Ashok Haldia

The regulator should nudge and guide for compliance and even consider safe harbour provision.

Reduction in Scope 3 Green House Gas (GHG) emissions, which account for 60-90% of the average entity’s total emissions, is key to reaching global net zero target by 2050. Scope 3, unlike Scope 1 and Scope 2 emissions, occur outside the company, through supply chain, upstream and downstream. These are, by very nature, complex and difficult in the collection of data and reporting. Scope 3 emissions have far-reaching consequences that extend beyond an entity's immediate operations and require entities to adopt a holistic approach that encompasses their entire value chain. 

Reporting Scope 3 emissions will help the companies in assessing risks from sources of high emissions both from upstream and downstream activities and then prepare on that basis an action plan for improving carbon footprint. Disclosure requirements is a critical first step for measuring, verification and reliable reporting.

Currently, disclosure requirements for Scope 3 emissions are voluntary though the framework for Environmental, Social and Governance (ESG) disclosure is in place since 2012. This is not surprising as the SEBI has adopted a highly pragmatic and practical approach. Disclosure requirements over listed companies have been made applicable in a phased manner, and the scope of the requirements is keeping in view the complexities involved and the preparedness of the companies in compliance thereof. Business Responsibility Reports (BRR) introduced in August 2012 mandated listed companies to respond to environmental issues mostly in the affirmative or otherwise – as part of one of the nine ESG principles.

The disclosure included the existence of a company’s strategy to address global environmental issues, identification of environmental risks, initiatives taken towards clean technology, renewable energy etc. It is also required to state whether the company has extended its policy to environmental issues to entities in the supply chain. The thrust was on creating an understanding of the companies to global warming issues, and their role and responsibility in addressing those. In May 2021 the requirements were made more specific, in response to global developments viz. the UN Sustainable Development Goals (SDGs), and Paris Agreement on Climate Change, by requiring companies to disclose, amongst others, the quantum of disclosure on Scope 1 and Scope 2 emissions as essential indicators, and of Scope 3 emission as leadership indicators. SEBI in July 2023 further improvised its reporting framework, responding to governments, investors and other stakeholders increasing thrust, by including Scope 1 and Scope 2 emissions in key performance indicators (KPIs) under one of the nine ESG principles, termed as BRSR Core, and requiring independent assurance thereon. Disclosure of Scope 3 emissions continued to remain voluntary.

The regime for voluntary disclosure for Scope 3 emissions has indeed created awareness on the significance of disclosures and issues and challenges faced in collection, measurement and disclosure of emissions over the value chain. However, this has not resulted in worthwhile compliance in form and substance by most of the companies. Targets for GHG reductions and progress made towards achieving those are either not given or not backed up by proper planning, systems and people to lend credibility. As per Carbon Disclosure Project (CDP) out of 122 companies in India which made CDP disclosures in 2022 only 41 percent have made Scope 3 emissions, and only 9 percent have reported both intensity-based and absolute emission reduction targets. Many of these companies have even otherwise been making these disclosures in sustainability reports prepared under the requirements of overseas regulatory agencies/stakeholders.
 

Pressure from investors
 

Globally, many countries have made Scope 3 emissions reporting requirements mandatory or are increasingly transitioning from voluntary to mandatory requirements. These include Canada, Japan, New Zealand, Hongkong and the UK. The Corporate Sustainability Reporting Directive (CSRD)of the European Commission require scope 3 emissions reporting by large entities in the EU and those having activities in the EU. Last week, The Securities and Exchange Commission (SEC) in the USA also mandated standardised quantitative and qualitative disclosures in Scope 3 emissions. The State of California has already made it mandatory. Australia also plans to make scope 3 emissions reporting mandatory for large entities.

Scope 3 emissions are important for understanding transition risk and evaluating investment risks and unlocking opportunities for enhanced efficiency, cost reduction and improved resilience. GHG emissions have significant effects on profitability, risk profile, and long-term resilience.

Companies have been facing increasing pressure from investors and other stakeholders to disclose their carbon footprint, reduction targets, risks, practices and impacts. For instance, AllianzGI voted against the approval of a climate report by an Australian energy company because it lacked a Scope 3 emissions reduction target. The activism of investors and other stakeholders is catching fast in other countries.

Considering that the industry will take time to mature, the requirements for disclosure of Scope 3 emissions can progressively be made mandatorily applicable to the top 1,000 listed companies over a period of the next 5 years for companies where Scope 3 emissions dominate, for example in oil and gas, and financial institutions. SEBI should, to start with, nudge and guide for compliance and can even consider safe harbour provision. The government may also incentivise through fiscal and non-fiscal measures the investment needed for gathering and reporting Scope 3 data for the value chain. SEBI’s policy and approach, together with market pressures reaching net- zero.

(Note: The views expressed are solely of the authors and do not necessarily represent IICA’s stand.)