The rules for how UK companies report on their Scope 3 emissions should be purpose-led and developed in a way that complements the requirements of international sustainability disclosure standard IFRS S2 Climate-related Disclosures, ICAEW says in a consultation response.

Although some of the UK’s largest organisation sare already required to disclose their Scope 1 and Scope 2 emissions in their annual reports in line with the Streamlined Energy and Carbon Reporting (SECR) framework, Scope 3 emissions remain largely voluntary. 

However, a call for evidence launched in October by the Department for Energy Security and Net Zero, is seeking views on the costs, benefits and practicalities of Scope 3 greenhouse gas emissions reporting in the UK. 

Scope 3 includes all other indirect emissions that occur in the upstream and downstream activities of an organisation beyond those occurring from the purchase and use of electricity, steam, heating and cooling.

Although ICAEW says it recognises the demand from investors and other stakeholders for broader emissions information, it warns that measuring and reporting Scope 3 emissions is not without issues. As such emissions are largely beyond an entity’s direct control, reporting challenges include a high dependence on estimation, risk of double counting and the potential for significant error. 

Nonetheless, understanding Scope 3 emissions provides important information about the risks faced by a business in the transition to net zero, ICAEW says. It believes that we cannot and should not wait for perfect data to be available to start reporting Scope 3 information.

ICAEW’s consultation response identifies three separate but interrelated purposes to Scope 3 reporting: to inform investment decisions; to encourage behavioural changes to reduce emissions; and to provide stakeholders with information they need for compliance or data collection purposes. “The characteristics of information produced to meet each of these purposes are likely to differ,” ICAEW says. 

The call by ICAEW for purpose-led regulation is by no means new: in August, a representation from ICAEW to a call for evidence on Smarter Regulation stressed the importance of a purpose-led approach to non-financial reporting in annual reports.

ICAEW is also calling on the government to endorse IFRS S2 as a good starting point for Scope 3 reporting requirements. It is also urging the UK government to think very carefully before introducing any requirements that go beyond those that are in IFRS S2. 

“We hope that the UK government will shape an emissions reporting system that starts with the requirements embedded in IFRS S2 at the top and are complemented by proportionate but aligned requirements for other entities in the reporting system,” ICAEW says in its representation.

Commenting on the greenhouse gas reporting requirements for quoted companies introduced in 2013 and the subsequent 2019 SECR regulations, ICAEW says they have resulted in increased attention to energy and carbon reporting among the boards of listed entities. However, ICAEW says it is not convinced that SECR (for unquoted companies) provides for consistent measurement and disclosure. 

“In our view, the SECR requirements now need to be updated or entirely replaced to take account of the changing reporting landscape in a way that complements the International Sustainability Standards Board reporting requirements, rather than duplicates or overlaps.” 

Other key ICAEW recommendations to government include publishing a roadmap for sustainability reporting requirements in the UK, including Scope 3, that outlines who will be required to report, what they will need to report and when. ICAEW also suggests that the government should establish a central emissions portal together with a basic common methodology requirement to facilitate cost savings for businesses. 

Setting the right regulatory and enforcement tone is key, ICAEW warns: “Scope 3 reporting is a journey, but improvements are expected.” 

Laura Woods, Technical Manager in ICAEW’s Corporate Reporting Faculty, says: “The stakeholder demand for Scope 3 information is justified, but must be balanced with a widespread understanding that entities are unlikely to have all the data needed to report a complete and precise package of Scope 3 emissions disclosures. 

“This is why we think requirements must focus on transparency, particularly transparent disclosures about an entity’s use of estimates, measurement limitations and changes to methodology.”

Read the Call for Evidence representation from ICAEW in full.