How understanding Scope 3 emissions can help drive economy-wide climate action

Corporate action on climate has long faced a paradox. Most attention to date has focused on companies’ direct climate impacts – their Scope 1 and 2 emissions. But these represent, on average, just 20% of companies’ overall carbon footprint. The remaining 80% is caused by their Scope 3 emissions – the greenhouse gas emissions associated with their supply chains or the use of their products.

How companies are managing and planning to reduce these Scope 3 emissions is an increasing focus for investors, regulators, customers and wider stakeholders. A company that relies on selling carbon-intensive products, or buying carbon-intensive goods and services, will struggle as the global economy decarbonises. Conversely, those that can find net zero suppliers or provide zero-carbon products are more likely to thrive – making Scope 3 assessments crucial to a growing number of investors.

Addressing value-chain emissions will also be critical in driving economy-wide climate action. By using their influence as customers, companies can encourage their suppliers to reduce emissions – minimising both parties’ climate transition risks at the same time.

Policymakers recognise this. They are introducing a growing number of regulations designed to encourage companies to measure and act upon their Scope 3 emissions. From 2025, listed companies subject to the EU’s Corporate Sustainability Reporting Directive will be required to report Scope 3 emissions “where relevant”. In California, businesses active in the state with more than $1bn in revenues will be required, from 2027, to report emissions across all three scopes. Both Japan and the UK are considering introducing standards that would require Scope 3 disclosures.

A growing number of companies are already reporting some Scope 3 emissions data. In research recently carried out by LSEG, we found that the proportion of FTSE-All World constituents disclosing some form of Scope 3 emissions data had risen from 37% in 2016 to 45% in 2021, the last year for which complete data is available.

However, collecting and understanding Scope 3 data is challenging. Companies (or data providers or investors) must rely on third parties to disclose their emissions, meaning that there may be errors or gaps in the data provided. Companies use different methods to measure and calculate Scope 3 emissions.

Perhaps most challenging is the lack of consensus over what Scope 3 emissions each company should consider material – even among regulators. This means that companies may opt to report Scope 3 emissions that are of little relevance to their business, or that comprise a small part of the total.

We have developed a methodology to identify the most material categories of Scope 3 emissions that each company should be tracking, using the 18 Scope 3 categories and based on each company’s industry classification.

Applying this methodology to the FTSE-All World, we found that over half of companies that report Scope 3 emissions omit the most material categories from their disclosures. The quantity and quality of Scope 3 reporting varies widely by sector, and there is high year-on-year volatility in disclosed data from the same companies.

The gaps and variability of Scope 3 disclosures pose major challenges to users, whether for assessing transition risk exposure or for engaging to encourage companies to reduce emissions.

At LSEG, we have developed solutions that aim to address these challenges, helping companies measure Scope 3 emissions reporting and investors fill the gaps.  

Our Climate Data tracks Scope 3 emissions from more than 18,500 companies worldwide, using innovative estimated emissions models, coupled with complementary third-party climate data, to close gaps in disclosure.

Similarly, our Sustainability Intelligence tool is designed to support companies’ to measure, manage and report their sustainability data and carbon emissions strategy. The tool allows users to build and visualise a comprehensive view of Scope 1, 2 and 3 emissions, identify hotspots in their value chain and engage with high-emitting suppliers to gather more accurate data and support decarbonisation efforts. 

Sustainability Intelligence, which won Environmental Finance’s 2024 ESG Data Initiative of the Year Award, is also designed to be adopted by exchanges and financial institutions to be integrated into their systems and offerings. Bursa Malaysia is the first exchange to do so, providing access to Sustainability Intelligence for both public listed companies and non-listed small and medium-size enterprises, allowing them to assess their carbon emissions impact and disclose standardised ESG data.  

There are lessons here for other sustainability exposures beyond climate. As with emissions, companies have environmental and social impacts beyond their direct operations. To the extent that these are potentially material, investors will expect them to disclose and manage these exposures.

So will regulators: the EU’s Corporate Sustainability Due Diligence Directive – approved by European governments in May – will require companies to address impacts on human rights and the environment within their own operations, those of their subsidiaries, and along their “chain of activities”. Given the globalised nature of supply chains, this will extend the reach of EU regulation around the world.

As with emissions data, it will prove challenging for companies to collect data regarding these supply chain impacts, and for companies and their investors to accurately assess and manage those exposures. The clear direction of travel is for regulators to require disclosures that will help them do so. At the same time, voluntary industry initiatives, such as the work of the International Sustainability Standards Board, are aiming to bring consistency to the disclosure of ESG indicators, including along supply chains.

These efforts will take time to raise the overall standard of sustainability disclosures and data. In the meantime, LSEG can help companies and investors get a clearer picture of supply chain sustainability.