UK government launches call for evidence on scope 3 emissions reporting

UK government seeks views on the costs, benefits and practicalities of Scope 3 emissions reporting to inform whether it endorses the International Sustainability Standard Board's sustainability disclosure standards. 

The Department for Energy Security and Net Zero ("DESNZ") has launched a call for evidence on Scope 3 greenhouse gas emissions ("GHG") reporting. Scope 3 emissions are the indirect emissions (not included in Scope 2) that occur in the reporting company's value chain. Disclosure of most Scope 3 emissions remains voluntary under current reporting requirements, though as Scope 3 disclosures are contained in the Metrics and Targets TCFD Recommended Disclosures under the Listing Rules, listed companies are required to include disclosures consistent with this TCFD requirement in their annual report on a comply or explain basis (see our briefing for more details on the TCFD disclosure regime for listed companies).

The International Sustainability Standards Board's ("ISSB") first two standards – IFRS S1 (general requirements for disclosure of sustainability-related financial information) and IFRS S2 (climate-related disclosures) – require entities to report their Scope 1 (direct emissions from owned or controlled sources), Scope 2 (indirect emissions from the generation of purchased energy) as well as Scope 3 emissions. The government's call for evidence therefore seeks views on the costs, benefits and practicalities of Scope 3 emissions reporting to inform its decision as to whether it endorses the ISSB's sustainability standards.

The government acknowledges the complexities associated with identifying and quantifying Scope 3 emissions but, at the same time, recognises the significance of measuring these emissions to prioritise and support decarbonisation efforts. As such, the call for evidence is more likely an exercise of how the government will endorse the ISSB standards rather than whether it will do so. This is especially so given the government's announcement in August 2023 that it will establish the UK Sustainability Disclosure Standards based on the ISSB standards, which is expected by July 2024. Stakeholders have until 14 December 2023 to respond.

Background

A variety of legal regimes govern emissions reporting in the UK. The Companies Act 2006 (Strategic Report and Director's Report) Regulations 2013 put in place requirements for quoted companies to report their annual emissions and an intensity ratio. The Streamlined Energy and Carbon Reporting ("SECR") framework, introduced in 2019, added further disclosure requirements on quoted companies. It also created new requirements for large unquoted companies and large limited liability partnerships. By and large, the SECR framework focuses on Scope 1 and Scope 2 emissions, with only a limited subset of Scope 3 emissions and energy use requiring disclosures. This means most Scope 3 disclosures are voluntary, notwithstanding that Scope 3 emissions make up roughly 80-95% of total emissions for many organisations. As noted above, listed companies are also required to consider Scope 3 disclosures as part of their TCFD consistent disclosures under the Listing Rules.

Rationale for Scope 3 disclosures

Investors and stakeholders are increasingly taking into account the transition readiness of businesses to adapt to a low-carbon economy in light of net-zero commitments made in the UK and elsewhere. Disclosure of Scope 3 emissions is deemed an important indicator of such readiness because there is a clear link between a business' exposure to GHG emissions and its exposure to risks in a decarbonising society and economy. This rationale led to calls for the ISSB's sustainability disclosures standards to require disclosure of absolute gross GHG emissions, that is, Scope 1, Scope 2 and Scope 3 emissions, which the ISSB subsequently accepted. The final IFRS S2 requires an entity to disclose information about its climate-related risks and opportunities that is useful to primary users of general-purpose financial reports in making decisions. Such information will include disclosure of absolute gross GHG emissions so long as the information is "material", that is, it could reasonably be expected to affect the business' prospects.

Objectives of the call for evidence

As noted, the government's call for evidence seeks feedback on the costs, benefits and practicalities of Scope 3 emissions reporting. The feedback gathered will help inform the government's decision as to whether it endorses the ISSB standards for use by UK businesses. The call for evidence also seeks information on how endorsement of the ISSB standards might complement existing reporting requirements under the SECR framework and any future changes to the framework that will be considered in its post-implementation review in 2024.