Everything you always wanted to know about Scope 3, but were afraid to ask

Climate Economy, Climate Finance

Everything you always wanted to know about Scope 3, but were afraid to ask

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Scope 3 emissions reporting is here, and investors want it

One simple fact seasoned investors know: reporting on all the carbon emissions a company is responsible for – from those tied directly to its operations to the indirect ones churned out by its supply chains or customers – is neither an insurmountable data challenge nor a disincentive for real economy actions. 

Major investment managers know this because they have lived and breathed this issue for years. Many have advocated for robust value chain emissions data, or worked directly with portfolio companies to gather this information for risk analysis. In fact, more than 500 institutional investors representing $30 trillion in assets called on governments around the world last year to enact policies that would leverage private capital to address climate change.

Investment managers also know this because they’ve seen the number of U.S. corporations voluntarily disclosing and managing the full suite of Scope 1, 2 and 3 emissions grow into the thousands. Now, governments and regulators around the world are accelerating the trend by adopting or proposing mandatory disclosure. 

In a groundbreaking move, California recently passed a pair of laws, SB 253 and SB 261, which together require any business operating in the state with more than $500 million in revenue to disclose emissions starting in January 2026, including those of their supply chains and customers, known as Scope 3 emissions. 

Because California is the world’s fifth largest economy and its laws policies tend to lead the nation’s, this is a big win for investors, marking a significant step toward transparent climate-related financial disclosure well beyond the Eureka state. 

Scope 3 was a major topic at COP28 in Dubai, as the U.S., the UN Climate Compact and other organizations discussed its benefits – and importance. On Finance Day at COP28, nearly 400 organizations from 64 jurisdictions declared support for adoption of the International Sustainability Standards Board’s climate-related disclosure standards at a global level.

Over the past decade, major investment managers have increasingly asked companies to disclose greenhouse gas emissions so they can make informed investment decisions and manage climate-related risks and opportunities across their portfolios.

In fact, 50% of all publicly registered U.S. companies with $1 billion+ in revenue disclosed through CDP in 2023; of those almost 80% reported Scope 3 emissions.

Some opponents of the California disclosure laws and the Securities and Exchange Commission’s proposed regulations would have you believe that requiring companies to report on the Scope 3 emissions would be impossibly complex, costly and ineffective. 

However, these claims that Scope 3 reporting is too onerous don’t square with reality. Hundreds of companies – including giants like Microsoft, Google, Apple, Salesforce, Unilever and Ikea – are already reporting Scope 3 emissions voluntarily. 

Apple, headquartered in California, applauded the inclusion of Scope 3 emissions in a September letter, stating, “Our reports attest to the feasibility of reasonably modeling, measuring, and reporting on all three scopes of emissions, including Scope 3 emissions.”

In fact, 50% of all publicly registered U.S. companies with $1 billion+ in revenue disclosed through CDP in 2023; of those almost 80% reported Scope 3 emissions. And 746 financial institutions managing $136 trillion in assets signed CDP’s letter calling on more than 15,000 companies worldwide to share more data on their environmental impact. 

These corporate efforts reflect rising global support for Scope 3 emissions reporting. The companies that already provide voluntary CDP disclosure have positioned themselves well for compliance with disclosure laws in California and abroad. 

California’s new laws streamline national movement toward global standards 

Scope 3 disclosure is nothing radical or new. It’s becoming the global norm, and future-minded corporations will want alignment to help build their brands and business. Salesforce emphasized this in its letter publicly expressing support for SB 253, saying it is “encouraged by amendments that would align Scope 1, 2, and 3 emission disclosure requirements with existing global regimes.” 

The European Union‘s Corporate Sustainability Reporting Directive (CSRD) start requiring to gather Scope 3 data in 2024. The International Sustainability Standards Board (ISSB) guidelines, which also include Scope 3, are being adopted or included in mandatory disclosure proposals in the UK, Canada, and several countries in Asia. 

Mandatory Scope 3 reporting also aligns with the Task Force on Climate-related Financial Disclosures (TCFD) framework, which was endorsed by over 1,440 organizations and businesses representing a combined market capitalization of $12.6 trillion. That framework is the foundation for many regulations, including the disclosure requirements that the U.S. Securities and Exchange Commission (SEC) is expected to roll out in 2024.

“The world’s financial markets are moving to force companies to report on Scope 3 emissions,” Keith Davidson and Will Scott wrote in Lexology. Last month the global Basel Committee, for example, recommended that major international banks disclose all emissions associated with their lending and investment activities in order to improve transparency and address transition risks.  

It’s time for naysayers and laggards to recognize that Scope 3 reporting is simply good business, and that sustainable practices are now best practices

The UK government says it will base its Sustainability Disclosure Standards on the ISSB standards that mandate Scope 3. The UK Financial Conduct Authority last month reiterated its previous proposal to mandate Scope 3 disclosure. Both major parties have published plans to make the UK a global leader in sustainable finance, and the “big four” accounting firms have all urged the UK to adopt the full ISSB standards, including Scope 3.

In Asia, Japan, Hong Kong. Singapore and Australia have proposed adopting the ISSB standards with Scope 3 mandates. And the Hong Kong Stock Exchange (HKEX) plans to require Scope 3 disclosure by 2026. These emerging requirements around the world and in California, which alone covers 75% of the Fortune 1000, mean that most leading U.S. corporations will need to report Scope 3 emissions regardless of whether or not the SEC includes Scope 3 in its upcoming new rules.  

Scope 3 reporting is here- let’s get on with it 

The myths that Scope 3 reporting is too complex, expensive or unreliable distract from the fact that it’s already expected – and being practically implemented. Investors are already using Scope 3 data to identify companies that will emerge as leaders in the clean energy economy. Investors and leading corporations know that neglecting Scope 3 disclosure would be a costly oversight that far surpasses the expenses of responsible reporting. 

California and the EU have now provided guidelines and mandates that will drive investors and companies to invest in the more resilient and equitable future we need. It’s time for naysayers and laggards to recognize that Scope 3 reporting is simply good business, and that sustainable practices are now best practices

Written by

The Rev. Kirsten Snow Spalding

The Rev. Kirsten Snow Spalding leads the Ceres Investor Network and Ceres' California office. She previously served as California’s Chief Deputy Treasurer and Director of the Treasurer’s environmental financing authorities. Prior to government service, Kirsten worked as Chief of Staff for the California Labor Federation, AFL-CIO. She chaired the Center for Labor Research and Education at University of California, Berkeley, taught at Boalt Hall School of Law, represented unions and their pension plans as a lawyer at Beeson, Tayer and Bodine, and worked as a community organizer in South Africa. Kirsten also serves as an Episcopal priest.