Navigating mandatory Scope 3 emissions reporting in the EU, US, and beyond
September 26, 2023
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 of mandatory Scope 3 emissions reporting regulations across different countries, outlining the specific requirements your company must meet under each regulatory framework.
Download our complete guide in PDF:
What are the categories of Scope 3 emissions?
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, there is a proposed SEC rule for all public companies and an upcoming California mandate for any company with more than $1 billion in revenue. Other proposed regulations and reporting standards, such as ISSB, are being adopted by countries such as the UK, Australia, and Canada.
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) – Proposed
Part of the European Green Deal, this proposed 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
This applies to EU-companies with:
<500 employees and a net worldwide turnover of EUR 150+ million; OR…
<250 employees and a net worldwide turnover of EUR 40+ million — if at least 50% of this net turnover was generated in a “high-risk” sector (textiles, clothing and footwear, agriculture, forestry, fisheries, food and extractives)
This applies to non-EU companies with:
Net turnover of EUR 150+ million generated in the EU, OR…
Net turnover of EUR 40+ million (but not more than €150 million) generated within the EU – provided at least 50% of its net worldwide turnover was generated in one high-risk sector.
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’s climate neutrality goal by 2050 and the EU’s 2030 climate target, by including time-bound targets related to Scope 1, 2, and “where relevant,” 3 emissions (Amendment 68).
Assurance
The new rules will be enforced through administrative supervision—Member States will appoint an overseeing authority to enforce sanctions, including fines and compliance orders. Meanwhile, the Commission will establish a European Network of Supervisory Authorities to ensure a unified approach. The timeline for this, or for any other level of mandated assurance, is not yet clear.
Timeline
This proposed directive was adopted by the European Commission in February 2022 and is moving through the EU legislative process. Likely to come into effect in 2025.
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.
Securities and Exchange Commission (SEC) Climate-Related Disclosures – Proposed
If passed, the U.S. SEC will mandate that all public companies report their carbon emissions, climate-related risks, and their strategies for cutting emissions and managing risk, alongside their financial results. The proposed climate-related disclosure rules are modeled after the Taskforce for Climate-related Financial Disclosures (TCFD) and are intended to meet the needs of investors who want a more standardized method for comparing climate data across companies.
Company type
All public-listed companies and non-US companies with US-traded shares must disclose Scope 1 and 2 emissions.
Scope 3 reporting is only necessary for companies that have a reduction target for Scope 3 or if Scope 3 emissions are determined to have a material impact on their business, operations results, or finances.
Smaller companies will not have to report on Scope 3.
Scope 3 emissions reporting requirements
If Scope 3 emissions are material, or if the company has a target that includes Scope 3, disclosures of upstream and downstream emissions must be reported.
Reported emissions will need to include absolute values and intensity measures (e.g., emissions per dollar in sales, or emissions per manufactured car.
Methodology of the calculations, the GHGs that are covered, and the emission sources will also be required.
Assurance
Assurance is only required for Scope 1 and Scope 2 emissions. Large, accelerated companies must obtain limited assurance for 2024 data (filed in 2025) and reasonable assurance for 2026 data (filed in 2027). Accelerated companies must obtain limited assurance for 2025 data and reasonable assurance for 2027 data.
Timeline
The SEC is expected to release its climate disclosure rule later in 2023.
The first mandatory filings are scheduled for companies’ 2024 financial reports, using 2023 data.
The compliance date is dependent on the registrant’s filer status and an additional phase-in period for Scope 3.
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 (proposed)
October 2023: Australian Accounting Standards Board (AASB) released draft of proposed standards based on ISSB, with an open comment period until March 1, 2024.
2024: Reporting requirements will apply to large companies.
Larger entities meeting two out of three criteria—consolidated revenue of AUD $500+million; consolidated gross assets of AUD $1+ billion or more; 500+ employees.
2025: Medium size companies required to report.
Smaller entities meeting two out of three criteria—consolidated revenue of AUD $50+ million; consolidated gross assets of AUD $25+ million; 100+ employees.
2027: Small companies required to report.
Canada’s adoption (proposed)
As of 2023, the ISSB Standards are not required of Canadian companies. The Canadian Securities Administrators (CSA) and Canadian Sustainability Standards Board (CSSB) are working to determine whether and how the ISSB Standards will be adopted in Canada.
Starting in 2024, CSA will require public companies to report climate risks and opportunities, modelled on the TCFD.
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 300,000+ 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.
