Imagine if farmers had to fulfill government regulations that required them to track the greenhouse gases (GHG) emitted when the potatoes they grow are transported to the store. Then, they had to track the emissions caused by the people who bought their potatoes while traveling to and from the store. Also, the emissions produced when the potatoes are washed, peeled, baked, or fried in an oven or over a fire. Then, determine exactly what potato consumers do with the bags in which the potato was sold so that GHG emissions can be determined for bag disposal.

In other words, what if farmers became responsible for recording and reporting to the government for use by financial institutions deciding on loan applications to farmers, the greenhouse gas emissions caused by every downstream (and upstream) activity needed to bring potatoes from the farm to the mouth of the consumer?

What if energy companies, especially coal, oil, and natural gas producers, were subjected to the same rules? They would have to track down, record, and report how their products were used by everyone who bought and used them. And what if the same requirements applied to every publicly traded company on the stock exchange?

That would obviously be a nightmare, of course. All this expensive, time-consuming, and useless activity would inevitably lead private businesses who could be re-located to flee to jurisdictions where such onerous reporting requirements were not needed… if that is, they did not go broke first as their bank loans dried up when their financial institutions insisted on a low ESG score, based largely on the companies’ successes in reducing GHG emissions, not only that they produce directly, but also that everyone who supplies them or uses their products produces.

Unbelievably, all this is soon coming to Canada, the European Union, and even the U.S. if our over-active woke standards bureaucrats get their way. This approach of being responsible for the reporting of not only “Scope 1 GHG emissions” (direct emissions from owned or controlled sources) and “Scope 2 emissions” (indirect emissions from the generation of purchased energy) but also “Scope 3 emissions” (all other indirect emissions in a company’s value chain, including upstream and downstream activities) is one of the ultimate outcomes of the 28^th United Nations Climate Change Conference (COP28), that took place at the end of 2023 in Dubai, United Arab Emirates.

To understand this evolving situation, we need to get into the weeds a bit on two of the initiatives that came out and were boosted at COP28.

During COP28, the formation of the International Sustainability Standards Board (ISSB) was announced by the Trustees of the London, UK-based International Financial Reporting Standards Foundation (IFRS Foundation, which is responsible for developing and maintaining the International Financial Reporting Standards (IFRS)), which oversees financial reporting standard-setting. The ISSB’s primary mandate is to develop sustainability-related financial reporting standards that will give investors, including banks and pension fund managers, the information they need to rate companies based on their environmental footprint and GHG emissions.

Also highlighted during COP28 was the Glasgow Financial Alliance for Net Zero (GFANZ), “a global coalition of leading financial institutions committed to accelerating the decarbonization of the economy.” Included in those institutions are asset owners, asset managers, banks, and insurance companies, each of which has its own sub-group under the GFANZ umbrella. To get into this club, the financial institution needs to have a net-zero by 2050 commitment. GFANZ was actually initiated in April 2021 by UN Special Envoy on Climate Action and Finance Mark Carney along with the COP26 presidency, “in partnership with the UNFCCC Race to Zero campaign, to coordinate efforts across all sectors of the financial system to accelerate the transition to a net-zero global economy.” In other words, GFANZ is based on the scientifically unfounded idea that we must reduce our GHG emissions to save the world from a climate change disaster.

In June 2023, the International Sustainability Standards Board issued two IFRS Sustainability Disclosure Standards, both of which became effective at the start of 2024:

IFRS S1, General Requirements for Disclosure of Sustainability-related Financial Information

IFRS S2, Climate-related Disclosures

Here is how the IFRS describes IFRS S1. (Yes, I know this is tedious, but we need to understand all this properly if we are to stop it before all this is turned into binding regulations by various national regulators (more on that later)):

“The objective of IFRS S1 is to require an entity to disclose information about its sustainability-related risks and opportunities that is useful to users of general purpose financial reports in making decisions relating to providing resources to the entity.

“IFRS S1 requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term (collectively referred to as ‘sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects’).

“IFRS S1 prescribes how an entity prepares and reports its sustainability-related financial disclosures.

“It sets out general requirements for the content and presentation of those disclosures so that the information disclosed is useful to users in making decisions relating to providing resources to the entity… and so on.

Here is how IFRS describes IFRS S2, Climate-related Disclosures:

“The objective of IFRS S2 is to require an entity to disclose information about its climate-related risks and opportunities that is useful to users of general purpose financial reports in making decisions relating to providing resources to the entity.

“IFRS S2 requires an entity to disclose information about climate-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, … and so on, similar to IFRS S1 with “requirements for disclosing information about an entity’s climate-related risks and opportunities.”

They define climate-related risks to which the entity is exposed as:

1. 1. “climate-related physical risks,” [namely risks caused by climate change forecast to occur in the future by the UN Intergovernmental Panel on Climate Change (IPCC) reports and those of other official bodies]
   2. “climate-related transition risks,” [namely risks caused by the transition to a low carbon economy]

The purpose here is that lenders, investors, and insurers can assess an entity’s ability to adapt to climate risks (and take advantage of opportunities caused by climate change). The problem is, of course, that the scenarios used to forecast what climate change risks the entity will be subjected to are in themselves problematic. In her June 2022 report, “Counting Carbon Molecules,” UK-based strategic energy analyst Dr. Tammy Nemeth wrote:

“The ISSB also admits that the preparers of the Draft Exposures raised concerns regarding ‘the speculative nature of the information that scenario analysis generates, potential legal liability associated with disclosure (or miscommunication) of such information, data availability and disclosure of confidential information about an entity’s strategy.’ Despite those concerns, the requirement for scenario analysis was included.

“Dr. Peter Wells, an expert on financial reporting regulation and financial statement analysis, wrote in his letter of comment that it was inappropriate to include scenario analyses in a reporting standard because they were subject to value judgements and not quantifiable. He expressed similar reservations about anything beyond Scope 1 reporting as Scope 2 and Scope 3 were impossibly unverifiable.”

The new ISSB standards, IFRS S1 and IFRS S2 are not mandatory. However, many countries are producing their own standards based on the ISSB standards, and regulations based on those standards will likely become mandatory for entities operating within those jurisdictions.

For example, in Canada, the Canadian Sustainable Standards Board (CSSB), a body appointed by Canadian financial and accounting industry insiders, deliberated on the IFRS S1 and S2 standards for about 9 months and concluded that nothing had to be changed except adding a year of relief for filing Scope 3 emissions accounting and conducting climate scenario analysis. So, in March 2024, the CSSB produced draft versions of its own standards (both of which are open to public comment until June 10), essentially identical to IFRS 1 and 2:

• Canadian Sustainability Disclosure Standard (CSDS) 1, General Requirements for Disclosure of Sustainability-related Financial Information
• Canadian Sustainability Disclosure Standard (CSDS) 2, Climate-related Disclosures

Interestingly, Canada’s Office of the Superintendent of Financial Institutions (OSFI), which supervises federally regulated financial institutions and pension plans, was told Scope 3 emissions accounting was essentially impossible when it solicited comments on its B15 Guidelines for climate risk, but they mandated it anyway. So, the banks, insurers, and pensions must do Scope 3 emissions accounting starting next year. CSSB is apparently hoping this will be made mandatory for all companies.

Next week, I describe the disastrous impact all this will have on you the consumer and further discuss what is happening on this front in the U.S. and how we can fight back.

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