Evaluating material business risk: The critical role of Scope 3 GHG emissions
Evaluating material business risk: The critical role of Scope 3 GHG emissions
Although climate reporting is not yet mandatory in Australia, listed entities should already be assessing and reporting on their climate-related risks and opportunities in their annual reports:
- Section 299A(1)(c) of the Corporations Act 2001 requires a listed entity to disclose its material business risks and opportunities in the directors’ report (or Operating and Financial Review) – including for climate risks and opportunities.
- Recommendation 7.4 of the ASX Corporate Governance Principles and Recommendations requires disclosure of a listed entity’s material exposure to climate and social risks in the Corporate Governance Statement.
Both the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange (ASX) strongly encourage listed entities to follow the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) recommendations as part of this process. While many listed organisations already do this, some do not go so far as to measure their Scope 3 upstream and downstream greenhouse gas (GHG) emissions.
Why is it important to measure Scope 3 GHG emissions?
Complying with section 299A and Recommendation 7.4 means entities should disclose climate risks and opportunities throughout the value chain.
Many entities have started measuring Scope 1 and Scope 2 GHG emissions, but not Scope 3, and for most, their Scope 3 GHG emissions will be greater than their Scope 1 and Scope GHG emissions combined.
Overlooking Scope 3 GHG emissions means listed entities could have material unreported climate risks and opportunities up and down the value chain, resulting in potential adverse financial impacts in future reporting periods, and non-compliance with the requirements in the Corporations Act 2001 and the ASX Corporate Governance Principles and Recommendations to disclose all material risks and opportunities.
The breadth of upstream and downstream considerations may surprise businesses that haven’t begun their carbon footprint measurement journey yet. From supplier logistics, lifecycle emissions of capital assets and personnel movements, to the distribution, processing and end-of-life treatment of your sold goods, as well as your financed emissions, these are some of the sources of emissions that arise as a result of your entity’s decisions and activities.
Exploring the sources of GHG emissions that arise across an entity’s entire value chain, may yield valuable insights as to how a business affects or is affected by external systems. The global prioritisation of decarbonisation is expected to impact existing ways of working, which potentially means the upstream and downstream systems upon which your business is reliant.
Sources of Scope 3 GHG emissions may be challenging to understand or identify and time-consuming to measure, so we urge entities to start the process now. With climate reporting expected to be mandatory for the largest entities (Group 1) from 2025, understanding Scope 3 GHG emissions for these businesses is a matter of urgency, but no less important for Group 2 and Group 3 entities.
How BDO can help
Our national team of carbon reporting experts can help you on your journey to measuring Scope 3 GHG emissions.
Contact us today.