to be more principles-based with supplemental guidance reacting more quickly to changing technologies and available methodologies.

Setting up this infrastructure will obviously take time; meanwhile, ongoing and active collaboration with standard setters, industry groups (e.g. PCAF) and other relevant organizations (e.g. SBTi) would be beneficial – to provide a path for preparers to align GHG measurement with climate-related disclosure requirements as they develop.

Alignment of organizational boundaries with the ‘reporting entity’ concept

Currently, the organizational boundaries available in the GHG Protocol align with the ‘reporting entity’ concept used for financial reporting more by chance than design. As the reporting of GHG emissions starts to play a role in companies’ annual reporting in conjunction with their financial reporting, aligning the two concepts would harmonize with emerging disclosure requirements and enhance connectivity between GHG emissions inventories and financial reporting.

We recommend exploring how the approaches to organizational boundaries could be updated to facilitate alignment with financial reporting, while taking into account the needs of other stakeholders.

It’s about the outcomes

Of course, any discussion about governance, process and institutions shouldn’t lose sight of the ultimate goal. By agreeing a global baseline for sustainability reporting, the organizations responsible for these new requirements aim to make companies properly accountable for their environmental impacts as never before.

These companies will be required to prepare their reports with diligence and rigor. That cuts both ways. Preparers will also expect to see the same rigor from their standard setters.

The GHG Protocol has played an integral part throughout this century in providing a common base for measuring and reporting these emissions. As it prepares for the future, and the first sustainability reporting standards, it should grasp the opportunity to harmonize its processes with the standard setters, and in so doing help realize its mission to establish comprehensive standardized frameworks for emissions reporting across the world.

John McCalla-Leacy is Head of Global ESG at KPMG