1 November, 2023
DESNZ launches Call for Evidence on Scope 3 GHG
The Department for Energy Security and Net Zero (DESNZ) has launched a Call for Evidence to gather feedback on the “benefits, costs, and practicalities” of Scope 3 greenhouse gas (GHG) emissions reporting in the UK, including links to the Government’s Streamlined Energy and Carbon Reporting (SECR) framework to inform a Post-Implementation Review of the policy.
Background and current regulatory requirements
The Streamlined Energy and Carbon Reporting (SECR) framework, which was introduced by the UK Government in April 2019, requires mandatory disclosure of Scope 1 and 2 emissions with the aim of simplifying and streamlining the reporting of energy and carbon emissions for businesses. The SECR framework consolidates several reporting requirements, making it easier for organizations to disclose their energy consumption and greenhouse gas emissions.
The SECR applies to large UK incorporated companies and limited liability partnerships (LLPs) meeting two or more of the following criteria: a turnover of £36 million or more, a balance sheet total of £18 million or more, and 250 employees or more.
However, the two standards introduced by the International Sustainability Standards Board (ISSB) in June 2023 – IFRS S1 (outlining general requirements for disclosing sustainability-related financial information) and IFRS S2 (focusing on climate-related disclosures) require entities to disclose not only their Scope 1 and Scope 2 but also their Scope 3 emissions.
In August 2023, the Government confirmed its intentions to establish UK Sustainability Disclosure Standards aligned with the ISSB’s standards, expected in July 2024, deviating only “from the global baseline if absolutely necessary for UK-specific matters.”
The Financial Conduct Authority (FCA) in the UK has subsequently revealed plans to initiate consultations in Q1 2024 regarding proposals to adopt sustainability disclosure rules for listed companies, incorporating the ISSB’s initial two reporting standards.
The Scope 3 emissions consultation
The UK Government’s Call for Evidence seeks opinions on the expenses, advantages, and practical aspects associated with reporting Scope 3 emissions. This input is intended to guide the Government in deciding how to endorse the ISSB’s sustainability standards.
The Government recognizes the challenges involved in identifying and quantifying Scope 3 emissions. It also acknowledges the importance of measuring these emissions to prioritize and bolster decarbonization initiatives. Reporting Scope 3 emissions is essential for a comprehensive evaluation of an organization’s environmental footprint, extending beyond direct operations to encompass indirect emissions throughout the value chain. This reporting provides a holistic view of a company’s impact, identifying significant contributors and enabling informed decisions on emissions reduction strategies. It enhances transparency with stakeholders, aligns with emerging reporting standards, and supports the development of sustainable and resilient supply chains.
Overall, this Call for Evidence aims to complement the Technical Advisory Committee’s (TAC) considerations. It specifically delves into Scope 3 reporting in greater detail than what may be addressed in TAC meetings. Additionally, the Call for Evidence serves as an opportunity to collect information for a Post-Implementation Review of the SECR requirements.
Responses to this consultation will be shared across Government and with the TAC, which is assisting in the evaluation of IFRS S1 and S2. Upon receiving the TAC’s advice, the Government plans to release a draft version of the UK-endorsed standards for public consultation, with the finalization of the standards to follow.
After completing the endorsement process for ISSB standards, the Government will assess the potential introduction of reporting requirements obliging businesses to report against UK-endorsed IFRS S1 and S2. The Government will consider the timeframes for implementing these requirements. If such requirements are pursued, the Government will conduct further consultations on the reporting obligations, encompassing the entities subject to these requirements. This process will be part of the broader UK non-financial reporting review, which examines the entire corporate reporting regime in the UK.
What businesses can do to improve their Scope 3 reporting
The consultation document recognises that the current availability of data is a challenge for companies seeking to disclose their Scope 3 emissions.
Financial institutions and financial institutions are struggling to obtain data from their SMEs customers or supply chain partners. Therefore, many corporate disclosures are built on proxy data or estimations from spend based analysis. As the regulatory pressures land on small businesses from the top down, there is currently no standardised way of agreeing this data, particularly when it comes to SMEs.
A solution to this problem is Bankers for Net Zero’s Perseus programme which, alongside our project partners Icebreaker One, is developing a whole-of-market solutions to create rapidly scalable, low-effort, low-friction sustainability reporting. Building on the principles of Open Banking, Perseus aims to unlock access to capital by automating GHG reporting for every small and medium enterprise (SME) in the UK. This means that financial institutions can access reliable and standardised energy data that will enhance the quality and accuracy of their ESG reporting. Critically, Perseus focuses on automating access to assurable energy data to support GHG Scope 3 Category 15 emissions. By engaging with Perseus, financial institutions and corporates can gain insights into their Scope 3 emissions and identify opportunities to reduce their carbon footprint. This will help financial institutions meet regulatory requirements, respond to investor demands, and demonstrate their commitment to sustainability. Additionally, by aligning with Perseus, financial institutions will contribute to the development of industry standards and best practices in Scope 3 emissions reporting and disclosure.
The UK Government has already recognised Perseus in its recently published Green Finance Strategy as a crucial part of the decarbonisation architecture required to ensure the UK reaches its emissions reduction targets.
In summary, engaging with Perseus can bring numerous benefits to financial institutions and corporates, including improved climate risk management, enhanced ESG reporting, alignment with industry standards such as PCAF and GHG Scope 3 Category 15, market opportunities, collaboration and partnerships, and regulatory compliance.
Elena Pérez Celis,
Head of Policy & Public Affairs