Faced with new regulations and public scrutiny, investors are acting with a renewed sense of urgency to address the Scope 3 emissions of companies in their portfolios.
And while some researchers say there are far too many data challenges involved in calculating emissions from sources like supply chains or customer product use—which are not controlled by the company but make up around 80% of their carbon footprint—other experts argue that it’s not that complicated, noting that thousands of companies voluntarily report Scope 3 emissions already.
“Major investment managers have lived and breathed this issue for years,” explains Climate & Capital Media. 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 US$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 have also seen the number of corporations in the United States 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 proposing mandatory disclosure.
Mandatory Scope 3 Disclosure on the Rise
In a groundbreaking move in October 2023, California 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—and to include Scope 3 emissions from supply chains and customers.
Because California is the world’s fifth-largest economy and its laws and policies tend to lead the rest of the U.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 emissions were also a major topic at last year’s COP28 climate summit in Dubai, where the U.S., the UN Climate Compact, and other organizations discussed its benefits and importance. On Finance Day at the COP, nearly 400 organizations from 64 jurisdictions declared support for adoption of the International Sustainability Standards Board’s (ISSB) disclosure standards at a global level.
Regulators from the European Union, Japan, the United Kingdom, and other countries are also signaling mandatory Scope 3 disclosures for corporations, Bloomberg notes. And the U.S. Securities and Exchange Commission (SEC) has discussed whether big emitters should be required to disclose.
The trend has been growing over a decade. Major investment managers are asking companies to disclose all emissions so they can make informed investments and manage climate-related risks and opportunities across their portfolios.
‘Scope 3 Conundrum’ Persists
The Institutional Investors Group on Climate Change (IIGCC) explained why disclosure matters, writes Bloomberg. “Without recognizing the Scope 3 emissions of a company, it isn’t possible to fully understand and assess its contribution to climate change.” However, there are numerous “practical challenges” to properly report and calculate Scope 3 numbers that must be overcome, IIGCC added.
FTSE Russell, the indexes and benchmark unit of London Stock Exchange Group, calls it the “Scope 3 Conundrum.”
A full emissions picture is critical for a clear assessment of a company’s climate risk, but FTSE Russell says integrating Scope 3 data with portfolio analysis and investment decisions is “often hobbled” by the complexity of Scope 3 accounting. “That complexity is caused by low disclosure rates, variable data quality, and poor comparability,” Bloomberg writes.
“On the one hand, it’s really critical; we need this data and we need to understand it and bring this into the investment process, not least because there’s real business and regulatory risks attached to these Scope 3 emissions,” said Jaakko Kooroshy, FTSE Russell’s global head of sustainable investment research. “But on the other hand, we don’t really have the mature data sets to do this.”
Lucian Peppelenbos, a climate strategist at Dutch asset manager Robeco, said even when Scope 3 emissions data is accessible, it can be difficult to apply to investment decision-making—partly because the most widely used reporting standards were not implemented with investors in mind.
Some of those who see difficulties in making Scope 3 reporting usable for investment decisions recommend narrowing the range of emissions that are considered. For example, recent research from FTSE Russell found that investors focusing on the two most material categories for an industry can account for an average of 81% of the sector’s total Scope 3 emissions,
By simplifying the problem and narrowing the lens in this way, “you get your arms around the lion’s share of the problem,” Kooroshy said.
Major Companies Are Already Disclosing Scope 3
But Climate & Capital disputes that there’s a problem at all. It says 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, 2023 letter. “Our reports attest to the feasibility of reasonably modeling, measuring, and reporting on all three scopes of emissions, including Scope 3 emissions,” the tech giant wrote.
In fact, 50% of all publicly registered U.S. companies with $1 billion or more 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, Climate & Capital says. The companies that already provide voluntary CDP disclosure have positioned themselves well for compliance with disclosure laws in California and abroad.
California Steers U.S. Toward Global Standards
Scope 3 disclosure is nothing radical or new—and it’s becoming the global norm, Climate & Capital Media says. 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 was “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) started requiring companies 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 more than 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 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.
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
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, writes Climate & Capital. 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 cost 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, Climate & Capital concludes. 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.
