‘Parsimonious and empirically driven approach’ to Scope 3 emissions can lower reporting burden

A lack of consensus on which categories should be regarded as material is making it harder for companies to report Scope 3 emissions, says the London Stock Exchange Group

Investors should concentrate on the most material types of a company’s Scope 3 greenhouse gas emissions when making an assessment, says the London Stock Exchange Group.

Scope 3 emissions represent more than 80 per cent of companies’ carbon footprints, but businesses are dogged by low disclosure rates, poor data quality and weak comparability, while organisations face a high reporting burden, says a LSEG report. 

“We argue that a lack of consensus on which categories should be regarded as material is key to the Scope 3 conundrum,” it states. Scope 3 categories can include emissions linked to leased assets, employee commuting and the end-of-life treatment of sold products. 

The LSEG paper proposes “a new, parsimonious, and empirically driven approach to determine the most material Scope 3 categories in each sector, which can help lower reporting burdens for companies and increase the quality and comparability of both reported and estimated Scope 3 data”. It identifies the two most material Scope 3 categories in different sectors, which on average cover 81 per cent of all Scope 3 emissions. These categories are often purchased goods and services, but can change depending on the sector.

The paper addresses 10 questions, including how investors should use Scope 3 data alongside Scopes 1 and 2 emissions, and how to estimate missing Scope 3 data. It also sets out the considerations of standard-setters and regulators, observing that while watchdogs “are guiding firms to disclose their most ‘material’ or ‘significant’ emissions, [they] largely sidestep the question of which Scope 3 categories to cover or how to determine materiality”.

You can find the full report here.