Scope 3 emissions are a knotty problem for financial services businesses. Management in financial services firms found themselves spending a lot of time explaining how Scope 3 works in the sector to board and audit committees, due to its complexity.

These explanations came at the expense of the findings themselves, creating a need for quick and simple ways to get stakeholders up to speed on how Scope 3 works.

High-quality Scope 3 reporting is more than compliance, says Stephen Farrell, Deloitte’s Head of Controls, Sustainability & Emerging Assurance in Audit and Assurance practice for the UK. “It’s about empowering companies to communicate their strategic pathway for long-term success and resilience. These disclosures can help equip investors with the information needed to make informed capital allocation decisions, supporting sustainable growth and robust governance across the financial sector."

With UK Sustainability Reporting Standards, based on IFRS S1 and S2, now published and the FCA proposing mandatory reporting from 2027, firms are looking for practical ways to build understanding of Scope 3 requirements, adds Polly Tsang, Senior Financial Services Regulatory Manager at ICAEW..

Why is it so complex?

One of the key challenges in accounting for Scope 3 emissions in financial services is that firms are measuring emissions linked to the activities they finance, invest in and insure across a wide range of sectors, explains Tsang.

“Scope 3 in financial services is fundamentally different from many other sectors. The challenge is that Scope 3 is driven by activities firms finance rather than activities they directly control, which creates complexity around data, timing and double-counting.”

“The methodologies are still evolving and, in some areas, there is no single agreed approach. That makes it important for users of sustainability disclosures to understand not just the numbers, but the assumptions and context behind them.”

Reporting and materiality

Scope 3 emissions often constitute a big proportion of a company’s overall greenhouse gas footprint, particularly for financial institutions, says Farrell. “Ensuring these are measured and disclosed is central to managing climate-related risks and supporting credible transition plans. Omitting Scope 3 data risks leaving out potentially financially material information that investors and stakeholders may rely on to assess long-term resilience."

Data gaps and sector variations

Reporting Scope 3 financed emissions can be challenging due to the data gaps and variations across asset classes and sectors, Farrell explains. However, the continued development of industry standards is helping to overcome these hurdles. “Transparency about measurement approaches, exclusions, and plans for improvement is critical to building trust and enabling meaningful progress."

Data quality, assurance and methodological advancements

The quality and depth of Scope 3 reporting varies, Farrell explains, but methodologies are improving steadily, and more entities are embracing assurance, which are positive signs. “The number of prior year adjustments for Scope 3 disclosures underscores both the complexity and the commitment to refining data accuracy. Assurance under recognised standards enhances credibility.”

Case studies break down the complexity

ICAEW has collaborated with partners from several firms and the Partnership for Carbon Accounting Financials to develop Scope 3 case studies covering key financial services sub-sectors.

"We developed these case studies to provide a practical, accessible introduction to the main sources of Scope 3 emissions across retail banking, investment banking, insurance and asset management. The aim is to help readers quickly understand the key issues in their sub-sector without having to work through large volumes of technical guidance," says Tsang.

The case studies set out the main emissions sources, common data challenges and the methodologies currently used across the sector.

“They are intended as a concise starting point for boards, audit committees and practitioners who need a clearer view of how Scope 3 issues arise in financial services. They also help illustrate why Scope 3 in financial services is structurally more complex than sectors such as manufacturing, where emissions boundaries are more clearly defined.”

Example case study: retail banking

Residential mortgages are often the main driver of financed emissions for retail banks and present distinct Scope 3 challenges:

• Sourcing data: pulling in information from various sources often results in inconsistent data quality.
• Proxies and estimates: entities rely on these, supplied by third-party data providers due to the above data gaps, which create their own inconsistencies and inaccuracies.
• Diverse portfolios: with different asset and investment types in residential portfolios, it can be difficult to calculate emissions.

Emissions could be calculated using several methodologies, based on the data available:

• Actual building emissions: this could include supplier-specific emission factors, or average emission factors;
• Estimated emissions based on floor area: energy consumption per floor area can be calculated based on official building energy labels and floor area, or building type, location-specific statistical data and floor area; and 
• Estimated building emissions based on the number of buildings: this would be calculated based on building type and location-specific statistical data as well as the number of buildings.

“With UK Sustainability Reporting Standards based on IFRS S1 and S2 coming into effect, these case studies provide a timely starting point for boards, audit committees and practitioners. As expectations evolve, understanding the current limitations and challenges of Scope 3 data is becoming increasingly important across financial services,” concludes Tsang.