A Dangerous Precedent: Why Excluding Derivatives from Scope 3 Undermines Global Standards

As part of our submission to the ISSB’s Exposure Draft on amendments to IFRS S2, Eco Sustainability has formally registered its stance.

In this opinion editorial, we offer our insights and position. To view our Technical Opinion, please see the full text of our formal submission.

Full Text From ISSB Exposure Draft

Question 1—Measurement and disclosure of Scope 3 Category 15 greenhouse gas Emissions

The ISSB proposes to permit entities to limit their disclosure of Scope 3 Category 15 greenhouse gas emissions. This limitation would permit entities to exclude some of their Scope 3 Category 15 greenhouse gas emissions, including those emissions associated with derivatives, facilitated emissions and insurance-associated emissions, when measuring and disclosing Scope 3 greenhouse gas emissions in accordance with paragraph 29(a)(i)(3) of IFRS S2.

(a) The ISSB proposes to add paragraph 29A(a), which would permit an entity to limit its disclosure of Scope 3 Category 15 greenhouse gas emissions to financed emissions, as defined in IFRS S2 (being those emissions attributed to loans and investments made by an entity to an investee or counterparty). For the purposes of the limitation, the proposed paragraph 29A(a) would expressly permit an entity to exclude greenhouse gas emissions associated with derivatives. Consequently this paragraph would permit an entity to exclude emissions associated with derivatives, facilitated emissions or insurance-associated emissions from its disclosure of Scope 3 greenhouse gas Emissions.

The proposed amendment would not prevent an entity from choosing to disclose greenhouse gas emissions associated with derivatives, facilitated emissions or insurance-associated emissions should it elect to do so.

Paragraphs BC7–BC24 of the Basis for Conclusions describe the reasons for the proposed Amendment.

Do you agree with the proposed amendment? Why or why not?

o Broadly agree

o Broadly disagree

o Neither agree nor disagree

Optional: Please explain______________________________

We Broadly Disagree

The ISSB’s proposal effectively allows financial institutions - banks, insurers, asset managers - to pick and choose which types of Scope 3 emissions they disclose. They must report emissions linked to loans and equity investments, but may exclude emissions from more complex or indirect sources like:

• Derivatives – e.g., a bank issuing a carbon futures contract or oil swap.

• Facilitated emissions – e.g., underwriting or arranging financing for a new coal plant.

• Insurance-associated emissions – e.g., an insurer providing coverage to an LNG terminal.

These emissions are not theoretical. They are very real and material. Particularly in ASEAN, where banks and insurers routinely support high-emitting sectors (e.g., palm oil, fossil fuels, plastics) through these exact channels. By allowing institutions to exclude these, ISSB risks introducing massive data blind spots, weakening the global push for transparency.

Let's break it down.

1. Material Emissions Are Being Excluded

A major Southeast Asian bank could underwrite a billion-ringgit bond for a new petrochemical complex and not disclose any emissions from that transaction. That’s a systemic risk - it may not show on the balance sheet.

2. It Destroys Comparability

One institution might fully report Scope 3, while another omits half its exposures. Without a level playing field, disclosures become useless for benchmarking, assurance, or investor confidence.

3. It Violates the Principles We Claim to Uphold

This amendment runs counter to the GHG Protocol, ISO 14064-1, and ISSB’s own principles of completeness, transparency, and consistency.

4. It Shifts Responsibility Downstream

By excluding these categories, financial institutions push accountability to their investees, obscuring their own role in enabling high-emissions activities.

5. It Slows Progress in Emerging Markets

Just as ASEAN countries are starting to align with global best practices -

• Singapore’s MAS and GFIT promote PCAF-aligned Scope 3 reporting

• Malaysia’s JC3 encourages transition risk management

• Thailand will require Scope 3 from 2025 onward

This amendment could reverse momentum. The message it sends is: don’t bother if it’s hard.

Our Recommendations

• Keep all Scope 3 Category 15 emissions in scope, including derivatives and insurance.

• Allow temporary flexibility using proxies or ranges, but not outright exclusions.

• Require justification for exclusions and a roadmap for full disclosure.

• Support alignment with existing frameworks like PCAF.

Full Text From ISSB Exposure Draft

(b) The ISSB also proposes to add paragraph 29A(b), which would require an entity that limits its disclosure of Scope 3 Category 15 greenhouse gas emissions in accordance with the proposed paragraph 29A(a), to provide information that enables users of general purpose financial reports to understand the magnitude of the derivatives and financial activities associated with the entity’s Scope 3 Category 15 greenhouse gas emissions that are excluded.

Therefore, the ISSB proposes to add:

• paragraph 29A(b)(i) which would require an entity that has excluded derivatives from its measurement and disclosure of Scope 3 Category 15 greenhouse gas emissions to

  disclose the amount of derivatives it excluded; and

• paragraph 29A(b)(ii) which would require an entity that has excluded any other financial activities from its measurement and disclosure of Scope 3 Category 15 greenhouse gas emissions to disclose the amount of other financial activities it excluded.

The term ‘derivatives’ is not defined in IFRS Sustainability Disclosure Standards, and the ISSB does not propose to define this term. As a result, an entity is required to apply judgement to determine what it treats as derivatives for the purposes of limiting its disclosure of Scope 3 Category 15 greenhouse gas emissions, in accordance with the proposed paragraph 29A(a).

The proposed paragraph 29A(b)(i) would require an entity that has excluded derivatives from its measurement and disclosure of Scope 3 Category 15 greenhouse gas emissions to explain the derivatives it excluded.

Paragraphs BC7–BC24 of the Basis for Conclusions describe the reasons for the proposed disclosure requirements.

Do you agree with the proposed disclosure requirements? Why or why not?

o Broadly agree

o Broadly disagree

o Neither agree nor disagree

Optional: Please explain____________________________________________

We Broadly Agree

Eco Sustainability broadly agrees with the disclosure requirements under 29A(b). If emissions are excluded, stakeholders must at least know what’s been left out. But that’s not enough. Without defining what “derivatives” mean - or requiring emissions estimates - the rule becomes too easy to game.

Our Recommendation

• Define “derivatives” and “financial activities” using IFRS or PCAF guidance.

• Disclose emissions estimates, not just dollar values. A $100M swap on crude oil has real carbon implications.

• Encourage joint attribution between banks and clients to prevent emissions disappearing.

• Support emerging markets with phased adoption and technical support.

Conclusion

We urge ISSB not to lower the bar just as the world is aligning around better disclosures. Scope 3 Category 15 is hard, yes. But what matters most is that we report what we can - not what’s convenient. Transparency cannot be optional.

About Eco Sustainability

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