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TAC Public Meeting September 2024 Paper 3: GHG emissions Scope 3

AGENDA PAPER 3

Executive summary

Date	03 September 2024
Paper reference	2024-TAC-014
Project	Technical assessment of IFRS S1 and IFRS S2
Topic	Scope 3 greenhouse gas emissions

Objective of the paper

This paper considers the requirements in IFRS S2 Climate-related Disclosures (IFRS S2) relating to the disclosure of Scope 3 emissions, including a discussion about the Scope 3 categories and the support mechanisms provided for in IFRS S2. The TAC is asked to consider whether UK entities are able to provide Scope 3 emissions disclosure and whether the support mechanisms are sufficient to supporting entities disclosing their Scope 3 emissions.

Decisions for the TAC

The TAC is asked to tentatively decide to:

• maintain the requirements in IFRS S2 requiring the disclosure of absolute gross Scope 3 emissions;
• insert a requirement in IFRS S2 requiring further disaggregation of Scope 3 emissions data by Scope 3 category;
• engage with the ISSB in relation to improving the industry-based guidance to support entities in reporting their Scope 3 emissions data; and
• engage with the GHG Protocol during its review of its materials to provide insight into UK views relating to Scope 3 categories—including the treatment of leased assets—and to support improvements to the GHG Protocol materials.

The TAC is also asked to conclude that:

• public interest entities in the UK should already have the capacity, skills and systems to produce Scope 3 emissions disclosures, although further progress is needed to ensure this data is 'reliable'; and
• Scope 3 guidance and data infrastructure should be developed by an international body, like the GHG Protocol, which may be more appropriate than UK-specific guidance.

Appendices

There are no appendices to this paper.

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This paper has been prepared by the Secretariat for the UK Sustainability Disclosure Technical Advisory Committee (TAC) to discuss in a public meeting. This paper does not represent the views of the TAC or any individual TAC member.

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Context

1IFRS S2 Climate-related Disclosures (IFRS S2) set out requirements for the disclosure of Scope 3 greenhouse gas emissions, including application guidance to support entities collecting data in the value chain. The relevant references to the requirements in IFRS S2 are as follows:

• Paragraph 29(a) Greenhouse gas emissions
• Appendix A Defined terms
• B19, B32–B57 Application guidance

2Scope 3 emissions are defined in IFRS S2 Appendix A as:

Indirect greenhouse gas emissions (not included in Scope 2 greenhouse gas emissions) that occur in the value chain of an entity, including both upstream and downstream emissions. Scope 3 greenhouse gas emissions include the Scope 3 categories in the Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard (2011).

3Additionally, IFRS S2 Appendix A defines indirect greenhouse gas emissions as:

Emissions that are a consequence of the activities of an entity, but occur at sources owned or controlled by another entity.

4The ISSB confirmed that absolute gross Scope 3 emissions would be required as part of IFRS S2. However, recognising the challenges with Scope 3 emissions reporting, the ISSB also included a number of support mechanisms including:

• a transition relief that permits entities to exclude Scope 3 emissions in the first year of reporting;
• permission for entities to use information from a reporting period that is different from the entity's reporting period, in specific circumstances; and
• a measurement framework to support entities in disclosing Scope 3 emissions data that is faithfully representative.

5This paper does not discuss in detail the reference to the GHG Protocol materials, which is presented in paper 2024-TAC-013, nor does it discuss the requirements for financed emissions which is presented in paper 2024-TAC-015. Additionally, the transition relief available in IFRS S2 relating to Scope 3 emissions will be considered in a future paper alongside all reliefs available in both IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and IFRS S2. The TAC is not asked to make a decision on the Scope 3 emissions reliefs in this paper.

6In its context letter dated 20 May 2024, the Department for Business and Trade (DBT) indicated that it would welcome the TAC's view on Scope 3 emissions including on the timescales involved for public interest entities to have the capacity, skills, and systems to be able to produce reliable Scope 3 disclosures, if they do not do so already. DBT would also welcome views from the TAC on what, if any, further guidance and data infrastructure would be needed to facilitate Scope 3 emissions reporting.

Endorsement criteria

7The endorsement criteria applied in the analysis of this technical area include whether:

1. use of the IFRS Sustainability Disclosure Standard is likely to result in an improvement in the international comparability of sustainability-related reporting in the UK.
2. use of the IFRS Sustainability Disclosure Standard is likely to support companies in making disclosures that are understandable, relevant, reliable and comparable.
3. use of the IFRS Sustainability Disclosure Standard is likely to improve the quality of corporate reporting within the UK in the long term.
4. companies are likely to be able to provide the disclosures required by the IFRS Sustainability Disclosure Standard within the timeframes that a company normally reports without undue cost or effort.
5. use of the IFRS Sustainability Disclosure Standard is likely to be conducive to the UK's economic growth and international competitiveness, taking into account the costs and benefits of compliance.
6. the IFRS Sustainability Disclosure Standard is likely to be coherent with, and suitable for inclusion in, UK domestic legislation and regulation.

Analysis

8In relation to the requirements relating to Scope 3 emissions, there are a number of matters for the TAC to discuss, including:

8.1 general views and current practice in the UK on Scope 3 emissions disclosure. Stakeholders broadly support the requirements relating to Scope 3 emissions, while acknowledging that it is one of the most onerous and challenging aspects of IFRS S2. Paragraphs 11–17 outline stakeholder feedback as well as current practice in the UK. The TAC is asked to consider whether entities in the UK are able to produce reliable Scope 3 emissions disclosures.

8.2 the Scope 3 categories and the requirement in IFRS S2 for entities to disclose which of the 15 categories have been used to calculate Scope 3 emissions. There are currently inconsistencies in how entities apply the 15 categories which means that Scope 3 emissions data is less comparable. Some stakeholders have called for greater specificity as to which categories entities should disclose, whereas other stakeholders agree with the principles-based approach in IFRS S2. Paragraphs 18-27 analyse whether a more prescriptive approach is appropriate and necessary. The TAC is asked to consider whether further guidance from the ISSB and GHG Protocol would be appropriate.

8.3 the challenges associated with data collection and whether the Scope 3 measurement framework in IFRS S2 Appendix B (application guidance) is useful. The TAC has previously discussed the challenges with collecting data in the value chain, including the data lags that create challenges when reporting sustainability-related information at the same time as the associated financial statements. Paragraphs 28-38 discuss IFRS S2 paragraph B19 that permits greenhouse gas emissions to be disclosed using a reporting period that is different from the entity's reporting period in specific circumstances, in addition to the Scope 3 measurement framework that supports entities using estimates. The TAC is asked to consider whether the provisions in IFRS S2 are likely to alleviate some of the cost and burden of collecting and disclosing Scope 3 emissions data.

9This paper also introduces the transition relief that permits entities to exclude Scope 3 emissions data in the first year of reporting. However, the TAC will consider this relief in a future paper alongside all reliefs available in both IFRS S1 and IFRS S2. The TAC is not asked to make a decision on the Scope 3 emissions reliefs in this paper.

10Additionally, this paper introduces the concept of a safe harbour provision relating to Scope 3 emissions disclosures. However, this is an implementation issue and therefore there are no decisions for the TAC on whether a safe harbour provision would be appropriate.

General views and current reporting practice in the UK on Scope 3 emissions disclosure

11In response to the TAC's call for evidence, stakeholders broadly supported the inclusion of greenhouse gas emissions as a specified metric in IFRS S2 as there is already established practice in the market and it is critical for understanding an entity's impact and exposure to climate-related risks and opportunities. Some stakeholders noted that many entities in the UK are already required to report greenhouse gas emissions—through the FCA's Listing Rule relating to TCFD and Streamlined Energy and Carbon Reporting (SECR)—and therefore are likely to already have systems in place to measure and report on greenhouse emissions. Although this is a common view from stakeholders, the TAC Secretariat has not completed a full assessment of whether entities reporting in accordance with SECR and TCFD would be able to also disclose information required by IFRS S2.

12Most stakeholders that responded to the call for evidence agreed that Scope 3 emissions reporting is essential in managing systemic transition risks, but also recognised that the value chain is the onerous part of an entity's carbon footprint. Stakeholders recognised that data availability and quality for Scope 3 emissions is a significant challenge, meaning that many entities are likely to struggle with the completeness and reliability of the underlying data. Stakeholders also highlighted the extensive use of estimates and third-party data which contributes to higher levels of uncertainty. Stakeholders suggested that this might be especially challenging when third-party data providers are not always transparent about the source of the data.

13Stakeholders suggested that companies should be encouraged to describe and justify their approach to calculating Scope 3 emissions, including providing insight into the data quality and reasons why the data may be incomplete. Some stakeholders supported the application guidance in IFRS S2 on Scope 3 emissions, including the use of 'impracticable' in relation to use of estimates. However, some stakeholders requested further guidance on what 'impracticable' means. Stakeholders also requested further guidance on the use of estimates, in addition to specific industry guidance which stakeholders believe to be vital to ensure a meaningful approach.

14Some stakeholders acknowledged that the challenges associated with Scope 3 emissions reporting are unlikely to be fully resolved over time, but despite this, stakeholders recognised there is still benefit in entities being required to provide Scope 3 emissions data.

15In its June 2024 meeting, the TAC was presented with paper 2024-TAC-004b which summarises current reporting practice in the UK based on a literature review. PwC's 2023 review of 50 FTSE 350 entities' TCFD reporting found that 28% of the sample provided comprehensive Scope 3 emissions data, with 24% of entities not providing any Scope 3 emissions data. The PwC review found that entities that did provide comprehensive Scope 3 emissions data often also provided an explanation when a certain Scope 3 category was determined as not material. Additionally, PwC's review found that 40% of companies recognised data limitations with Scope 3 emissions data. This review noted that Scope 3 is one of the most challenging disclosure requirements due to issues in the collation of accurate, complete and timely data from value chains. The review found that 62% of companies that reported Scope 3 data did so for the same reporting period, but that meant that estimates had to be used to complete the data. Other companies used different approaches to their Scope 3 disclosures, including providing a limited reporting period (six to nine months) or providing information from the previous year.

16The TAC Secretariat also completed its own review of FTSE 100 companies in relation to greenhouse gas emissions reporting (as of August 2023), which found 89 FTSE 100 entities disclosed their Scope 3 emissions. The table below highlights the number of FTSE 100 entities disclosing Scope 3 emissions.

Scope 3 emissions disclosure	No. of FTSE 100 companies
Scope 3 emissions disclosed	89
Scope 3 emissions not disclosed	3
No greenhouse gas emissions disclosure	3
Unclear	5

17While the TAC Secretariat's review found that many entities provided Scope 3 emissions data, the quality of the disclosure varied significantly, especially in relation to the Scope 3 categories that were used and disclosed.

Scope 3 categories

GHG Protocol Corporate Value Chain Standard 15 categories

18IFRS S2 does not require entities to use the GHG Protocol Corporate Value Chain (Scope 3) Standard, but instead IFRS S2 paragraph 29(a)(vi)(i) requires entities to disclose which Scope 3 emissions categories that the entity has included in accordance with the GHG Protocol Corporate Value Chain (Scope 3) Standard. There are currently 15 categories, as included in IFRS S2 Appendix A, which are:

• Category 1 Purchased goods and services;
• Category 2 Capital goods;
• Category 3 Fuel- and energy-related activities not included in Scope 1 greenhouse gas emissions or Scope 2 greenhouse gas emissions;
• Category 4 Upstream transportation and distribution;
• Category 5 Waste generated in operations;
• Category 6 Business travel;
• Category 7 Employee commuting;
• Category 8 Upstream leased assets;
• Category 9 Downstream transportation and distribution;
• Category 10 Processing of sold products;
• Category 11 Use of sold products;
• Category 12 End-of-life treatment of sold products;
• Category 13 Downstream leased assets;
• Category 14 Franchises; and
• Category 15 Investments.

19Entities are also required to disclose any additional information about Category 15 Investments, which includes the financed emissions requirements in IFRS S2 paragraph B58–B63. Paper 2024-TAC-015 discusses the requirements relating to financed emissions in more detail.

20It is important to note that IFRS S2 does not require Scope 3 emissions data to be disaggregated by category. Entities are only required to disclose their absolute gross Scope 3 emissions and to also disclose which Scope 3 categories have been included in the calculation. The TAC may decide that further disaggregation by Scope 3 category might be useful information for primary users. For clarity, this recommendation would not require the disclosure of all Scope 3 categories, but a disaggregation of the categories that an entity has included in its Scope 3 GHG emissions total. There are pros and cons to amending IFRS S2 to require further disaggregation, as described below.

20.1 Entities will already need to identify the relevant categories and collect data according to these categories to be able to aggregate the data into an absolute gross Scope 3 emissions figure. Therefore, presenting this data by category may not increase the reporting burden. However, there may be additional costs associated with disaggregating the data if it requires greater levels of verification. Additionally, if the entity is not in receipt of disaggregated Scope 3 emissions data from entities in the value chain, then there may be additional costs associated with requesting and obtaining this additional disaggregated information.

20.2 Scope 3 emissions disaggregated by category would provide further insight into an entities decarbonisation strategy and transition plan by highlighting which activities are likely to result in greater decarbonisation. For example, an entity's Scope 3 emissions under Category 11–Use of sold products may be the majority of the entity's greenhouse gas emissions. This information would help both entities and users understand whether an entity's transition plan and its planned activities to reduce greenhouse gas emissions are likely to result in significant decarbonisation.

20.3 When applying the Scope 3 measurement framework in IFRS S2 paragraphs B38–B57 (which is discussed further in paragraphs 28–38), entities are required to disclose the extent to which the Scope 3 emissions are measured using inputs from specific activities in the value chain and inputs that are verified. This information may not be useful when Scope 3 emissions are aggregated into a single figure. For example, the entity may find that certain categories are more straightforward to calculate (e.g. business travel) and that the type of inputs that are required are different for each category.

20.4 In the Japanese Exposure Drafts of their equivalent standards, entities are required to disaggregate Scope 3 emissions data by category. Other jurisdictions, including in the EU, only require aggregated Scope 3 emissions data.

20.5 Although the TAC would not be recommending that all Scope 3 categories are included regardless of materiality, by disaggregating Scope 3 emissions by category some entities may feel compelled to provide data for all categories. This would increase the cost and burden on entities, especially if they are collecting immaterial information that does not have significant benefit.

20.6 There are already a number of requirements relating to greenhouse gas emissions which may result in extensive disclosures (see illustrative presentation of the requirements below). Adding requirements for further disaggregation will extend the amount of information disclosed creating longer, and immaterial, disclosures that obscure material information.

Illustrative presentation of greenhouse gas emissions data in accordance with IFRS S2

• Absolute gross Scope 1
• Absolute gross Scope 2 (location-based)
• Absolute gross Scope 2 (any contractual instruments that is necessary to inform users' understanding of the entity's Scope 2 greenhouse gas emissions)
• Absolute gross Scope 3
  • Which categories used in Scope 3
  • Financed emissions (if asset management, commercial banking or insurance)
• Consolidated accounting group (Scope 1 and 2)
• Other investees (Scope 1 and Scope 2)
• Measurement approach, inputs and assumptions
  • Including the approach used to determine greenhouse gas emissions (e.g. equity or control approach)
  • Including the extent to which Scope 3 emissions are measured using inputs from specific activities within the entity's value chain
  • Including the extent to which Scope 3 emissions are measured using inputs that are verified
• Reason for measurement approach, inputs and assumptions
  • Including the reason for the approach used to determine greenhouse gas emissions (e.g. equity or control approach)
• Any changes in measurement approach, inputs and assumptions

21The TAC Secretariat's review of FTSE 100 entities found that 20 entities had not provided a clear description of which categories were included in the Scope 3 emissions, and of those entities that did disclose which categories they used there were 55 different amalgamations of the categories. Figure 1 demonstrates which Scope 3 categories were disclosed by FTSE 100 entities based on the TAC Secretariat's review. Additionally, the approaches taken to present this information were varied and it was often difficult to locate and understand which categories were used. For example, of those entities that did provide information about the categories they used, some disaggregated their Scope 3 emissions by category, whereas others included a description of the categories—without justification as to why the categories have or have not been included—either in a footnote or a separate document.

Figure 1 Scope 3 emissions categories reported by FTSE 100 companies (August 2023)

Bar chart showing the number of FTSE 100 companies reporting each of the 15 Scope 3 emissions categories. Categories 1 to 15 are listed on the y-axis, and the number of companies (0 to 70) on the x-axis.

• Category 1: Approximately 65 companies
• Category 2: Approximately 20 companies
• Category 3: Approximately 65 companies
• Category 4: Approximately 55 companies
• Category 5: Approximately 35 companies
• Category 6: Approximately 65 companies
• Category 7: Approximately 55 companies
• Category 8: Approximately 30 companies
• Category 9: Approximately 5 companies
• Category 10: Approximately 35 companies
• Category 11: Approximately 45 companies
• Category 12: Approximately 25 companies
• Category 13: Approximately 15 companies
• Category 14: Approximately 45 companies
• Category 15: Approximately 50 companies

22Some stakeholders have suggested that all 15 Scope 3 categories should be made mandatory for all entities to ensure that comparability is improved and to increase confidence in the total Scope 3 emissions being reported. Other stakeholders believe that it is unreasonable to expect entities to disclose immaterial information that is unlikely to affect decision making, and would prefer the flexibility in IFRS S2 which does not specify which categories an entity is supposed to use. However, current practice, as described in paragraph 21, may benefit from additional specificity or guidance to improve the quality of reporting in the UK.

23In January 2024, the FTSE Russell published a research paper on Scope 3 emissions reporting. In this paper, it is suggested that a sector-based approach may be appropriate to understand which are the most relevant Scope 3 categories. It is suggested that entities should be required to disclose at a minimum the two most material Scope 3 categories for their sector, which may then be supplemented with additional categories that reflect individual business models and circumstances. Regardless of whether certain categories are mandated, Scope 3 emissions are likely to benefit from industry-based guidance that reflects the types of assets or business activities that could determine which Scope 3 categories are material. Therefore, the TAC may consider engaging with the ISSB with regard to improving the industry-based guidance to support entities in disclosing their Scope 3 emissions data, including in relation to guidance on the relevant Scope 3 categories. Currently, the Industry-based Guidance on Implementing IFRS S2 does not include any metrics or guidance relating to Scope 3 emissions—nor does the SASB Standards on which this guidance is based. When updating this guidance for consultation (the timeline for which is unknown), the ISSB may consider adding industry-based guidance on Scope 3 emissions that supports entities in collecting and reporting the necessary information, including providing guidance on which categories may be considered the most relevant to certain industries.

24As noted in paper 2024-TAC-013 relating to the GHG Protocol and measurement methods, the GHG Protocol is currently reviewing its corporate standards and guidance including the materials that relate to Scope 3 emissions. After completing stakeholder surveys to receive feedback on its materials, the GHG Protocol published its Scope 3 Proposals Summary in June 2024 which considers a number of proposals suggested by stakeholders. These proposals include:

• making changes to the boundaries used for Scope 3 emissions, including among the fifteen categories;
• developing guidance for biogenic emissions and removals;
• phasing out the use of the spend-based method and focusing more on primary data collection;
• providing clarification of the use of cradle-to-gate emission factors for different categories; and
• providing clarification of how Scope 2 market-based emissions data is used for Scope 3 emissions.

25The TAC may consider engaging with the GHG Protocol during its review of its materials to provide insight into UK views relating to Scope 3 categories and to support improvements to the GHG Protocol materials.

Leased assets

26In the GHG Protocol Corporate Value Chain (Scope 3) Standard, leased assets are included in Scope 3 emissions in Category 8–Upstream leased assets and Category 13–Downstream leased assets. The treatment of a leased asset in the GHG Protocol materials is different to how they are treated in financial accounting, which means that an entity's greenhouse gas emissions disclosures may not align with the related financial statements. For example, IFRS 16 Leases requires lessees to recognise assets and liabilities in the financial statements for all leases unless the lease term is 12 months or less, or the underlying asset has a low value. Additionally, which Scope the leased asset is categorised as will change depending on how the leased asset is treated. For example, if an entity has operational control of the leased asset, then it may be disclosed as part of Scope 1 or Scope 2 emissions.

27This is an existing issue with the GHG Protocol materials and is not unique to IFRS S2. Therefore, the TAC may decide to engage with the GHG Protocol during its review of its materials to encourage the GHG Protocol to consider how greenhouse gas emissions from leased assets are reported, including which scope they should be included in. This might include encouraging the GHG Protocol to align with how leased assets are treated in financial accounting standards.

Data collection and the application guidance

28IFRS S2 paragraph B19 permits greenhouse gas emissions from the value chain to be disclosed using a reporting period that is different from the entity's reporting period in specific circumstances. This attempts to address the challenges associated with time lags when collecting data in the value chain, especially from entities in the value chain that might have a different reporting period. Entities can only apply IFRS S2 paragraph B19 on the condition that:

• the entity uses the most recent data that is available;
• the length of the reporting period is the same; and
• the entity discloses the effects of any significant events and changes in circumstances that might have occurred during the time lag.

29The TAC has previously discussed the challenges with collecting data in the value chain, including time lags and the use of estimates. TAC members noted that coterminous reporting is ideal and that over time the ability to report information for the same reporting periods as financial reporting will improve. In that regard, members noted that delays in collecting data may be transitional in nature. However, members also acknowledged that for some disclosures, such as financed emissions, there is likely to always be a delay in acquiring the data from entities in the value chain. Members agreed that the increased transparency from entities where timing does not align is important. IFRS S2 permits the use of a different reporting period for Scope 3 emissions, but does not require entities to disclose the fact that they have used this relief or that the reporting period is not aligned to their own reporting period.

30IFRS S2 paragraphs B38–B57 also provides a measurement framework to support entities in collecting and reporting their Scope 3 emissions data and to improve the consistency and comparability of Scope 3 emissions disclosures. In IFRS S2 Basis for Conclusions on Climate-related Disclosures (IFRS S2 Basis for Conclusions) paragraph BC116, the ISSB acknowledged that the measurement of Scope 3 emissions is expected to be imperfect and reliant on estimates. The ISSB introduced the Scope 3 measurement framework to categorise and prioritise the measurement approaches, inputs and assumptions that would enable entities to faithfully represent their Scope 3 greenhouse gas emissions.

31The Scope 3 measurement framework requires an entity to prioritise particular types of data it uses in its measurement of Scope 3 emissions, including any inputs and assumptions. IFRS S2 focuses on these desired characteristics of the data which are required to be prioritised in no particular order:

• data based on direct measurement;
• data from specific activities within the entity's value chain;
• timely data that faithfully represents the jurisdiction of, and the technology used for, the value chain activity and its greenhouse gas emissions; and
• data that has been verified.

32For example, if an entity uses estimates rather than direct measurement of the greenhouse gas emissions, the entity is required to prioritise data that represents, as close as possible, the specific activity.

33IFRS S2 Basis for Conclusions paragraph BC118 acknowledges that an entity should also consider the trade-offs between these characteristics used to prioritise data. The example given in the IFRS S2 Basis for Conclusions is:

[A]n entity that is estimating its greenhouse gas emissions for the year ending 2023 might use an emission factor that is not timely (for example, the emission factor might be from a research project in 2017). However, this emission factor might best represent the greenhouse gas emissions associated with the technology used in the entity's value chain as at the reporting date.

This example demonstrates that the characteristics listed in paragraph 31 are not intended to be used as a hierarchy. Instead, the entity is expected to apply judgement and apply the guidance to ensure that the Scope 3 emissions data that is disclosed is, to the extent possible, a faithful representation of the entity's Scope 3 emissions.

34A notable element of the Scope 3 measurement framework is the requirement to prioritise Scope 3 emissions data that is verified. The TAC has previously discussed the challenges in collecting data from the value chain which would make verification exceptionally challenging. However, in IFRS S2 Basis for Conclusions paragraph BC119, the ISSB confirms that IFRS S2 does not specify how the data is verified as the ISSB recognises that verification might happen in several ways, including internal or external verification. Rather than prescribing a verification approach, IFRS S2 paragraph B56 requires entities to disclose the extent to which Scope 3 emissions are measured using data inputs that are verified.

35Additionally, IFRS S2 paragraph B39 requires entities to use 'all reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort' when selecting the measurement approach, inputs and assumptions used to calculate Scope 3 greenhouse gas emissions. This includes the verification of Scope 3 emissions. IFRS S2 paragraph B54 recognises that 'in some cases an entity might be unable to verify its Scope 3 greenhouse gas emissions without undue cost or effort.' Further, an entity may determine that is it is impracticable to estimate its Scope 3 emissions after making every reasonable effort to do so. If this is the case, IFRS S2 paragraph 57 requires the entity to disclose information about how it is managing its Scope 3 emissions. Some stakeholders have requested further guidance as to what is meant by 'impracticable'. However, this term and its definition are also used in accounting standards, both international and national. IFRS S2 Basis for Conclusions paragraph BC121 explains that this exemption refers more to effort rather than cost—and is a higher hurdle than assessing cost-benefit—and notes that in practice the ISSB expects this exemption to be rarely used, especially as the Scope 3 measurement framework permits the use of estimation with different characteristics.

36In addition to applying the Scope 3 measurement framework, entities are also required to disclose accompanying disclosures that are specified in IFRS S2 paragraph B56. This includes information about 'the extent to which the entity's Scope 3 greenhouse gas emissions are measured using inputs from specific activities within the entity's value chain'. This disclosure is designed to provide users with transparency about the characteristics of the data and inputs used to calculate Scope 3 emissions. In response to the TAC's call for evidence, stakeholders acknowledged the extensive amount of uncertainty relating to the quality and comparability of Scope 3 emissions data. Therefore, stakeholders suggested that entities should be encouraged to describe and justify their approach to calculating Scope 3 emissions, including providing insight into the data quality and reasons that the data may be incomplete. The Scope 3 measurement framework and disclosure requirements in IFRS S2 may provide helpful guidance and provide users with the information they need to understand the limitations of an entity's Scope 3 emissions disclosure. Additionally, entities are required to apply IFRS S1 paragraphs 74–82 in relation to judgements and uncertainties, which should provide users with an understanding of the most significant uncertainties and judgements an entity has made in the process of preparing its disclosures.

37Some stakeholders explicitly supported the Scope 3 measurement framework in IFRS S2, including the use of 'impracticable' in relation to the use of estimates. However, some stakeholders requested further guidance on the use of estimates, in addition to specific industry-specific guidance which stakeholders believe to be vital to ensure meaningful approach. The TAC may consider engaging with the ISSB with regard to improving the industry-based guidance to support entities in disclosing their Scope 3 emissions data. Paragraph 23 also discusses engaging with the ISSB on improving these materials in relation to guidance on the relevant Scope 3 categories that may be relevant to a specific industry.

38There have been some calls from stakeholders for the UK government to provide additional support on Scope 3 emissions reporting. For example, previous suggestions have included that the UK government provide a database of emissions data that can support entities in disclosing their Scope 3 emissions data. Although a central repository of data would be useful, this may be more appropriate at a global level. A few stakeholders have also suggested that the UK government's conversion factors could be improved to include Scope 3 specific emissions factors. As noted in paper 2024-TAC-013, jurisdiction-specific emissions factors are used to convert activity data into greenhouse gas emissions data using local data relating to the energy mix of that jurisdiction. Scope 3 emissions data should represent an entity's value chain which is likely to go beyond the jurisdictional boundaries of the UK, and therefore it may not always be appropriate for an entity to only use UK-specific emissions factors for Scope 3 emissions data. The challenges associated with Scope 3 emissions is not unique to the UK. Therefore, it may not be appropriate for UK specific guidance or data infrastructure to be developed.

Transition relief and safe harbour provisions

39Additional to IFRS S2 paragraph B19 that permits greenhouse gas emissions to be disclosed using a reporting period that is different from the entity's reporting period and the Scope 3 measurement framework, IFRS S2 also includes transition relief that permits entities to exclude Scope 3 emissions in the first year of reporting. The majority of stakeholders that responded to the TAC's call for evidence welcomed this relief as it recognises the practical challenges associated with Scope 3 emissions disclosures and allows phased-in disclosure. Some stakeholders requested that the period of relief be extended for all or some entities, while others warned that any extension to the relief period could impact other entities' ability to disclose their own Scope 3 emissions including financed emissions. This transition relief will be considered in a future paper alongside all reliefs available in both IFRS S1 and IFRS S2. The TAC is not asked to make a decision on the Scope 3 emissions relief in this paper.

40Additionally, some stakeholders that responded to the TAC's call for evidence raised concerns about legal liability in relation to Scope 3 emissions disclosure. Some stakeholders requested exemption or safe harbour on Scope 3 emissions to encourage reporting and to recognise the challenges in the quality and completeness of the data which are unlikely to ever be fully resolved. A safe harbour is a legal provision in a statute or regulation that provides protection from a legal liability or other penalty when certain conditions are met. Decisions about exemptions or safe harbour provisions are an implementation issue and therefore should be discussed by the UK Sustainability Disclosure Policy and Implementation Committee (PIC).

Endorsement recommendations

Alternative options considered but not recommended

41In considering the TAC's endorsement recommendations on the requirements relating to Scope 3 emissions, the Secretariat considered alternative options that have been disregarded. The alternative options that were considered but not recommended included:

41.1 removing all requirements relating to Scope 3 emissions. While is it widely acknowledged that Scope 3 emissions are one of the most onerous and challenging aspects of IFRS S2, most stakeholders agreed that there is still benefit in entities being required to provide Scope 3 emissions data. In IFRS S2 Basis for Conclusions, the ISSB note that users would find Scope 3 emissions data useful to understand how an entity is exposed to transition risks in its value chain. Additionally, it is likely that the quality of Scope 3 emissions disclosures will improve over time as entities become more familiar and comfortable with collecting and disclosing Scope 3 emissions data, so removing the requirement will not be conducive to ultimately improving the quality of disclosure.

41.2 developing UK-specific guidance relating to Scope 3 emissions. Although stakeholders acknowledge that further guidance would be helpful, the challenges associated with Scope 3 emissions are not specific to the UK. Additionally, to disclose Scope 3 emissions data, entities will be required to collect information from entities across their value chain, some of whom may be located in other jurisdictions. Therefore, it may not appropriate or helpful to develop UK-specific guidance on Scope 3 emissions.

Suggested endorsement recommendation

42On balance, and based on the analysis provided in this paper, the TAC is asked to tentatively recommend:

42.1 to maintain the requirements in IFRS S2 requiring the disclosure of absolute gross Scope 3 emissions. Despite acknowledging that Scope 3 emissions are one of the most onerous and challenging aspects of IFRS S2, most stakeholders agreed that there are still benefits in entities being required to provide Scope 3 emissions data and that these benefits will outweigh the costs over time. IFRS S2 includes a number of support mechanisms that are intended to support entities in collecting and disclosing Scope 3 emissions data. For example, IFRS S2 allows entities to use reasonable and supportable information that is available to the entity at the reporting date without undue cost or effort in relation to the requirements relating to Scope 3 emissions. Further, an entity may determine that is it impracticable to estimate its Scope 3 emissions after making every reasonable effort to do so. Additionally, IFRS S2 paragraph B19 permits—in certain circumstances—greenhouse gas emissions from entities in the value chain to be disclosed using a reporting period that is different from the entity's reporting period, and provides a Scope 3 measurement framework to support entities using estimates. These mechanisms should reduce the anticipated cost and burden to entities and help improve the consistency and comparability of the disclosures.

42.2 to insert a requirement in IFRS S2 requiring further disaggregation of Scope 3 emissions data by Scope 3 category. Entities are already required to identify the relevant Scope 3 categories that make up the absolute gross Scope 3 emissions figure, and therefore entities will already be collecting data according to these categories to be able to aggregate the data into single figure. Therefore, requiring entities to also present Scope 3 emissions data by category may not result in undue cost or burden—although some additional cost and burden may apply to the additional requirement. This information would also likely improve the quality of reporting by making entities' Scope 3 emissions data more understandable and reliable, which could ultimately improve the decision-usefulness of the data. The TAC may decide that recommending this insertion would be conducive to the long-term public good by improving the decision-usefulness of the Scope 3 emissions data and by providing important information in relation to an entity's transition plans.

42.3 to engage with the ISSB in relation to improving the industry-based guidance to support entities in reporting their Scope 3 emissions data. Currently, the Industry-based Guidance on Implementing IFRS S2 does not include any metrics or guidance relating to Scope 3 emissions. When the ISSB updates this guidance and makes it available for public consultation (the timeline for which is unknown), the TAC may consider suggesting that the ISSB add industry-based guidance on Scope 3 emissions that support entities in reporting the necessary information, including providing guidance on which categories are most relevant to certain industries. Additional industry-based guidance could support consistency and comparability and could result in improved quality of reporting in the UK.

42.4 to engage with the GHG Protocol during its review of its materials to provide insight into UK views relating to Scope 3 categories—including the treatment of leased assets—and to support improvements to the GHG Protocol materials. Stakeholders have called for further guidance on Scope 3 emissions disclosure, including further guidance on the categories. Rather than creating additional guidance, the TAC may consider engaging the GHG Protocol as it reviews and amends its materials. This could include engaging with the GHG Protocol Secretariat and any consultations that are published during the review. Supporting the GHG Protocol's process and the development of guidance for a global audience would support international comparability.

Suggested response to DBT's request

43As noted in paragraph 6, DBT would welcome the TAC's view on the timescales involved for public interest entities to have the capacity, skills, and systems to be able to produce reliable Scope 3 emissions disclosures, if they do not do so already. Based on the analysis provided in this paper, the TAC may conclude that public interest entities in the UK should already have the capacity, skills and systems to produce Scope 3 emissions disclosures, although further progress is needed to ensure this data is 'reliable'. Feedback received from stakeholders suggests that while reporting practice will improve over time, some of the challenges with Scope 3 emissions data are unlikely to be fully resolved. However, the Scope 3 measurement framework in IFRS S2 could provide helpful guidance that, if applied faithfully, could improve the consistency and comparability of Scope 3 emissions disclosures.

44DBT also noted that it would welcome views from the TAC on what, if any, further guidance and data infrastructure would be needed to facilitate Scope 3 emissions reporting. The challenges associated with Scope 3 emissions are not unique to the UK. Therefore, it may not be appropriate for UK specific guidance or data infrastructure to be developed. For example, Scope 3 emissions data should represent an entity's value chain which is likely to go beyond the jurisdictional boundaries of the UK, and therefore it may not always be appropriate for an entity to use jurisdictional-specific emissions factors. The TAC may conclude that Scope 3 guidance and data infrastructure should be developed by an international body, like the GHG Protocol, which may be more appropriate than UK-specific guidance. For example, as recommended in paragraph 42.3, the TAC may suggest that the ISSB provide industry-based guidance on Scope 3 emissions that support entities in reporting the necessary information, including providing guidance on which categories are most relevant to certain industries.

Questions for the TAC

1. Does the TAC agree with the analysis in this paper in relation to Scope 3 emissions requirements in IFRS S1?
2. Does the TAC agree to tentatively recommend to maintain the requirements in IFRS S2 requiring the disclosure of absolute gross Scope 3 emissions?
3. Does the TAC agree to tentatively recommend to insert a requirement in IFRS S2 requiring further disaggregation of Scope 3 emissions data by Scope 3 category?
4. Does the TAC agree to tentatively recommend to engage with the ISSB in relation to improving the industry-based guidance to support entities in reporting their Scope 3 emissions data?
5. Does the TAC agree to tentatively recommend to engage with the GHG Protocol during its review of its materials to provide insight into UK views relating to Scope 3 categories—including the treatment of leased assets—and to support improvements to the GHG Protocol materials?
6. Does the TAC agree with the conclusions in paragraph 43–44 and agree to feed this back to DBT?

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Name TAC Public Meeting September 2024 Paper 3: GHG emissions Scope 3

Publication date 27 August 2024

Format PDF, 372.9 KB

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