Scope 3 emissions (all indirect emissions in an entity's value chain outside of purchased electricity) are typically the largest component of total GHG footprint and the hardest to measure. IFRS S2 requires their disclosure despite the challenges, with proportionate flexibility in how they are measured.
Why Scope 3 Matters
For most companies, Scope 3 emissions are by far the largest part of their carbon footprint, often 70 to 90% of total emissions. This is because:
- Supply chain emissions (Category 1, purchased goods and services) embed the carbon cost of all the materials, energy, and services consumed upstream
- Product use emissions (Category 11) for products that combust fuel or consume electricity can be many times the manufacturing emissions
- Investment portfolio emissions (Category 15) for financial institutions can dwarf their operational footprint
Investors need Scope 3 data to understand a company's exposure to:
- Supply chain transition risks: If suppliers face carbon pricing, costs increase
- Product transition risks: If customers' demand for high-carbon products declines, revenue is affected
- Policy risks: Carbon border adjustment mechanisms (like the EU CBAM) price embedded supply chain emissions
The 15 Scope 3 Categories
Scope 3 is organised into 15 categories defined by the GHG Protocol Scope 3 Corporate Value Chain Standard (2011):
| # | Category | Type | Examples |
|---|---|---|---|
| 1 | Purchased goods and services | Upstream | Raw materials, component parts, services used in production |
| 2 | Capital goods | Upstream | Equipment, buildings, vehicles purchased |
| 3 | Fuel- and energy-related activities | Upstream | Extraction, production, transport of fuels and energy not in Scope 1 or 2 |
| 4 | Upstream transportation and distribution | Upstream | Third-party transport of products to or from the entity |
| 5 | Waste generated in operations | Upstream | Disposal and treatment of waste produced |
| 6 | Business travel | Upstream | Employee travel by air, rail, road |
| 7 | Employee commuting | Upstream | Employees commuting to and from work |
| 8 | Upstream leased assets | Upstream | Operations in assets leased by the entity (excluded from Scope 1 or 2) |
| 9 | Downstream transportation and distribution | Downstream | Transport from entity to customers or end consumers |
| 10 | Processing of sold products | Downstream | Emissions when intermediaries process sold intermediate products |
| 11 | Use of sold products | Downstream | Emissions from customers using sold products (for example, car fuel combustion) |
| 12 | End-of-life treatment of sold products | Downstream | Waste and disposal when products reach end of life |
| 13 | Downstream leased assets | Downstream | Assets leased by the entity to others |
| 14 | Franchises | Downstream | Emissions from franchisee operations |
| 15 | Investments | Downstream | Emissions from equity investments, loans, bonds (financed emissions) |
Think of Scope 3 categories like the rings of a tree. The entity (the core) is Scope 1 and Scope 2. Moving outward, rings 1 to 8 represent upstream emissions: everything that happened before the product or service reached the entity. Rings 9 to 15 represent downstream emissions: everything that happens after the entity's product or service is sold. Together, they capture the full carbon story of a company's value chain.
What IFRS S2 Requires for Scope 3
Paragraph 29(a)(vi) requires entities to disclose:
- (1) Which Scope 3 categories are included in the entity's Scope 3 measure. An entity need not include all 15 categories if some are not material, but it must explain which are included and (implicitly) why others are not.
- (2) For entities in financial activities, additional financed emissions information for asset managers, commercial banks, and insurers is required (B58 to B63A, covered in Module 6).
The Scope 3 Measurement Standard (B32 to B37)
Application Guidance B32 to B36 describes how to determine which categories to include:
- B32 to B33: Consider the entire value chain. All 15 categories should be considered, even if not all are ultimately included. The entity must disclose which categories are included.
- B34 to B36: Scope 3 boundaries should be reassessed when there are significant events or changes in the value chain (mergers, acquisitions, major new supplier relationships, or changes in business model).
- B37: Entities in financial activities (asset management, commercial banking, insurance) must apply the additional financed emissions requirements in B58 to B63A.
The Most Contested Requirement
The Basis for Conclusions (BC110 to BC121) records that Scope 3 was the most debated area during the development of IFRS S2. Users strongly supported mandatory Scope 3 disclosure because it reveals the full scope of transition risk exposure. Many preparers raised concerns about:
- Data availability and quality from supply chain partners
- Methodological complexity and estimation uncertainty
- Comparability issues across entities using different approaches
The ISSB addressed these concerns by:
- Providing a first-year transition relief (entities may defer Scope 3 disclosure to year 2)
- Developing the Scope 3 measurement framework (B38 to B57) that categorises and prioritises inputs
- Allowing estimation and secondary data where primary data is unavailable
Despite the challenges, the ISSB concluded that Scope 3 information is too important for investors to omit from the mandatory standard.
Key Takeaways
- 1Scope 3 is typically 70-90% of total corporate emissions and reveals exposure to supply chain transition risk, product transition risk, and carbon border adjustment mechanisms
- 2The 15 GHG Protocol categories span upstream (categories 1-8, purchased goods through leased assets) and downstream (categories 9-15, distribution through investments)
- 3Entities must disclose which categories are included and explain exclusions - all 15 must be considered even if not all are ultimately material
- 4Category 15 (investments) is critical for financial institutions and subject to enhanced financed emissions requirements
- 5A first-year transition relief allows Scope 3 deferral, but building measurement capabilities for year 2 compliance should start immediately