Navigating mandatory Scope 3 emissions reporting in the EU, US, and beyond
April 26, 2024
Transparency into a company’s ESG (environmental, social, governance) practices is becoming exponentially important for business success. Investors, customers, employees, and governments are increasingly demanding data on a company’s social and environmental impacts.
Currently, most ESG reporting is voluntary, with public and private companies worldwide collecting their data and fitting it into a myriad of frameworks, including CDP, TCFD, GRI, and SASB. However, the landscape for mandated sustainability reporting is changing. Many governments are rolling out mandated reporting, often starting with a company’s Scope 1, 2 and 3 greenhouse gas emissions:
Scope 1 emissions are direct emissions that occur from sources owned or controlled by the company.
Scope 2 emissions are indirect emissions from a company’s purchased electricity or other forms of energy.
Scope 3 emissions are indirect emissions from upstream and downstream activities in a company’s value chain.
Overview of GHG Protocol scopes and emissions across the value chain (Source: Scope 3 Standard)
Scope 3 emissions can account for over 90% of a company’s total greenhouse gas (GHG) emissions and are typically the hardest to measure.
This article offers a comprehensive guide to mandatory Scope 3 emissions reporting regulations across different countries, outlining the specific requirements your company must meet under each regulatory framework.
The Scope 3 Standard includes 15 reporting categories as shown in the table below. Scope 3 categories that companies commonly report include purchased goods and services, upstream/downstream transportation and distribution, business travel, use and end-of-life treatment of sold products, and franchises. All categories are intended to be mutually exclusive so that emissions do not get double counted across the supply chain.
Upstream Scope 3 emission categories
Downstream Scope 3 emission categories
1. Purchased goods and services 2. Capital goods 3. Fuel- and energy-related activities (not included in scope 1 or scope 2) 4. Upstream transportation and distribution 5. Waste generated in operations 6. Business travel 7. Employee commuting 8. Upstream leased assets
9. Downstream transportation and distribution 10. Processing of sold products 11. Use of sold products 12. End-of-life treatment of sold products 13. Downstream leased assets 14. Franchises 15. Investments
Is Scope 3 emissions disclosure mandatory for your business?
Determining whether your company needs to report on Scope 3 disclosures depends on the country where you operate and your company type (e.g., by size and revenue). In the EU, large, listed companies need to begin reporting in 2025 under CSRD. In the US, California mandates Scope 3 reporting for any company operating in the state with more than $1 billion in annual revenue. Other regulations and reporting standards, such as ISSB, are being adopted by countries such as the UK, Australia, and Canada. Scope 3 reporting has been removed from the US SEC climate-related disclosure final rules.
See the table below for a high-level summary of requirements, followed by a detailed list of each regulation/standard.
The CSRD establishes the EU’s legal framework for mandatory sustainability reporting. The European Sustainability Reporting Standards (ESRS) serve as its operational tool, specifying the reporting requirements.
Company type
Large companies: Includes large Public Interest Entities (PIEs), which have >500 employees, and other large companies that meet two of the following criteria (for both EU and non-EU subsidiaries):
> 250 employees
> € 40 million net turnover (revenue)
> € 20 million total assets
Small- and medium-sized companies listed on EU-regulated markets (except micro-enterprises)
Non-EU parent companies: Other non-EU-based companies with substantial activity and presence in the EU if they meet the following criteria:
Company/consolidated group generated net turnover > € 150 million in the EU for each of the last two consecutive years
AND ultimate parent company had at least one EU subsidiary that meets two of the large company criteria, if not…
THEN the ultimate parent had at least one EU branch that generated net revenue > € 40 million in the last year.
Scope 3 emissions reporting requirements
Requires a double materiality approach – impact (social and environmental) and financial materiality (e.g., how your cash flows, financial position and financial performance are affected) must be reported.
Reporting boundaries are expanded to include upstream and downstream impacts from your operations. Reports must include Scope 3 emissions.
Companies can determine which data points are material for each topic, with justification for those not reported.
Assurance:
CSRD requires assurance across all topics, including Scope 3. Limited insurance is expected from the date of initial reporting (i.e., applying to 2024 data for large PIEs, 2025 data for other large companies, 2026 data for SMEs, and 2028 data for non-EU companies), with an intent to move towards reasonable assurance at a future date.
The European Commission will adopt limited assurance standards in FY 2025, followed by a feasibility assessment to adopt reasonable assurance standards around FY 2027.
Timeline
CSRD went into effect in January 2023, with a phased introduction of required reporting by company type:
2024 (reporting in 2025): Large Public Interest Entities (PIEs) with more than 500 employees.
2025 (reporting in 2026): Other large companies, including those listed on the EU-regulated markets.
2026 (reporting in 2027): Small and medium-sized companies listed on EU-regulated market.
2028 (reporting 2029): Ultimate non-EU parent companies with substantial activity and presence in the EU.
Corporate Sustainability Due Diligence Directive (CSDDD)
Part of the European Green Deal, CSDDD establishes a corporate sustainability due diligence duty to address negative impacts on human rights and the environment. It requires companies to conduct due diligence on the potential and actual impacts across Scopes 1, 2 and 3 emissions.
Company type
EU companies and parent companies with:
>1000 employees, and > €450 million turnover worldwide
EU franchisors or licensors with:
> €80 million turnover worldwide, and > €22.5 million royalties
Non-EU companies and parent companies with:
> €450 million turnover in the EU
Non-EU franchisors or licensors with:
> €80 million turnover in the EU, and> €22.5 million royalties
SMEs are not yet affected by this proposal.
Scope 3 emissions reporting requirements
Companies must adopt and implement a transition plan in alignment with the Paris Agreement global warming limit of 1.5°C, by including time-bound targets related to Scope 1, 2, and “where relevant,” 3 emissions.
The plan must be updated annually with a description of the progress made towards achieving the targets.
Assurance
To comply with the obligation under this Directive, companies should seek to obtain contractual assurances from a direct business partner that it will ensure compliance with the code of conduct and, as necessary, the prevention action plan.
Timeline
The directive was approved by the European Parliament on April 24, 2024. Member states will have two years to transpose the new rules into their national laws. The new rules will apply to companies in three phases:
2027: EU companies with over 5000 employees and €1500 million worldwide turnover; Non-EU companies with over €1500 million turnover in the EU.
2028: EU companies with over 3000 employees and €900 million worldwide turnover; Non-EU companies with over €900 million turnover in the EU.
2029: All other companies within the scope of the directive.
Climate Corporate Data Accountability Act (California SB 253)
The Climate Corporate Data Accountability Act–California SB 253–aims to improve corporate transparency about GHG emissions, align with public investments, and raise the standards for companies needing to act on climate change. It will mandate the disclosure of GHG emissions, including Scope 3 emissions, from more than 5,000 companies, with the first disclosures due in 2026. However, the Governor has urged the California Air Resources Board (CARB) to address concerns about the feasibility of implementation deadlines and cost impacts on businesses.
Company type
All public and private companies operating with over $1 billion in revenue. There is a low threshold that qualifies companies as “doing business in California.”
Scope 3 emissions reporting requirements
Companies will disclose their Scope 1, 2 and 3 emissions following the GHG Protocol guidance, which details Scope 3 emissions calculations. This includes 15 categories spanning from purchased goods and services, to upstream/downstream transportation and distribution, to waste from operations, and more.
Companies will be required to verify GHG data with 3rd party auditors and report to a nonprofit emissions reporting organization (designated by the CA state board).
Once verified and reported, emissions data will be made publicly available on the California State Board website and updated annually.
Assurance
Companies are required to obtain third-party limited assurance for 2025 Scope 1 and 2 emissions data. For 2029 data, companies must obtain reasonable third-party assurance for Scope 1 and 2 and limited assurance for Scope 3.
Qualifications for third-party assurance providers will be reassessed and updated, as needed, by the state board on or before January 1, 2030.
Timeline
California’s state Senate approved this bill on September 12, 2023, and Governor Newsom signed it into law on October 7, 2023.
Companies will disclose their Scope 1 and 2 emissions in 2026 and Scope 3 emissions in 2027.
Limited assurance for Scope 1 and 2 is allowable beginning in 2026, but by 2030 companies must report at a reasonable assurance level.
In 2033 and every five years after, the state will assess the GHG Protocol Accounting and Reporting Standards, determining if there is an alternative globally recognized standard that better meets the goals of the bill.
International Sustainability Standards Board (ISSB) Standards
The ISSB Standards focus on providing investors and the financial markets with higher quality and more consistent climate-related risks and opportunities information. It builds on other reporting initiatives focused on investor needs such as the voluntary industry-specific SASB standards (now part of the IFRS Foundation) and the Task Force on Climate-related Financial Disclosures (TCFD). Countries can mandate companies disclose these standards, but so far only the UK has fully adopted ISSB.
Companytype
To be defined by individual countries, as they determine local rules for mandating ISSB filings.
Scope 3 emissions reporting requirements
Scope 3 requirements are in the S2 Climate-related Disclosures and aligned with the Scope 3 categories from the GHG Protocol.
Additional information about Scope 3 Category 15 emissions associated with investments must be disclosed if the company’s activities include asset management, commercial banking, or insurance.
A phased-in approach will apply for Scope 3, with the requirement beginning in the year following a company’s adoption of the ISSB Standards.
Assurance
Since ISSB cannot mandate compliance from companies or jurisdictions, specific countries will need to determine how they plan to adopt the ISSB standards and any level of assurance to their local context.
General timeline
Trustees of the International Financial Reporting Standards (IFRS) Foundation announced the formation of the ISSB in 2021 at COP26.
In June 2023, the ISSB issued its IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.
Standards are available for voluntary use and will be officially effective beginning January 1, 2024.
UK’s adoption
October 2021: UK government committed to creating mechanisms for adopting and endorsing the disclosure standards of ISSB in the UK.
By 2022, the UK government already implemented “mandatory disclosure requirements in Annual Reports incorporating UK Green Taxonomy and ISSB-issued standards” for UK-registered and UK-listed companies.
2023 and onward, UK legislation will mandate other companies subject to consultation to also disclose ISSB Standards in their Annual Reports.
Adoption of ISSB also aligns with the Financial Conduct Authority (FCA)’s existing requirement for all listed companies in the UK to annually report using Task Force on Climate-Related Financial Disclosures (TCFD). The FCA intends to adapt its requirements to reference ISSB Standards.
For reports in 2023 and thereafter, TCFD now requires disclosures that include material Scope 3 emissions.
Australia’s adoption
In September 2024, Australia’s House of Representatives approved the Treasury Laws Amendment bill for the ISSB-aligned disclosure of climate-related risks, opportunities, and Scope 1, 2, and 3 emissions.
Phased-in reporting start dates for companies meeting two out of three criteria:
July 1, 2026: Revenue > AUD $200 million; assets > AUD $500 million; or employees > 250.
July 1, 2027: Revenue > AUD $50 million; assets > AUD $25 million; or employees > 100.
Scope 3 emissions: Companies will have an extra year to report on value chain emissions, with three years of protection from litigation related to these disclosures.
Assurance: Phased approach leading to reasonable assurance for all climate disclosures, with standards to be developed by AUASB in late 2024.
Canada’s adoption (proposed)
March 2024, Canadian Sustainability Standards Board (CSSB) released proposed Canadian Sustainability Disclosure Standards (CSDS) based on ISSB, with an open comment period until June 10, 2024.
Adoption will be voluntary until the standards are incorporated into the rules of the Canadian Securities Administrators (CSA).
How can Aligned Incentives help you prepare for mandatory Scope 3 reporting?
Aligned Incentives provides a science-based sustainability platform AITrack that helps global organizations effectively measure, report, and mitigate environmental impacts, while ensuring regulatory compliance.
Granular Scope 3 insights at scale: Powered by process-based life cycle assessment (LCA) models covering 400,000+ Scope 3 activities, AITrack enables rapid and accurate footprint assessment by impact drivers, down to individual suppliers, for each purchased good.
Efficient assurance: The robustness of AITrack and our accounting system ensures auditability, traceability, and security. It offers detailed documentation down to the line-item level, simplifying the auditing and assurance processes and setting you up for success.
Broad supplier and stakeholder collaboration: AITrack offers role-based and secure access to information tailored to various stakeholders, streamlining communication across divisions and with key suppliers.
