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Sustainability now: GHG reporting questions answered · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought leadership from PWC's national office.
• 0:07
  SPEAKER_03: Hello, I'm Heather Horn, the host of Sustainability Now, and thanks so much for joining us today.
• 0:13
  SPEAKER_03: One note before we jump into today's episode.
• 0:16
  SPEAKER_03: We recorded this prior to February 26, 2025, when the European Commission released its first omnibus package of proposals to quote, provide substantial simplification in the field of sustainability and EU investment programs.
• 0:32
  SPEAKER_03: End quote.
• 0:33
  SPEAKER_03: For more on these proposals, please look for an upcoming episode.
• 0:36
  SPEAKER_03: And we've also linked a number of resources in the show notes.
• 0:40
  SPEAKER_03: In the meantime, these proposals are draft and subject to change through the adoption process.
• 0:45
  SPEAKER_03: So in today's episode, we'll continue to focus on the currently enacted requirements.
• 0:50
  SPEAKER_03: With that, let's jump into the recording.
• 0:54
  SPEAKER_03: Hello, and welcome to PWC's Accounting Podcast Series.
• 0:57
  SPEAKER_03: I'm Heather Horn, PWC US sustainability technical leader, and I'm so happy you're joining us today.
• 1:05
  SPEAKER_03: Today's episode is planned as the final episode.
• 1:08
  SPEAKER_03: Who knows?
• 1:08
  SPEAKER_03: We may do a few more bonus episodes in our video podcast series on sustainability reporting.
• 1:14
  SPEAKER_03: And as I said, this in a way is a bonus episode because we're actually going to hit some frequently asked questions about GHG emissions reporting.
• 1:23
  SPEAKER_03: So those of you who are regular listeners will know that last fall we did an entire series on GHG emissions reporting.
• 1:30
  SPEAKER_03: So if you need the basics, I highly encourage you to go back to that.
• 1:33
  SPEAKER_03: And then even last week, we did a compendium of information giving you a lot of the highlights and reporting.
• 1:40
  SPEAKER_03: However, we have been getting so many questions as companies get into practical implementation, particularly for companies that are first-time adopters of ESRS, the European European sustainability reporting standards for companies reporting in the EU under the corporate sustainability reporting directive.
• 1:59
  SPEAKER_03: So my guest Marchin Lewinsky and I thought that we would bring you some frequently asked questions in GHG emissions.
• 2:08
  SPEAKER_03: And not that Marchin needs a big introduction, but just in case, as a reminder, Marchin is a specialist in our national office focused on GHG reporting, and the chair of our GHG Global Working Group, and serving clients in sustainability working space, and one of the lead authors of SRG 7 Sustainability Guide, a reporting guide on GHG, and probably more.
• 2:32
  SPEAKER_03: Do you want to add any more accomplishments, Marchin, or is that I'm also serving multiple clients.
• 2:38
  SPEAKER_03: There you go.
• 2:38
  SPEAKER_03: Thank you.
• 2:39
  SPEAKER_03: Although I think I said that, so you weren't listening to me.
• 2:42
  SPEAKER_03: All right.
• 2:43
  SPEAKER_03: So with that, um, now we'll get into good stuff.
• 2:46
  SPEAKER_03: So as I said, Marchin, we obviously have covered a lot of the basics.
• 2:50
  SPEAKER_03: So for listeners that have not listened to some of the basics or don't know the basics, this episode may seem to jump around a lot because we are going to jump into different topics, but I think they're great ones because they're all the ones that we've been getting questions on.
• 3:06
  SPEAKER_03: So I'm going to start with the starting point: organizational boundaries.
• 3:10
  SPEAKER_03: And I know, you know, ESRS has unique rules for organizational boundaries for people that are used to preparing their organizational boundaries under the GHG protocol.
• 3:20
  SPEAKER_03: And we continue to get a lot of questions there.
• 3:23
  SPEAKER_03: So what are some of the areas we're getting questions on?
• 3:26
  SPEAKER_00: I think it's uh, yeah, you're absolutely correct.
• 3:28
  SPEAKER_00: Um and I think we're receiving questions because of the nature of uh ESRS uh guidance in this area.
• 3:34
  SPEAKER_00: So as a reminder, and I know we might have a mixed uh audience, so the uniqueness of ESRS organizational boundary guidance is it is a two-step approach.
• 3:44
  SPEAKER_00: So the first companies have to consider um reporting emissions from uh subsidiaries, subsidiaries fully consolidated in financial statements.
• 3:52
  SPEAKER_00: And then for all the unconsolidated subsidiaries, joint ventures, and other types of arrangements, uh you have to consider operational control.
• 4:00
  SPEAKER_00: And if you have operational control, you have to report also 100% of scope one, two, and relevant uh scope three emissions.
• 4:06
  SPEAKER_00: Why it is kind of like creating problems is because a lot of our clients have uh uh experience that have experience reporting emissions.
• 4:14
  SPEAKER_00: Usually they do it they're doing this using one or the other.
• 4:17
  SPEAKER_03: So well, that's what's permitted at the G work also.
• 4:21
  SPEAKER_03: Exactly.
• 4:21
  SPEAKER_00: So which means they might not be fully familiar with the concept of the other approach that they don't.
• 4:26
  SPEAKER_00: So um therefore, we start having the questions about how you approach those, what is the practical difference between the two, and we start having more specific kind of application questions in various areas.
• 4:40
  SPEAKER_00: And today I'm gonna just as an example uh to illustrate, like focus on two of them, leases and uh investment company accounting for emissions from the investees.
• 4:49
  SPEAKER_00: Um again, this is not like overarching issues, but like as an example of what type of questions we're getting and uh what does it mean for practical application, right?
• 4:59
  SPEAKER_03: Yeah, and I think a key point there, Martin, and this is something Diana and I talked about earlier in the series, when we're talking about reporting boundaries more broadly, is that the reporting boundaries or organizational boundaries for GEG apply to entities, assets, and operations.
• 5:14
  SPEAKER_03: And again, this may apply in the financial statements, but we don't think of it the same way.
• 5:19
  SPEAKER_03: And that's where I think least assets comes in, it's in the assets category of these entities' assets and operations.
• 5:26
  SPEAKER_03: So, with that said, again, as a reminder to listeners, ESRS, but we are talking about ESRS here.
• 5:33
  SPEAKER_03: So this will not apply if you are talking about GHG protocol or reporting under ISSB.
• 5:40
  SPEAKER_03: But what are the issues under ESRS?
• 5:42
  SPEAKER_00: Quite frankly, the uh the uh the the issues with uh lease accounting under ESRS are connected to the problems of GHG protocol.
• 5:49
  SPEAKER_00: Uh so kinds of as a reminder, I'm gonna do do it as a starter.
• 5:52
  SPEAKER_00: So GEG protocol has a specific model to account for leases, which depends on the type of lease and organizational boundaries selected, right?
• 6:00
  SPEAKER_00: Um so that's a starting point.
• 6:02
  SPEAKER_00: Um, in general, um, the operational control is assumed to be held by LESI, who is operating the considered to be operator of leased assets.
• 6:12
  SPEAKER_00: The problem begins with the fact that uh GEG protocol did not update its guidance to reflect the changes in accounting or financial reporting of leases.
• 6:23
  SPEAKER_00: So the guidance is based on old um lease accounting uh pronouncements under IFRS on US GAAP.
• 6:30
  SPEAKER_00: And as we all know, the IFRS and US GAAP change accounting for leases quite substantively.
• 6:35
  SPEAKER_00: Uh, in particular, under new guidance, or lessee, all lessees have to uh record right of use assets uh that relates to the to the lease arrangements they have.
• 6:46
  SPEAKER_00: So now historically, only certain types of leases resulted with booking out recording of the assets.
• 6:52
  SPEAKER_00: Now all lease types result in recording right of use assets by lessee on a balance sheet, which is quite significant change, right?
• 6:59
  SPEAKER_00: Um so we're getting questions from clients, okay, what does it mean for my reporting um uh under uh ESRSs?
• 7:08
  SPEAKER_00: And um it's kind of a complicated issue and it diverges from historical practice because when you think about it, the two-step approach, first part of approach is reporting emissions from uh assets which are fully consolidated in financial statements of uh of reporting entity.
• 7:24
  SPEAKER_00: So the question is okay, now I have a right of use assets, which we already published the position.
• 7:30
  SPEAKER_00: Lessee should report emissions from scope one, two, and a respective uh part of scope three from right of use uh assets, which creates certain issue.
• 7:39
  SPEAKER_03: Well, yeah, I just want to pause this there though, because I think for us you can go pretty fast through this because we've been through it so many times.
• 7:47
  SPEAKER_03: We talked about this for months and months, but let's pause a bit on lessees.
• 7:51
  SPEAKER_03: So, again, what you said under the GHG protocol, the historical model, the unupdated model, is that you would base everything on operational control.
• 8:00
  SPEAKER_03: And then there's uh some differences.
• 8:03
  SPEAKER_03: And even under the um GHG protocol, we think that you may need to make some changes to how you're reporting emissions under the new guidance.
• 8:12
  SPEAKER_03: But now, under ESRS, those assets, you have the right of use asset on your balance sheet, and so it is in your financial control for and operational control across the board for lessees.
• 8:25
  SPEAKER_03: Is that what we're saying?
• 8:26
  SPEAKER_00: Yeah, so like it's uh under two steps.
• 8:28
  SPEAKER_00: Even if you conclude somehow that you don't have to do it for out of use asset, then you have to assess operational control.
• 8:34
  SPEAKER_00: As I said, as I said before, lesie is presumed to have operational control of all these assets, right?
• 8:40
  SPEAKER_00: So whichever way or direction you take, you're always gonna end up lessee has to be reporting scope one, two, two, and three emissions associated with leased assets.
• 8:49
  SPEAKER_03: Okay, so that's easy.
• 8:50
  SPEAKER_03: I'm the lessee, I report.
• 8:52
  SPEAKER_03: All right, so now Lassor.
• 8:54
  SPEAKER_00: Well, so uh that creates a certain problem for Lessource, right?
• 8:57
  SPEAKER_00: Because Lesour's, depending on a type of lease, you can have uh two scenarios.
• 9:03
  SPEAKER_00: Either you retain the physical asset on your um on your balance sheet, right?
• 9:08
  SPEAKER_00: Like as nothing happened, let's say, so it's part of your uh uh fixed assets, or you can have situations whereby in certain types of leases you can remove or de-recognize this physical asset and uh recognize like lease receivable, right?
• 9:23
  SPEAKER_00: Uh on your on your um on your balance sheet.
• 9:27
  SPEAKER_00: So now, depending on which scenario you are, if you continue to report physical assets under ESRS based on our interpretation, you have to be reporting scope one and two uh emissions because this asset is fully consolidated on your balance sheet, right?
• 9:42
  SPEAKER_00: Yes.
• 9:42
  SPEAKER_00: Um when you don't have that asset but you have a lease receivable, we think it's uh akin to like a loan or finance emission, and a Lessor could be reporting scope three, category fifteen, or you know, um actually no, that's category 11.
• 9:57
  SPEAKER_00: Category 11.
• 9:58
  SPEAKER_00: Well, not 11.
• 9:59
  SPEAKER_00: Uh yes.
• 10:00
  SPEAKER_03: 13.
• 10:01
  SPEAKER_00: 13.
• 10:01
  SPEAKER_03: Yes.
• 10:02
  SPEAKER_03: Category 13.
• 10:03
  SPEAKER_03: Okay, third times the time.
• 10:04
  SPEAKER_00: Yeah, that's similar, right?
• 10:06
  SPEAKER_00: So um, but but the first part is that's that's where it's a little bit problematic under ESRC's because where what you're gonna end up having is two parties might be reporting the same emissions, you know, uh, because you have two types of you have assets related to leases recorded on your uh consulted financial statements, which is a little bit contradictory to historical practice under a GEG protocol, which presumes only one party is gonna report those emissions.
• 10:33
  SPEAKER_00: So that's why we're clients are a little bit uneasy.
• 10:35
  SPEAKER_00: Well, I'm gonna have a double counting uh in there.
• 10:38
  SPEAKER_00: We think it's fully supportable, first of all, because of a change of accounting model for leases.
• 10:42
  SPEAKER_00: Second of all, in our opinion, the ESRS two-step approach presumes that situation, it's not only for leases, also for unconsolidated investments.
• 10:52
  SPEAKER_00: It was designed to potentially require two separate parties report the same emissions.
• 10:58
  SPEAKER_03: So, Martin, one thing I want to pick up on on what you just described, because as you were walking through the model, you mentioned fully supportable.
• 11:04
  SPEAKER_03: And I think sometimes that gives a context of it's something people want to do.
• 11:10
  SPEAKER_03: And is it okay in the in the guidance?
• 11:12
  SPEAKER_03: And I mean, I think in this case, when we read the guidance in ESRS, this is what it says that Les Sours should do because they have the asset on the books in the scenario where it's not a financed receivable, they should be reporting scope one and scope two emissions.
• 11:29
  SPEAKER_03: However, I know that this has been an ongoing discussion because there is some concern from Les Sours.
• 11:34
  SPEAKER_03: Is this really the model that was intended?
• 11:37
  SPEAKER_03: And so, can you just give sort of an update on where we are in terms of what's required and what we expect to see over the next year?
• 11:45
  SPEAKER_00: Yes, uh, you're absolutely correct, Heather.
• 11:47
  SPEAKER_00: So um EFRAC received multiple questions on uh on these topics, especially from Lessors' side.
• 11:52
  SPEAKER_00: And we know they were considering the topic, just uh, you know, is there any explanation needed or update to the guidance?
• 11:59
  SPEAKER_00: Uh we hope that they're gonna issue that uh FAQ last year, but um, because of the complexity, they decided to postpone it to 2025.
• 12:08
  SPEAKER_00: Um, and so we urge everybody to look for this guidance in 2025 until it's issued because there is some uh judgment, other approaches may be uh acceptable, some industry practice and things like this.
• 12:22
  SPEAKER_00: Um, but we definitely urge clients to look for uh for this guidance and see which which direction the effect is gonna take.
• 12:30
  SPEAKER_03: All right, I I agree.
• 12:31
  SPEAKER_03: And maybe the other thing I would add for listeners is I think more channel and I teased you a little bit with the guidance for a GHG protocol um and people reporting under ISSB.
• 12:41
  SPEAKER_03: So definitely if you want to know more on that, check out this our discussion in SRG 7.
• 12:47
  SPEAKER_03: And in addition, I think if you want to understand better some of these implications for less swords under ESRS, there's also quite, well, both for less sees and less wars, there's some discussion in uh the SRG, just in case you want to know more.
• 13:02
  SPEAKER_03: So, all right, so definitely a lot of judgment there, and one that I think will be important for companies to discuss among themselves and with those charged with governance, the extent applicable.
• 13:13
  SPEAKER_03: But let's move on, or let's move on, because I know another area where we've been getting a lot of questions, again, under ESRS, is how you report emissions associated with investment entities.
• 13:25
  SPEAKER_03: So, what challenges are we seeing there?
• 13:28
  SPEAKER_00: Yes, again, very good question, Heather.
• 13:30
  SPEAKER_00: Um, the the unique nature of the challenges there is a very specific accounting model for uh for investments uh that is available to investment entities.
• 13:40
  SPEAKER_00: So, upon meeting certain conditions, IFRS 10 and ISC 46 allows investment entities um to um a certain exception to the general consolidation rules.
• 13:51
  SPEAKER_00: So, irrespective of uh size of um uh investment or size of a percentage of their holding in investee, uh, they don't have to consolidate their investments.
• 14:02
  SPEAKER_00: They can report them as a in a one-line item and measure this on a fair value, right?
• 14:08
  SPEAKER_00: So again, irrespective of uh size of their of their of their interest, which yes.
• 14:13
  SPEAKER_03: No, I just before you go on, and because I think you're gonna start to get into that that counting, and for our listeners that are very familiar with these models, you're you're probably thinking ASC46.
• 14:24
  SPEAKER_03: That's that's not exactly right, but it's ASC 946.
• 14:28
  SPEAKER_03: Yes.
• 14:28
  SPEAKER_03: So I just want to make sure for those listeners, you know, that that we got that right.
• 14:32
  SPEAKER_03: So anyway, I'm sorry.
• 14:34
  SPEAKER_03: Yeah.
• 14:35
  SPEAKER_03: All right, so go on.
• 14:36
  SPEAKER_00: Yes, obviously 946.
• 14:38
  SPEAKER_00: So um, based on this accounting model, um, investment entities uh uh get exception from uh general consolidation rules, and they don't have to consolidate those investees, report them as a one-line item, uh, and measure on uh uh uh based on fair value.
• 14:54
  SPEAKER_00: So um that again, even if investment entity hosts controlling interest.
• 14:59
  SPEAKER_00: So the question arises how do we consider this in a two-step uh ESRS model?
• 15:05
  SPEAKER_00: The first one is theoretically fully consolidated group, then operational control, fully consolidated people, it's equating to financial control.
• 15:14
  SPEAKER_00: So how we do this is like in between.
• 15:17
  SPEAKER_00: In between, exactly.
• 15:18
  SPEAKER_00: So um, so our interpretation of this issue that because of ESRS E1, paragraphs 46 and 50 specifically say that unconsolidated subsidiaries are not part of consolidated group, right?
• 15:30
  SPEAKER_00: And companies have to assess operational control.
• 15:33
  SPEAKER_00: Therefore, we think that under the first um uh first step of the assessment, it does not have to be included.
• 15:41
  SPEAKER_00: So companies still have to investment and still have to assess whether they hold operational control over those um uh investments.
• 15:49
  SPEAKER_00: Obviously, depending on facts and circumstances, that might be might differ.
• 15:53
  SPEAKER_00: As a general principle, and we have it published in our uh in our uh SRG uh chapter seven, uh we make the um um we kind of we conclude that uh operational control is oftentimes equated to uh what we call boots on the ground approach.
• 16:10
  SPEAKER_00: So party that actually actively operates an asset or entity has uh operational control.
• 16:16
  SPEAKER_00: It's more complex assessment.
• 16:18
  SPEAKER_03: Much more complex.
• 16:18
  SPEAKER_00: Yeah, you have to consider, especially in this situation, right?
• 16:21
  SPEAKER_00: You have to consider uh existing contractual arrangements, especially where you know, arrangements where you know uh financial interest might differ from uh some operational type of uh arrangement.
• 16:33
  SPEAKER_00: So um generally companies we have to assess those arrangements, but typical practice for investment entities, they're more interested in you know more strategic control over investments, not operational.
• 16:48
  SPEAKER_00: They oftentimes don't get involved in operational uh matters of a company.
• 16:53
  SPEAKER_00: So we would expect that in oftentimes they would also conclude they don't have operational control.
• 16:58
  SPEAKER_00: Again, it I just want to make sure I don't make any broad statements here.
• 17:02
  SPEAKER_00: Arrangements have to be assessed because in places like private equity, that might be different because in um in various private equity type of arrangements, actually, PEs, you know, uh are actively managing the companies, so it has to be assessed.
• 17:16
  SPEAKER_00: So, but it's you can see how kind of a challenging is it it is for uh for those entities, especially historically, a lot of these arrangements were reported and voluntary reported as a scope three category 15.
• 17:27
  SPEAKER_03: Yeah.
• 17:28
  SPEAKER_03: So and then so March and so just to reiterate then, so in step one, they're out.
• 17:35
  SPEAKER_03: We we believe it's supportable to say they're out because they're unconsolidated, they're not in the consolidated group.
• 17:41
  SPEAKER_03: And then in step two, you need to make this assessment of whether or not you have operational control.
• 17:46
  SPEAKER_03: If you conclude you do not have operational control, then you would continue to report under scope three, category fifteen.
• 17:54
  SPEAKER_03: If you conclude you do have operational control, then you would report your proportion.
• 17:59
  SPEAKER_03: Well, it's 100%.
• 18:00
  SPEAKER_03: Yeah, uh of the um Investee scope one, two, and three initiative.
• 18:04
  SPEAKER_03: Exactly.
• 18:05
  SPEAKER_03: So just to be clear though, if you don't have operational control, you still do need to continue to report scope three, category fifteen.
• 18:12
  SPEAKER_03: I think the question can come in is on scope one, too.
• 18:14
  SPEAKER_03: Yeah.
• 18:15
  SPEAKER_03: Okay, perfect.
• 18:16
  SPEAKER_03: All right, so definitely another area of judgment.
• 18:18
  SPEAKER_03: I think this is a really good answer, though, for a lot of investment entities, notwithstanding the fact I think they would have, it would have been nice to not have to do this operational control assessment.
• 18:29
  SPEAKER_03: But as you pointed out, this is a very important part of the evaluation.
• 18:33
  SPEAKER_03: Okay, so let's move on.
• 18:35
  SPEAKER_03: And again, I I promised at the beginning we're jumping around a little.
• 18:38
  SPEAKER_03: So we're going to jump all the way to scope three measurement.
• 18:42
  SPEAKER_03: And one of the things we've talked about in past episodes is the fact that within scope three, you then have 15 categories.
• 18:49
  SPEAKER_03: And, you know, we also have seven gases.
• 18:51
  SPEAKER_03: So it's multiplying very quickly all the different things we need to measure.
• 18:56
  SPEAKER_03: And one of the questions that comes up is how do you measure in each of those categories?
• 19:02
  SPEAKER_03: And that's where we cut have this concept of a minimum boundary.
• 19:06
  SPEAKER_03: So I know we were talking about organizational boundaries before.
• 19:09
  SPEAKER_03: Now we're talking about minimum boundaries.
• 19:11
  SPEAKER_03: So can you explain what we mean when we say that?
• 19:14
  SPEAKER_00: Again, great question.
• 19:15
  SPEAKER_00: And just one extra kind of a side comment.
• 19:18
  SPEAKER_00: Scope three generally is an area where we get start getting a lot of questions, right?
• 19:21
  SPEAKER_00: Because of a complexity, because of uh of the guidance, complexity of a nature of like calculation methodology.
• 19:28
  SPEAKER_00: So um, and a minimum boundary is one of the you know, first questions start getting.
• 19:32
  SPEAKER_00: So let me maybe back up a little bit.
• 19:34
  SPEAKER_00: So, as you mentioned, um scope GHG scope three standard uh requires um reporting of scope three emissions disaggregated by 15 distinct categories.
• 19:46
  SPEAKER_00: So uh these categories were implemented to reflect the nature of underlying activities, emission-generating activities, and just help clients properly categorize that and measure and report those um those emissions.
• 20:00
  SPEAKER_00: As you mentioned, protocol also implements the concept of minimum boundary, right?
• 20:05
  SPEAKER_00: Minimum boundary was it's a very important concept because when you think about it, scope three emissions or emissions in a value chain, upstream and downstream.
• 20:14
  SPEAKER_00: When you start thinking about value chain of our clients or reporting entity, it could be vast, could be very complex and almost ad infinitum, right?
• 20:24
  SPEAKER_00: So the first kind of a um when when protocol introduced uh the concept of minimum boundary first, that he would they wanted uh reporting entities to focus on activities and value chain partners that actually matter and contribute the most to each uh scope three category.
• 20:42
  SPEAKER_00: And then they wanted to ensure that that the companies are not going exactly at infinitum, chasing down the emissions of remote value partners or activities down the value chain.
• 20:54
  SPEAKER_00: So that was the main goal, just to pre you know put some boundaries around it, make it manageable for a client, but also ensure consistency.
• 21:03
  SPEAKER_00: So they prescribe what has to be measured and how.
• 21:05
  SPEAKER_00: And that is one of the ways to ensure consistency, how everybody's is capturing this data.
• 21:10
  SPEAKER_00: So this data could be compared, it is comparable across different uh companies with uh reporting those emissions.
• 21:17
  SPEAKER_03: Okay, so Martin, I think that's really helpful.
• 21:19
  SPEAKER_03: Can you just give some examples then of what we see when we have these minimum boundaries?
• 21:26
  SPEAKER_03: And also then, what does the company do if they want to report more information?
• 21:30
  SPEAKER_00: Yes, so um, as I mentioned, the minimum boundary is established for every single category, and they might be different.
• 21:36
  SPEAKER_00: And I kind of consider them in group.
• 21:38
  SPEAKER_00: There are some categories that have like category from one to three that require companies to report uh all upstream emissions, um, on the it's called crowd craddle to gate basis.
• 21:50
  SPEAKER_00: So you have to capture all upstream emissions associated with production, uh, transportation, and extraction of capital goods, uh, other purchased uh goods that that you that you have so so it's kind of a all upstream credit to gate then in other categories like you know categories of uh report requiring uh category four which is transportation uh upstream transportation all require only reporting scope one and two of value chain partners so it's a val it's a significant difference what that um uh boundary represents the same category 15 right you require to uh report scope one and two emissions of of or your share of scope one two emissions of your investment and scope three if there are significance to the overall kind of uh emission profile of that investment so you can see there's a vast difference you mentioned what what else they can report so protocol also establish what's called optional category so uh so minimum boundary is something that companies have to report absolutely if material if category is determined to be material you have to capture emissions within that minimum boundary but their protocol lists some optional categories that companies can choose to report like let's let's say for example category four you have to report scope one uh emissions associated of your of your value chain partner which is like emissions incurred during transporting of your goods so combustion uh if it is a combustion vehicle um but optionally you can report also emissions associated with production of that the of the vehicles that are used to transport so again each category has its own minimum boundary and optional um reporting categories um use optional activities right uh they have to include I think it's very important to fully understand that because it makes huge difference how we look at every category.
• 23:36
  SPEAKER_03: Yes and I mean there's a huge amount of information in you mentioned the scope three standard if you go into the scope three standard they have tables of these activities and then they have descriptions and otherwise so a lot of information there.
• 23:48
  SPEAKER_03: And I know I I said this was all about ESRS, but let's stick with the GHG protocol for another moment because that's this then is the foundation for what we're going to talk about for minimum boundaries for ESRS.
• 23:59
  SPEAKER_03: Morgin, I you very notably mentioned categories one through three, which were the cradle to gate.
• 24:05
  SPEAKER_03: And then you also mentioned I think you used four to 14 maybe you just said the other some other categories.
• 24:11
  SPEAKER_03: Okay you just gave example of four.
• 24:13
  SPEAKER_03: However we talked about category uh 15 investments we've mentioned a few times in this episode and there are some unique considerations for category 15 and this is a category that applies to almost most many many companies not just financial institutions even though you know I think often it's thought of in that context.
• 24:33
  SPEAKER_03: So what can you share specifically about scope three category 15 investments?
• 24:38
  SPEAKER_00: So as I mentioned uh it's it's an interesting category because it actually has a as a has a what I call two levels of minimum boundary, right?
• 24:46
  SPEAKER_00: So as I mentioned that companies have to report um their share of scope one and two admissions of investments and scope three if significant material.
• 24:55
  SPEAKER_00: But there's another level of what I call a boundary.
• 24:58
  SPEAKER_00: Scope three standards specifically prescribe what type of investments have to be you know included in in reporting boundary.
• 25:06
  SPEAKER_00: And it limits this type of investments or asset classes you can name it one way or the other only to three types.
• 25:12
  SPEAKER_00: So it's equity investments, debt investments with known use of proceeds, and project finance.
• 25:19
  SPEAKER_00: So that's and those are only three classes or categories of investments that you have to collect and report emission information.
• 25:27
  SPEAKER_03: All right very helpful and so Marchin I know that we often get questions then about PCAF and PCAF for our listeners that probably those who need to know what it is do know what it is.
• 25:40
  SPEAKER_03: But this is a partnership for carbon accounting financials and it this was put together by financial institutions to measure many asset categories not just the three you talked about in in the minimum boundary.
• 25:54
  SPEAKER_03: And so I have this guidance out there this PCAF guidance that is built on GHG protocol which means that the GHG protocol has looked at it and said it's consistent with its standards.
• 26:07
  SPEAKER_03: So then am I also supposed to follow this this other guidance?
• 26:12
  SPEAKER_00: So first of all thank you very much for fully explaining the you know uh the PCAF I always make mistakes when I try to uh fully name the uh because I I'm used to just saying PCAF so yeah so maybe uh kind of let me step back so as I mentioned like scope three standard only requires three categories which when you think about it's probably those are most common categories across various types of industries with exceptional finance financial right because when you look at a financial industry when whether we're talking about banks, private equity firms, hedge funds, um even insurance companies right, their portfolio of investments it's usually much broader, much complex more complex.
• 26:48
  SPEAKER_00: They have different asset classes that are not captured by those three types of investments.
• 26:54
  SPEAKER_00: So that's why um industry led that initiative to and created their own standards to report emissions for reporting of GEG emissions for financial industry in which they try to capture the asset classes that are that are most common among the various financial institutions.
• 27:11
  SPEAKER_00: So as you can imagine there's more asset classes than uh than the three there's actually seven it includes some additional classes like you know mortgages or you know motor vehicle loans um and others that are prevalent in in in financial industries and that standard provides the measurement and reporting guidance for those extra classes.
• 27:35
  SPEAKER_00: As you mentioned GEG protocol reviewed that and approved that which means if you report in compliance with PCAF, it means you're also compliant with scope three standards.
• 27:47
  SPEAKER_00: But application of PCAF is not required to be compliant with scope three standards.
• 27:52
  SPEAKER_00: What does it mean?
• 27:53
  SPEAKER_00: PCAF did not change the scope of reporting of scope three standards in our opinion.
• 27:58
  SPEAKER_00: Therefore the minimum boundaries outlined in scope three standards are the only kind of a requirement to uh reporting requirements to be compliant with scope three standards.
• 28:08
  SPEAKER_00: So again key point is PCAF does not change uh the the the scope of and minimum boundaries of scope three standards in our opinion.
• 28:15
  SPEAKER_03: I so uh completely agree and I think that one thing that's very interesting is again if you dig into PCAF a bit is that you come it was actually designed so companies could also adopt PCAF standard.
• 28:30
  SPEAKER_03: And so then you would say that you were reporting in accordance with the GHD protocol and the PCAF standard.
• 28:36
  SPEAKER_03: And so to your point it was never intended to be sort of part of the GHG protocol.
• 28:41
  SPEAKER_03: And the reason I think that's important to spend so much time on this two reasons.
• 28:45
  SPEAKER_03: One is obviously so people who are reporting under the GHG protocol know the answers to this but also this is going to become very important when we start to talk about ESRS.
• 28:55
  SPEAKER_03: All right so let's move to ESRS and let's talk about the guidance in ESRS and how you would think about these minimum this concept of minimum boundaries when you're reporting in accordance with ESRS.
• 29:08
  SPEAKER_00: Mm-hmm so um ESRS obviously reporting of scope one, two and three emissions is outlined or reporting requirements are outlined ESRS E1-6 um and uh respective application uh requirement pieces parts of of of um E1.
• 29:26
  SPEAKER_03: And the it's a very interesting question because uh ESRS E1 um basically does not provide too much kind of a details as to how to uh report or measure especially scope three emissions what it does it uh requires reporting entities to consider scope three standard and PCAF for financial institutions right it also says that um uh companies should report emissions based on 15 categories outlined uh in um in GHG uh protocols scope three standard and those categories should be consistent with this um uh with this standard which we interpret uh that um the consistent part means that the it it means that determines how the category should be defined including the minimum boundaries so again it's uh it's our judgment uh in this area but there's no nothing else that you can go about by and the only additional guidance that ESRS provides it's it's explicit requires companies to disclose what boundaries they they consider for the purpose of determination and reporting of scope three yeah it's interesting you know you referenced um the the guidance here and this should be consistent and I think people who use these standards know that should is is must in in this context and there is in ESRS E1 this paragraph AR46 goes through all the measurement and disclosure for scope three emissions including multiple references then to the scope three standard and to the scope three standard categories and you know we believe when we look at those requirements then that that does refer specifically to using those minimum boundaries.
• 31:11
  SPEAKER_03: So for compliance with ESRS E1 and this is actually disclosure requirement E16 we believe this is what you would do you follow GHG protocol we'll talk about financial institutions in a moment uh and and then and follow these minimum boundaries however like there's always a however then you also need to take a step back and look broadly in in accordance with the ESRS framework and say okay do I have to make entity specific disclosures?
• 31:42
  SPEAKER_03: So do you want me to give a quick definition?
• 31:44
  SPEAKER_03: Yes.
• 31:44
  SPEAKER_03: Okay.
• 31:45
  SPEAKER_03: All right so ESRS 1 paragraph 11 does require companies to to add these entity specific disclosures when a uh material matter is not covered or not covered with sufficient granularity by one of the ESRS's and that could be topical ESRS, the sector ESRS when they come.
• 32:06
  SPEAKER_03: And I think it's this with sufficient granularity where the question comes because if you in your double materiality assessment conclude oh I have this material source of emissions, oh but look it's not in the minimum boundary well then that means there wasn't sufficient granularity there.
• 32:23
  SPEAKER_03: So then what does that mean in the context of this reporting?
• 32:26
  SPEAKER_00: So that basically because of this entity specific guidance we believe companies should potentially might be required to report those.
• 32:34
  SPEAKER_00: If they go through the materiality assessment and conclude that truly some some emissions activity or source which is outside of a minimum boundary, therefore outside of reporting of under E16, they might potentially consider this for measurement and reporting.
• 32:50
  SPEAKER_00: Obviously the information needs to meet the quality criteria uh of ESRS one.
• 32:56
  SPEAKER_00: So then it has to be measured using methodologies which are sufficiently reliable, right?
• 33:02
  SPEAKER_00: It must be comparable with with with other industry participants, but uh assuming that it can be done then companies might be required to to uh to report those emissions.
• 33:12
  SPEAKER_03: So Marchin one thing I want to pick up on here and to help our listeners is I was very clear that ESRS one paragraph 11 requires an entity to provide these entity specific disclosures when it's not when the matter material matter is not covered or not covered with sufficient granularity by an ESRS.
• 33:31
  SPEAKER_03: You were very careful to say you may need to make entity specific disclosures in the area of emissions.
• 33:38
  SPEAKER_03: And the key reason for that difference is the MAI comes in because it depends on whether or not you're going to apply the company is applying transitional provisions that are also provided in ESRS one.
• 33:50
  SPEAKER_03: So it gets complicated quickly but do you want to quickly walk through those transitional provisions and some of the considerations.
• 33:57
  SPEAKER_00: Yes so uh that's a very reason why I say may because um ESRS one specifically paragraph 133b provides the transition provision for entity specific disclosures.
• 34:07
  SPEAKER_00: So companies uh are not required to report entity specific uh disclosures uh if they qualify for those uh provisions for the first three years of reporting so it's very important uh provision requires judgment how companies think about it but we believe that uh companies can qualify and use those transition provisions to kind of a postpone their uh reporting of entity specific uh information yeah and I think not to get too much in the detail because people can refer to our uh the SRG7 which we keep referring to for more information but the key question here and why we're just saying it's it's could be a matter of judgment of whether or not the transitional relief applies is because of the exact wording of this transitional relief that says it is available.
• 34:55
  SPEAKER_03: It's it can be applied to value chain related information except not value chain related data points that are derived from other EU legislation.
• 35:07
  SPEAKER_03: And so then I think that's where some of the judgment comes in of how these requirements of E16 and the entity specific disclosures interact.
• 35:19
  SPEAKER_00: Yeah because exactly this you know the list of all these other data points derived from other EU legislation specifically mentions ESRS E16 Gross scope one, two and three emissions.
• 35:32
  SPEAKER_00: So um there are potentially two interpretations to to this one is it specifically precludes application of this to just E16 uh reporting or precludes it application of this provision to scope three, right?
• 35:47
  SPEAKER_00: And that's very important distinction because you know when you look at E16 we interpret that data points covered by E16 scope three minimum boundary uh requirement.
• 35:58
  SPEAKER_00: So anything within the minimum boundary scope three you cannot apply this provision.
• 36:03
  SPEAKER_00: But because of an uh entity specific uh disclosure by definition, as we mentioned before outside of E16, we believe that the companies can use it.
• 36:13
  SPEAKER_00: But there's alternative view says no, because this uh except for applies to just scope three this is all scope three therefore you have to start reporting this in year one.
• 36:24
  SPEAKER_03: All right so that's the first judgment and again we are comfortable that it can be applied in this circumstance but there are two views.
• 36:31
  SPEAKER_03: Now let's go to the second question because what we also hear from companies is that well can I still take this transitional relief if I have the information available because when you look at the broader context of the transitional relief for value chain information it really it talks about the fact that it's intended to allow companies time to gather information.
• 36:53
  SPEAKER_03: So how do you think about that?
• 36:55
  SPEAKER_00: Yeah so I would agree that in general all these transitional provisions were uh a lot of those were uh designed to like allow people you know give some reliefs if they don't have information however 133b is slightly different because it does not mention the availability of information at all and um when we compare it to other we see we see we think that this is or we believe that this is distinct difference right therefore our interpretation of this provision relief is you can you to use it irrespective of whether you have partial information or or don't have information at all because even all the even even all the information it's your your choice you want to you you have this availability to to exclude it from your reporting for the first three years.
• 37:41
  SPEAKER_00: And we think that's it's supportable by the fact that 133B does not mention availability of information while other transition provisions specifically mention mention those.
• 37:51
  SPEAKER_03: Yeah even 133a which so 133b is metrics 133a is policies actions and targets policies actions and targets you need to disclose the information you have available it's very specific.
• 38:04
  SPEAKER_03: And then all of this is supported in the implementation guidance issued by FRAC FRAC yeah yes but nonetheless there is some judgment there.
• 38:11
  SPEAKER_03: So now you've made two judgments well really three you applied the minimum boundaries and then you concluded that it's that uh the information entity specific information is outside the minimum boundaries and then now you also conclude you have to conclude on information availability.
• 38:27
  SPEAKER_03: So given all of those options that I'll say can you summarize what this really means because this is not a uh it it this is going to end this transition relief even if you take it so if I'm a company reporting how do I think about this in you know what this means?
• 38:45
  SPEAKER_00: Well so like I think the overarching comment is so we first of all we believe there are two acceptable approaches and difference between them is that essentially a timing when you might be required to report some of this information.
• 38:57
  SPEAKER_00: And the difference between them is also whether you conclude that these transition provisions are applicable or not.
• 39:03
  SPEAKER_00: So approach number one when you conclude you're not gonna use or you cannot use the transitional provision, which means starting year one, you have to report uh scope three emissions information uh based on E16 requirements, which means all the emissions included in minimum boundary, and also entity specific uh disclosures for other types of activities that you consider material and have to measure scope three emissions.
• 39:30
  SPEAKER_00: So year one, in both cases you start reporting those emissions.
• 39:35
  SPEAKER_00: Approach number two is when you conclude that you can apply the transition provision, which means that for E16 disclosure you still have to report in year one.
• 39:45
  SPEAKER_00: However, for entity specific so all the other activities outside of a minimum boundary you have until year four.
• 39:52
  SPEAKER_00: So you have to start reporting no later than year four.
• 39:54
  SPEAKER_00: So years one and three, you don't have to provide this information.
• 39:58
  SPEAKER_00: We believe that um probably approach one gives more information or is more meaningful during the first three years.
• 40:05
  SPEAKER_00: But we also um we also believe that approach two is fully supportable.
• 40:11
  SPEAKER_00: So companies uh can choose between the two obviously you still have to provide the disclosure I was mentioning before um uh ESR has a very specific uh disclosure requirements about boundaries so you have to disclose what is included in your reporting what you excluded uh but you have ability to get more time if you chose the approach number two.
• 40:31
  SPEAKER_03: Yeah and I think that more time margin actually has two benefits here.
• 40:35
  SPEAKER_03: One is because you know we didn't get into that too much on this podcast but a lot of companies either haven't been fully reporting scope three emissions.
• 40:45
  SPEAKER_03: If they are reporting scope three they're probably following the minimum boundaries maybe they're only reporting for a few categories but you know with three more years first of all gives you more time to refine your methodologies to get the data but also provides time for maybe more measurement guidance in certain places or just more coalescing around what approaches will be taken.
• 41:08
  SPEAKER_03: So again I think more information is normally helpful.
• 41:12
  SPEAKER_03: So we do think that approach one will provide meaningful information but approach two is is fully supportable.
• 41:20
  SPEAKER_03: Now there is one more judgment that we need to talk about for category 15 specifically for financial institutions and this is goes all the way rewinding back to our discussion of PCAF when we were talking about that for the GHG protocol and then as well when you laid out the guidance for reporting emissions under ESRS where you said you have to consider the provisions and principles of the GHG protocol and for financial institutions consider PCAF.
• 41:49
  SPEAKER_03: So what do we think PCAF means in the context of minimum boundaries for category 15 for financial institutions?
• 41:57
  SPEAKER_00: Well so that's another area that gives me headache, right?
• 42:00
  SPEAKER_00: Because uh it's literally as you mentioned standard basically say you have to consider a scope three standard maybe financial institution PCAF but it doesn't tell you how to consider this.
• 42:11
  SPEAKER_00: Which means in the context of our discussions about minimum boundary we think company financial institutions have had two options there.
• 42:18
  SPEAKER_00: Could conclude that um uh the minimum boundaries that they should be using are the minimum boundaries in scope three standard or they could also conclude uh that PCAF outlines those minimum boundaries we believe that both approaches are acceptable obviously it's all subject to entity specific um uh disclosures so and your conclusions and your conclusions that you reach on on on transition transitional provisions and so on and so forth.
• 42:45
  SPEAKER_00: So obviously uh it's not perfect answer this I know people don't like it like people like to have a very you know straight answer but we think that both approaches are are are acceptable because of this ambiguity in that language.
• 42:56
  SPEAKER_03: Yes and I do think I mentioned the fact transitional provisions will provide more time.
• 43:01
  SPEAKER_03: In particular we are expecting more guidance to be issued for financial institutions or maybe expecting this too strong but we know there's discussions and if you know with the sector specific standards.
• 43:12
  SPEAKER_03: So definitely for companies that you know particularly are taking the approach of minimum boundaries under GHG protocol.
• 43:20
  SPEAKER_03: So only three AC classes instead of uh seven ASA classes and there's more activities as well in uh the PCAF really need to be aware that this could evolve over time and there could be changes.
• 43:35
  SPEAKER_00: Yes.
• 43:36
  SPEAKER_00: And uh when we when we will uh get the um industry specific standards that could also clarify uh or suggest different solutions exactly so marchin let's move off of that I know there's some more related questions that people there's 10 pages about this in in the uh the SRG7 and that explain all the technical arguments that
• 44:00
  SPEAKER_03: If you're interested in knowing more.
• 44:01
  SPEAKER_03: But let's move on to a second question we've received.
• 44:04
  SPEAKER_03: And this one I think feels more obvious, but it is a question that we're asking.
• 44:10
  SPEAKER_03: So we want to make sure we address it.
• 44:11
  SPEAKER_03: And specifically, whether or not companies are required to report all categories of scope three emissions, and then how to decide if you should include or exclude some.
• 44:23
  SPEAKER_00: So let's go back to GHG, all the way back to GHG protocol.
• 44:28
  SPEAKER_00: So GHG protocol basically requires that companies should report all relevant uh categories.
• 44:35
  SPEAKER_00: Um however, it also says that um it should not exclude any significant categories.
• 44:41
  SPEAKER_00: And there's a difference between the two, which I'm gonna uh quickly explain.
• 44:46
  SPEAKER_00: So what they mean by relevant, uh GEG protocol outlines they has a guidance that helps companies to determine what categories are irrelevant.
• 44:56
  SPEAKER_00: They have this kind of a criteria or indicators that should be considered in determination of relevance of that.
• 45:01
  SPEAKER_00: The first one is size, so significance, but also things like influence, level of risks, stakeholders' interests, um, availability of data.
• 45:10
  SPEAKER_00: So it's very nicely outlined uh kind of a process you have to go through to determine what which categories are relevant for you.
• 45:19
  SPEAKER_00: However, I just want to emphasize it has very kind of a big qualifier that basically it does not expect you to exclude any category that is significant.
• 45:28
  SPEAKER_00: So this um the size uh criteria is pretty uh important there, right?
• 45:34
  SPEAKER_03: Yeah, and I think the other thing actually, you know, I referenced Diana Stoltzfest earlier in the episode, and I'll reference her again because she and I had a discussion about the fact sometimes you can't look at the word and just apply your normal understanding or meaning and say, oh, influence.
• 45:51
  SPEAKER_03: Okay, well, I know what influence is, I have it or I don't, because there is another level of information you need to look at.
• 45:57
  SPEAKER_03: So specifically all these criteria that you just ran through, there's more guidance in the scope three standard of how they're defined and in particular of what they mean when they say, you know, whether or not you have influence.
• 46:10
  SPEAKER_03: So again, don't just presume, oh, I know what that is, I know what risk is, I know what influence is, because you you need to actually go through and do this evaluation.
• 46:19
  SPEAKER_03: And to your point, if you're using these criteria and trying to justify excluding um significant emissions, well, you're you're caught by this overall requirement that you have to include all of them.
• 46:33
  SPEAKER_00: That I I strongly believe that.
• 46:34
  SPEAKER_00: The um in general, this whole um process of assessing relevance is really important because it's used also for screening.
• 46:45
  SPEAKER_00: So when you can imagine you are reporting entity and you have you never reported scope three, now you have to decide what and how to report.
• 46:53
  SPEAKER_00: So scope three has you know includes the whole screening process, how to go and determine which category is significant, which category is relevant, what tools to use to actually there, because at the beginning, especially significance, uh significant criteria, you never calculate that.
• 47:09
  SPEAKER_00: So, how do you do this?
• 47:10
  SPEAKER_00: So it's very interesting.
• 47:11
  SPEAKER_00: They point to different techniques and methodologies, how to do this, to do what they call screening and determine as a starting point which of these categories might be relevant and significant that would require capturing data and measuring it.
• 47:25
  SPEAKER_03: All right.
• 47:25
  SPEAKER_03: So, Martin, we promised that this episode is focused on ESRS.
• 47:29
  SPEAKER_03: We just spent time talking about the GHG protocol, and I think it's important because, again, this creates some foundation for ESRS.
• 47:38
  SPEAKER_03: But what guidance do we see?
• 47:39
  SPEAKER_03: There is some specific guidance on this in ESRS.
• 47:42
  SPEAKER_03: So, what does it say?
• 47:43
  SPEAKER_00: Yes, so ESRS E1 has a very specific guidance that requires companies first screen to determine significant categories to be reported, and specifically refers back to scope three standard, um, even quoting specific pages with that guidance I was just talking about, uh, for the process, how to screen, how to determine relevance, and um, how to determine what is uh significant in uh using words of ESRS E16 uh for inclusion in measurement and reporting of those emissions.
• 48:14
  SPEAKER_00: So that's why I started with GEG protocol, because uh oftentimes the the the standard refers just broadly scope three um to scope three standard, but in this case it's even quote specific pages where to look for, and those pages have those relevance criteria and methodologies, how to screen, what to use to determine what's significant and relevant for the company.
• 48:35
  SPEAKER_03: Yeah, and I think it's very important then for companies to recognize that when you're preparing, you know, the overall requirement is total scope three emissions or even gross, I think, uh gross scope three emissions.
• 48:50
  SPEAKER_03: However, this is those significant categories.
• 48:53
  SPEAKER_03: It's not your significant categories plus all these other small amounts.
• 48:57
  SPEAKER_03: It's it's that you do the screening, you identify your significant categories, and those are the ones that you disclose.
• 49:03
  SPEAKER_03: And since this is year one, I don't think we need to get into it, but there's even some guidance of how often you need to do the screening and how often you have to update your categories.
• 49:12
  SPEAKER_03: So at least here is the place where it's this this identification of categories is not something you have to do every year, unless, of course, you have significant changes to your business.
• 49:22
  SPEAKER_00: Yeah, and uh, it's you actually you're very correct.
• 49:25
  SPEAKER_00: Because people were people like ask these questions because when you look at the ESRS one, there's even specific tabular forms that list all the 15 categories.
• 49:34
  SPEAKER_00: And even in that disposal requirement, on top, it says significant.
• 49:38
  SPEAKER_00: And Ifra clarified this on you know one or two occasions said if something is not applicable, you just don't fill it out.
• 49:45
  SPEAKER_00: Because a lot of our clients thought, oh, there's a table, I have to fill it out, and it lists all 15.
• 49:49
  SPEAKER_00: Do I have to do all 15?
• 49:50
  SPEAKER_00: No, it's important that even that table says, I think it's AR-48, um, says you have to just include the significant categories.
• 49:58
  SPEAKER_00: And if something is not significant, you simply do not fill out the the box.
• 50:02
  SPEAKER_03: Yes.
• 50:03
  SPEAKER_03: So definitely I think that is helpful because again, anyone who followed this entire conversation knows there's already so much work involved to, you know, let's focus in on what's most important here and and these significant ones.
• 50:15
  SPEAKER_03: All right, so March, let's try to squeeze in one more topic here for today, and then we, I guess, might have to do a follow-on episode with some other questions.
• 50:24
  SPEAKER_03: But I want to move off of E1.6, still sticking in ESRS, and now I'm going to talk about targets.
• 50:30
  SPEAKER_03: So if my memory is correct, this would be an E1.
• 50:33
  SPEAKER_03: And so can you give us the requirement for targets and then we can talk a bit about why there are some questions?
• 50:40
  SPEAKER_00: Yes.
• 50:40
  SPEAKER_00: So um, so let's start.
• 50:42
  SPEAKER_00: ESRS does not require companies to establish targets.
• 50:46
  SPEAKER_00: That's a very foundational, right?
• 50:49
  SPEAKER_00: Yeah.
• 50:49
  SPEAKER_00: However, right, if companies do have any emission reduction targets, they have to be disclosed based on requirements of ESRS, E1.
• 50:58
  SPEAKER_00: And E14 requires companies to disclose gross absolute targets, right?
• 51:04
  SPEAKER_00: Excluding any carbon offsets, any reductions or anything like that, and it has to be absolute.
• 51:10
  SPEAKER_00: However, if companies also have the intensity target, it also has to be disclosed.
• 51:16
  SPEAKER_00: The interesting element that in the in this area is some companies might only have intensity target.
• 51:22
  SPEAKER_00: ESOS is pretty clear there too, that requires if you only have intensity target, you also have to disclose absolute value of this target, which is it's a very interesting concept for me because when you start doing like when you start reporting progress toward achievement of an intensity target, you might be showing like that you're achieving it, like decreasing the uh intensity of emissions, while on an absolute basis, you might be going the other way around.
• 51:49
  SPEAKER_00: And ESRS recognizes that, nevertheless, they still require companies to disclose that absolute gross target.
• 51:55
  SPEAKER_03: Well, I think that's why they require.
• 51:56
  SPEAKER_03: And I I guess just quickly for our listeners who maybe are less focused on this, so an intensity target, you are basically saying, here's my, you know, my amount of emissions as uh you know based on revenue.
• 52:10
  SPEAKER_03: So the amount of emissions per dollar of revenue or per some other financial statement metric versus to your point, an absolute metric is just emission.
• 52:19
  SPEAKER_03: Yeah, just the amount of emissions you have.
• 52:20
  SPEAKER_03: So if your revenues are going up and your emissions are going up at a slower pace, your intensity is going down.
• 52:27
  SPEAKER_03: But again, to your point, your absolute amount would be going up.
• 52:30
  SPEAKER_03: And in this case, yeah, they want you to show it because that's what's probably the most important here.
• 52:36
  SPEAKER_03: So I do think for companies that have historically reported intensity-based metrics, it's interesting because you you said, well, it doesn't require you to establish a target, but yet I do have to convert my intensity target into an absolute target.
• 52:53
  SPEAKER_03: And I think some companies have had a struggle with that.
• 52:56
  SPEAKER_03: And we do have a small transitional relief that has come up in one of the FRAG QA's that maybe we should, you know, as at least talking about because it could provide, again, it's a very small amount of relief, but at least it's a bit of relief.
• 53:10
  SPEAKER_00: Yeah, so the um um the question was raised to multiple, multiple questions were raised to EFRAC, especially from financial institutions in a context of having intensity target for scope three category 15 for the portfolio companies or investments in there, which is very popular in finance industry.
• 53:28
  SPEAKER_00: A lot of the companies have intensity targets there.
• 53:32
  SPEAKER_00: Um, for them, converting this intensity target to absolute value is it's challenging because it could requires additional information from portfolio companies they may not have, right?
• 53:42
  SPEAKER_00: So, and it's not in my simple mind, it should be very easy, but like when you start uh digging into the specifics of like this case, that therefore that's why they asked these specific questions.
• 53:52
  SPEAKER_00: So EFRAC responded that they recognize there might be some challenges there, but they still say standard is pretty clear, you have to show that.
• 54:00
  SPEAKER_00: However, they pointed uh to ESRS1 paragraph 133a that gives the relief, right?
• 54:07
  SPEAKER_00: For um certain uh value chain information.
• 54:11
  SPEAKER_00: So they say this absolute value would be value chain information, and you can get a relief based on the 133a, so you don't have to present it for first few years.
• 54:20
  SPEAKER_03: Yeah, and I think what's key here, and sorry to use so much uh references to the standards in this podcast, it's it's very specific, but it's important.
• 54:29
  SPEAKER_03: So earlier, Marchin and I were talking about ESRS par one, paragraph 133B.
• 54:35
  SPEAKER_03: Yes, and there's no information requirement, as we said.
• 54:38
  SPEAKER_03: ESRS 1 133A, as we mentioned earlier, does have an information qualifier.
• 54:46
  SPEAKER_03: So this transitional relief can be applied, but if you have the information for your target, you would need to make the disclosure.
• 54:55
  SPEAKER_03: So you cannot apply the relief if you have the information available to you in-house.
• 54:59
  SPEAKER_00: And EFRAC was pretty clear when they commented commented in that they said whatever information of in-house you report, but if you don't have it in-house, you can apply to provision.
• 55:09
  SPEAKER_00: Very good, Heather.
• 55:09
  SPEAKER_00: I just totally forgot about that, to be honest.
• 55:11
  SPEAKER_00: And I think it's very important.
• 55:12
  SPEAKER_00: It's extremely important.
• 55:14
  SPEAKER_00: And they they they emphasized that in their answer.
• 55:16
  SPEAKER_03: They did.
• 55:16
  SPEAKER_03: Now, the one other thing that uh we have talked quite a bit about is that the answer was given in the context of scope three category 15.
• 55:25
  SPEAKER_03: It obviously only applies to scope three because it's value chain.
• 55:29
  SPEAKER_03: So if you have targets related to scope one and two, you need to do these conversions from your one.
• 55:34
  SPEAKER_03: But we actually do believe that this transitional relief would equally apply to other categories to the extent you know applicable.
• 55:43
  SPEAKER_03: Now, if it's, you know, for some other categories, maybe you would already have the information in-house, so you would need to consider that aspect of the provision.
• 55:52
  SPEAKER_00: Yeah, I agree.
• 55:52
  SPEAKER_00: I mean, there's no reason why others could not, other categories could not be applied.
• 55:57
  SPEAKER_00: They specifically address category 15 because it's a fairly big issue for uh for financial institutions.
• 56:04
  SPEAKER_00: Um, and and those are the ones who ask the questions.
• 56:06
  SPEAKER_00: But if others have uh lacked the information for conversion of that to absolute value, they could apply the same provision.
• 56:12
  SPEAKER_03: All right.
• 56:12
  SPEAKER_03: So, March, I have actually several more questions for you, but we are at almost one hour, and that's probably the maximum anyone needs for GHG at any one time, including us.
• 56:22
  SPEAKER_03: Uh so maybe who knows to our listeners, we might have another bonus episode.
• 56:26
  SPEAKER_03: But um, just as always, such a pleasure to talk to you and thanks so much for joining me today.
• 56:31
  SPEAKER_03: All right.
• 56:32
  SPEAKER_03: And then to the listeners or viewers, potentially, if you're viewing our video podcasts, thank you as well for joining us today.
• 56:38
  SPEAKER_03: And I do highly encourage you to check out the other episodes in this video podcast series, whether that's listening on your favorite app, or you can find the links to the videos um on some apps and as well in uh Viewpoint.
• 56:51
  SPEAKER_03: And then in addition, as I said, who knows?
• 56:54
  SPEAKER_03: Look for another bonus episode or potentially another podcast, a video podcast series.
• 57:00
  SPEAKER_03: But once again, thank you.
• 57:02
  SPEAKER_02: That's our show for today.
• 57:04
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• 57:07
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• 57:24
  SPEAKER_02: From Thought Leadership at PWC, I'm Heather Horn.
• 57:29
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