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, the Canadian Climate Institute (CCI) concludes in a blog post published last month,.

To remain competitive in the global energy transition Canadian businesses need to disclose their material Scope 3 emissions, research analyst Arthur Zhang writes on the CCI’s 440 Megatonnes microsite. These disclosures provide a full picture of a company’s emissions, which helps investors and policy-makers 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, Zhang adds—risks both investors and policy-makers 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 United States and the United Kingdom, new disclosure rules are expected to come out this year that could potentially require large companies to disclose material Scope 3 emissions, although safe harbour rules would exempt certain companies facing difficulties measuring these emissions. The Europe Union has moved even faster, making it mandatory for large companies to disclose their material Scope 3 emissions under the Corporate Sustainability Reporting Directive.

In Canada, limited momentum for emissions disclosure requirements puts the country’s ability to compete in the low-carbon transition at risk, Zhang warns. 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 due to factors like 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 Scope 3 emissions down 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 downstream emissions from distributing and using a product, the end-of-life treatment of a product after it’s sold, and emissions from leased assets, franchises, and investments.

While 44 of the companies in the TSX60 stock index have reported some share of their Scope 3 emissions, what also matters is whether a company reports on its most material Scope 3 emissions categories—which 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 they’ve vehicles bought. 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 need or their actual operations.

Canadian Companies Need Better Understanding of Material Scope 3 Emissions

To track whether large Canadian companies are reporting on their most material Scope 3 categories, the Canadian Climate Institute analyzed the emissions reported in the latest sustainability reports of the TSX60 against the expectations for each category, assuming a company’s breakdown of Scope 3 emissions should be typical for its sector.

The CCI found 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.

Canada’s voluntary approach to Scope 3 emissions disclosure also seems to motivate companies to focus more of their reporting on easier-to-estimate, operation-based categories. For example, an overwhelming number of companies reported on Scope 3 category 6 (business travel), even though it’s 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 ultimately 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 by reducing the risk of large, future adjustments of their portfolios to comply with their own climate targets.

Disclosing material Scope 3 emissions will also help companies identify and reduce their risks and better set them up for success in the transition to a lower-carbon economy.

Adapted from a post originally published by the Canadian Climate Institute under a Creative Commons BY 4.0 international licence.