How Ready Are Companies for Mandatory Scope 3 Reporting?
- Across the globe, regulations for reporting on supply chain emissions are either on the books or in development, meaning many companies will soon have to report on their Scope 3 emissions.
- Enterprises that fall behind in reporting on their climate risks and impact risk reputational damage, legal penalties and more difficulty accessing capital.
- Some steps that leading companies are taking include conducting materiality assessments, engaging with suppliers and investing in technology to enhance tracking and reporting capabilities.
February 27, 2024 | Supply Chain Strategy
When it comes to measuring and tracking a company’s carbon footprint, investors, regulators and consumers are no longer solely focused on emissions from a company's direct operations (Scope 1) and purchased energy (Scope 2).
Instead, the spotlight is increasingly shining on indirect emissions across an enterprise’s entire value chain (Scope 3).
Are companies ready for mandatory Scope 3 reporting?
Currently, the global landscape of Scope 3 regulations is fragmented.
Some countries have begun implementation, while others are in the process of developing or considering legislation.
While no country boasts comprehensive, mandatory requirements across all sectors, certain regions and industries are paving the way:
United States – The Securities and Exchange Commission (SEC) has proposed a rule requiring public companies to disclose climate-related information, including Scope 3 emissions for many companies. This rule is still under development and not yet finalized.
The Biden administration has also proposed regulations that would require major federal contractors to report Scope 3 emissions. In addition, certain industries already face requirements related to Scope 3 emissions (e.g., oil and gas, auto manufacturers).
In California, the California Air Resources Board is developing regulations requiring large companies operating in the state to report Scope 3 emissions.
United Kingdom – Under the Streamlined Energy and Carbon Reporting framework, large companies meeting two or more of the following criteria (turnover £36m+, balance sheet total £18m+, 250+ employees) must report global Scope 1 and 2 emissions, but Scope 3 remains voluntary.
The British government is exploring mandatory Scope 3 reporting in line with International Sustainability Standards Board (ISSB) proposed standards.
European Union (EU) – The Corporate Sustainability Reporting Directive (CSRD) under development will likely require large companies to report Scope 3 emissions, starting in 2024.
Japan – The Financial Services Agency is considering requiring listed companies to disclose climate-related information, including Scope 3 emissions.
Switzerland – The Swiss Federal Act on CO2 Reduction requires large Swiss companies and foreign companies with Swiss subsidiaries to implement measures to reduce emissions, potentially including Scope 3.
Canada – The Canadian Securities Administrators are proposing mandatory climate-related disclosures, potentially including Scope 3 emissions, for issuers.
New Zealand – The Financial Markets Authority requires listed companies to report on significant climate-related risks and opportunities, including Scope 3 emissions where relevant.
Other Relevant Initiatives
International Financial Reporting Standards (IFRS) Foundation: Developing global sustainability reporting standards, covering climate-related matters, including potential Scope 3 requirements.
Task Force on Climate-Related Financial Disclosures (TCFD): Provides voluntary recommendations for companies to disclose climate-related information, including Scope 3 emissions.
Science Based Targets initiative (SBTi): Requires companies setting science-based targets to include Scope 3 emissions if they constitute more than 40% of total emissions.
Even without mandated disclosures, the pressure to report Scope 3 emissions is mounting. Investors are demanding transparency, stakeholders are raising their voices, and reputational risks loom large for companies lagging.
So, what are proactive players doing to get ahead of the curve?
Proactive Measures
• Conducting materiality assessments: Identifying significant sources of Scope 3 emissions within their value chains, allowing them to prioritize resources and focus on the most impactful areas.
• Piloting and experimenting with different methodologies: Trying out various approaches to collect and measure Scope 3 emissions, adapting the most effective ones for wider implementation.
• Engaging with suppliers: Collaborating with suppliers to improve data collection and transparency throughout the value chain, as accurate Scope 3 reporting relies on supplier cooperation.
• Investing in technology solutions: Adopting tools and software to streamline data collection, analysis, and reporting processes, making Scope 3 reporting more efficient and manageable.
• Setting science-based targets: Committing to ambitious emissions reduction goals encompassing Scope 3, demonstrating leadership and preparedness for future regulations.
Overall Readiness
While many companies are taking proactive steps, it’s difficult to paint a comprehensive picture regarding overall readiness across industries.
Large companies with significant resources and a focus on sustainability tend to be better prepared, while smaller companies or those in less regulated sectors may lag.
The pace of preparation is accelerating, driven by investor pressure, stakeholder expectations, and the imminent prospect of mandatory regulations in many countries. While the regulatory landscape is still in flux, it’s increasingly clear that the sooner enterprises start getting ready for Scope 3 reporting requirements, the better.
Want to discover what your enterprise can do to start measuring, tracking and reporting on its supply chain emissions? Learn how GEP can help you start tackling Scope 3 emissions.
