Making it mandatory for Canadian companies to report their largest and most material Scope 3 emissions categories will set them up for success in the global energy transition.
What’s new
To remain competitive in the global energy transition Canadian businesses need to disclose their material Scope 3 emissions. These disclosures provide a full picture of a company’s emissions which helps investors and policymakers make better decisions around funding and policy design. If a company is not explicitly addressing material emissions both upstream and downstream, this can present transition-related risks—risks both investors and policymakers need to be aware of to make sound decisions.
Recognizing the importance of disclosure, international regulators and standard-setters have been putting increasing pressure on companies to report their Scope 3 emissions, including emissions in material categories. In the U.S. and U.K. new disclosure rules are expected to come out this year that could potentially require large companies to disclose material Scope 3 emissions, although they would have safe harbour rules that would exempt certain companies facing difficulties measuring these emissions. The E.U. has moved even faster, making it mandatory for large companies to disclose their material Scope 3 emissions under the Corporate Sustainability Reporting Directive.
But in Canada, there is little momentum for emissions disclosure requirements and this puts Canada’s ability to compete in the low-carbon transition at risk. In 2022 the federal government announced mandatory reporting of Scope 3 emissions for large financial institutions starting in 2024. However, the lagging performance of Scope 3 disclosures from Canadian companies reflects a need for regulators to catch up to international peers and ensure more companies report on their Scope 3 emissions—particularly in their most material categories.
What are material Scope 3 emissions?
A company’s total emissions are categorized into three scopes by the Greenhouse Gas Protocol. What separates Scope 3 emissions from Scope 1 and 2 is that they do not represent a company’s direct exposure to policy costs like carbon pricing. Instead, failing to disclose material Scope 3 emissions raises the indirect risk for a company and its investors to factors such as increasing costs from high-carbon emitting suppliers, or declining demand as consumers seek lower-carbon alternatives.
Recognizing the various areas of potential material emissions across a company’s supply chain, the Greenhouse Gas Protocol breaks down Scope 3 emissions into 15 categories. Categories 1 through 8 refer to indirect emissions coming from upstream sources. These can include emissions that go into making a product or service, including the transportation of materials, any capital goods used, and emissions from operations such as employee travel. Categories 9 through 15 refer to emissions downstream, which include the emissions from distributing and use of a product, the end-of-life treatment of a sold product, and emissions from leased assets, franchises, and investments.
While 44 companies of the TSX60 have reported some of their Scope 3 emissions, what also matters is whether a company reports on their most material Scope 3 emissions categories. A company’s most material Scope 3 emissions categories can vary across sectors. For example, a car manufacturer may have significant emissions in Scope 3 category 11 (use of sold products) as people drive vehicles sold. But a construction company may have a much larger share for Scope 3 category 1 (purchased goods and services) because of the services and products they purchase upstream.
Canadian companies need a better understanding of their material Scope 3 emissions
To track whether large Canadian companies are reporting on their most material Scope 3 categories, we analyzed the total Scope 3 categories reported from the latest sustainability reports of the TSX60 against the expected categories reported, assuming a company should have a similar breakdown of Scope 3 emissions from sector-average data.
Our analysis suggests that only a third of TSX60 companies disclosed their most material Scope 3 categories in their latest reporting year. The biggest data gap was a lack of reporting on Scope 3 categories 1 (purchased goods and services) and 11 (use of sold products), which are especially significant as they represent the largest categories in downstream and upstream Scope 3 emissions respectively.
Figure 1: Large Canadian companies are falling short of reporting on their material Scope 3 emissions categories especially for two of the most important categories: 1 and 11.
Canada’s voluntary disclosure of Scope 3 emissions also seems to incentivize a larger share of emissions reported on easier-to-estimate, operation-based categories. For example, an overwhelming number of companies reported on Scope 3 category 6 (business travel) despite it being only significant to a few sectors. The disconnect between what is reported and which categories are the most material in specific sectors reflects the need for Canadian companies and regulators to tighten up the criteria for material Scope 3 emissions disclosures.
Canadian markets must continue to align their Scope 3 disclosures with international best practices. Making it mandatory for companies to disclose their most material Scope 3 emissions data will help them drive down emissions across their supply chain. It will also make Canadian businesses more attractive to investors as it reduces the risk of future large-scale adjustments of their portfolios to comply with their own climate targets.
Finally, disclosing their material Scope 3 emissions will help identify and reduce risks for Canadian businesses and better set them up for success in the transition to a lower-carbon economy.
Arthur Zhang is a research associate for the Canadian Climate Institute.