16 April 2024
Within the alphabet soup of standards and emerging reporting disclosure frameworks, the UK government’s Call for Evidence on ‘Scope 3 Emissions in the UK Reporting Landscape’ provided CCLA with the opportunity to press for clarity and certainty in companies’ emission disclosure.
The Department for Energy Security and Net Zero called for input on the current streamlined energy and carbon reporting (SECR) framework as well as feedback to help decide whether to endorse International Sustainability Standards Board (ISSB) standards in the UK.
Scope 3 emissions are the indirect carbon emissions associated with a company's activities, ranging from supply chain intricacies to the use of products and services by end consumers. These emissions often make up most of a company's total carbon footprint and are challenging to tackle.
Responding to the Call for Evidence, issued last October, CCLA advocated for mandatory Scope 3 emissions disclosure for UK listed companies. This aligns with moves globally promoting transparency and consistency in the information companies provide on their emissions and emission reduction activities.
Why support mandatory disclosure?
We support mandatory Scope 3 disclosure because we need this level of data to understand, monitor and reduce climate risks in our investment portfolios. Without this data we are held back from a full understanding of the challenges companies face and where they should be best directing their attention.
Why does it matter?
We use all three scopes of company emissions to identify the largest absolute emitters that we invest in. Currently we rely in part on estimated Scope 3 emissions, due to a lack of consistent disclosure from companies on Scope 3 data. A more accurate and informed approach to Scope 3 disclosure would help to ensure that our engagement is directed where we can better influence the most substantive corporate decarbonisation initiatives.
How are companies progressing?
From our experience in engaging on this topic, most companies we invest in are taking steps to reduce their scopes 1 and 2 emissions. However, reductions in Scope 3 emissions are more challenging. In some instances, companies tell us that they can’t calculate their Scope 3 emissions with any certainty.
Where should companies disclose?
Currently companies are required to report direct emissions data as part of their annual report. We consider this the most appropriate document for disclosure, given that it is put to shareholders at the annual general meeting. This approach also enables companies to signpost more comprehensive reporting that may be contained elsewhere, such as in a separate climate transition report.
What changes would we welcome?
Apart from disclosing total absolute emissions, companies can further break-down their disclosures. Where they can identify and disclose by emissions category, whether upstream (from production) or downstream (from product use) they are then much better placed to address them. In the same way, disclosure by type of greenhouse gas emission gives investors a far better understanding of the priorities of companies in tackling emission reductions. For example, methane is only one of about ten greenhouse gases but its warming potential over 20 years is said to be 80 times that of carbon dioxide.1
Who is promoting mandatory disclosure?
The most recent legislative precedent is from California where Scope 3 emission reporting will soon be made mandatory for companies over a certain revenue threshold. Regulatory requirements are already in place in the European Union, and Japan has signalled its intention to introduce mandatory Scope 3 disclosures. Scope 3 reporting is also required by the International Sustainability Standards Board (ISSB).
Where and what comes next?
The Call for Evidence closed in mid-December and the government’s response is expected imminently. The outcome will inform the decision as to whether the UK should endorse the ISSB standards for reporting. Mandatory corporate disclosure on Scope 3 emissions would provide a great opportunity for investors, enabling more informed interactions with companies on their role in accelerating the transition to a low-carbon economy.
1 UN Environment Programme: https://www.unep.org/news-and-stories/story/methane-emissions-are-driving-climate-change-heres-how-reduce-them