New ISO standards addressing carbon neutrality and sustainable finance

The International Organization for Standardization (ISO) has recently turned its attention to the world of ESG and is currently in the process of developing an international standard of ISO 14068 (the “Carbon Neutrality IS”) which will provide a standardized approach towards carbon neutrality and communicating associated claims, in addition to an international standard on sustainable finance in collaboration with the British Standards Institution, (the “Sustainable Finance IS”).

International Standard on carbon neutrality

The concept of carbon neutrality refers to balancing out of carbon dioxide emitted into the atmosphere with the amount that is removed from the atmosphere. The term is commonly considered to refer to only carbon dioxide emissions, whereas “net zero” generally considers other gases such as methane, nitrous oxide and hydrofluorocarbons – however it should be noted that there are no universally agreed definitions for these terms.

Already in circulation is the ISO 14060 family of standards which aim to provide clarity and consistency for quantifying, monitoring, reporting and validating or verifying GHG emissions and removals and carbon neutrality to support sustainable development through a low-carbon economy, with a view to providing clarity and consistency on quantifying, monitoring, reporting, and validating or verifying GHG emissions and removals. For example, ISO 14064-1 details principles and requirements for designing, developing, managing and reporting organization-level GHG inventories; and ISO 14064-2 details principles and requirements for determining baselines and for the monitoring, quantifying and reporting of project emissions. It focuses on GHG projects or project-based activities specifically designed to reduce GHG emissions and/or enhance GHG removals. It provides the basis for GHG projects to be validated and verified.

With this Carbon Neutrality IS, ISO now seeks to focus on developing a standardized approach to achieving and demonstrating carbon neutrality that could be applied to organizations and products (including services, buildings and events).

The Carbon Neutrality IS presents a GHG hierarchy approach to the reduction of GHG emissions, which emphasises reduction of GHG emissions with offsetting being linked to unabated GHG emissions, (crucially) following actions to achieve GHG emission reductions and GHG removals. Worth noting also is that avoided emissions are not dealt with in the Carbon Neutrality IS, which comes as no surprise given that this category of “Scope 4” emissions is relatively new and falls outside current agreed protocols.

It also specifies principles, requirements and guidance for achieving and demonstrating carbon neutrality through the quantification, reduction, removal, and offsetting of greenhouse gas emissions, and is intended to be used by a variety of organisations and in relation to products (such as events, buildings or services), though notably is not intended for use by territories.

Helpfully, and what will be welcome guidance for many, definitions for terms such as “carbon neutrality”, “carbon neutrality claim”, and “offsetting” have been provided, which many will appreciate given widespread confusion over what such terms should mean. Interestingly, the definition of the term “carbon neutral” does not refer only to carbon dioxide emissions.

The Carbon Neutrality IS is based on 10 principles, such as transparency; conservativeness; and GHG hierarchy approach, amongst others and provides guidelines for determining a subject’s carbon impact and defines the type of offsets that can be used to compensate for emissions. It also sets out criteria for carbon credits and for GHG programmes, and requires entities using the standard publish a carbon neutrality report and provides guidance around making carbon neutrality claims.

The Carbon Neutrality IS also builds on the work of the British Standards Institution's PAS 2060 standard, which is an already widely recognised benchmark.

International Standard on sustainable finance

In addition, the British Standards Institution and ISO have also launched BS ISO 32210: Sustainable Finance – Guidance on the application of sustainability principles for organizations in the financial sector, which aims to provide guidance to a wide range of financial institutions, including recipients of sustainable finance, governmental organizations, and public and private sector institutions – amongst others, on the application of overarching sustainability principles, practices and terminology for financing activities, in order to drive sustainable outcomes and integrate key principles of sustainability into their operations, activities, products and services.

It sets out principles and practices to support financial institutions to enable positive environmental and social outcomes, risk mitigation and deliver sustainable value and covers areas such as:

• Governance and culture, including that responsibility for sustainability matters should be integrated throughout corporate culture.
• Strategy alignment and objectives – including the adoption of a governing-body-approved sustainability policy or similar statement.
• Risk and opportunity management and impact assessment.
• Stakeholder engagement.
• Monitoring, measuring and metrics.
• Reporting, transparency and assurance.
• Continual improvement and enhancing ambition.

Given the current swathe of standards in circulation, ISO aims to “offer a path through the confusion” for actors in the sustainable finance space with the Sustainable Finance IS by providing clear guidance on how to become more sustainable, however it is unclear how it will interact with other international standards such as those developed by the ISSB and SASB, for example. Uniquely however, the Sustainable Finance IS is aimed at financial institutions specifically and as such is the first of its kind to be articulated beyond current regulatory disclosure requirements for such entities. It has also been designed for use regardless of expertise or capacity of organisations and is globally applicable.