In the evolving climate change regulatory landscape, Australian companies are increasingly focusing on measuring and reporting Scope 3 greenhouse gas (GHG) emissions (or “Scope 3 emissions”).
These emissions, which encompass all indirect emissions that occur in the value chain of the reporting organisation, present unique challenges and opportunities.
While there are a range of methodologies available to assist in estimating the Scope 3 emissions, with the most notable being those published by the Partnership for Carbon Accounting Financials (PCAF), this is still a developing practice with many companies grappling to understand and apply the evolving Scope 3 regulatory requirements.
This article explores the regulatory requirements and outlines why companies need to understand Scope 3 emissions, the key challenges in measuring Scope 3 emissions and how actuaries can support them.
Defining Scope 3 emissions
Scope 3 emissions refer to the indirect GHG emissions that occur in a company’s value chain, excluding those from the company’s own operations (Scope 1) and energy purchases (Scope 2).
As defined by the Greenhouse Gas Protocol, there are 15 distinct Scope 3 categories, including:
- Eight upstream Scope 3 emissions categories (including purchased goods and services, business travel, waste disposal)
- Seven downstream Scope 3 emissions categories (including investments)
Essentially, Scope 3 emissions cover the entire lifecycle of a product or service, from production to disposal, and are often the largest share of a company's total GHG emissions.
The figure below illustrates the GHG Protocol scopes and emissions across the value chain as per the GHG Protocol’s Corporate Value Chain Accounting Reporting Standard[1].
Overview of GHG Protocol scopes and emissions across the value chain. Source: World Resources Institute & World Business Council for Sustainable Development, 2011.
Regulatory requirements:
Australian Climate Reporting Requirements
- Until 2025, reporting on Scope 3 emissions has been voluntary for Australian companies.
- The Corporations Act 2001 has been amended to introduce a mandatory climate-related disclosure regime for large Australian businesses and financial institutions for financial years commencing as early as 1 January 2025.
- Under this regime, entities in scope are required to lodge a ‘sustainability report’ containing climate-related disclosures prepared in accordance with Australian Sustainability Reporting Standards (ASRS2[1]), which have been issued by the Australian Accounting Standards Board (AASB).
- Paragraph 29 (a) (i) (3) of ASRS2 mandates that entities must ‘disclose its absolute gross greenhouse gas emissions generated during the reporting period, expressed as metric tonnes of CO2 equivalent Scope 3 greenhouse gas emissions’.
- There is a one-year relief for reporting Scope 3 emissions, making it mandatory from the second reporting period. Limited assurance over Scope 3 disclosures will be required from year two and reasonable assurance from year four.
Proposed targeted amendments to IFRS S2 Climate-related Disclosures
- In April 2025, the International Sustainability Standards Board (ISSB) published an Exposure Draft proposing targeted amendments to IFRS S2 Climate-related Disclosures[2]. These amendments aim to ease the requirements related to the disclosure of GHG emissions, including Scope 3 emissions. The proposed changes provide relief from measuring and disclosing Scope 3 Category 15 GHG emissions associated with derivatives and specific financial activities related to investment banking (facilitated emissions) and insurance and reinsurance underwriting (insurance-associated emissions). It also offers clarification on the use of jurisdictional relief to use a measurement method other than the Greenhouse Gas Protocol.
- The Exposure Draft is open for comment for 60 days, with the comment period closing on 27 June 2025.
- In response to this, the AASB released AASB ED SR2 Amendments to Greenhouse Gas Emissions Disclosures[3],which consults on the same amendments proposed by ISSB with the comment period closing 2 June 2025 to enable AASB to respond to ISSB’s consultation.
Why is it important?
In the Financial Services Sector, Scope 3 emissions make up the largest portion of an entity's overall emissions footprint. Therefore, it is important for these entities to understand their Scope 3 emissions. In particular:
- Disclosure requirements: ASRS2 requires companies to disclose their Scope 3 emissions. The reporting requirements will be phased in over the next three years based on set criteria, including size.
- For ‘Group 1’ companies, including large Australian insurers, these disclosures come into effect for financial years commencing on or after 1 January 2025.
- For most Australian Superannuation companies, ASRS2 will take effect for reporting periods beginning from 1 July 2026
- Risk management: Scope 3 emissions impact a company’s risk profile. Understanding these emissions can help companies assess potential liabilities and climate-related risks.
- Investment decisions: Superannuation funds are increasingly considering environmental, social, and governance (ESG) factors in their investment strategies. Companies with high Scope 3 emissions may face reputational and regulatory challenges, affecting long-term viability.
- Stakeholder expectations: Investors, consumers, and regulators are demanding greater transparency in sustainability practices. Proactive management and reporting of Scope 3 emissions enhance reputation and stakeholder trust.
- Target setting: Understanding Scope 3 emissions is important for setting baseline emissions and future targets. Entities need to be able to efficiently calculate Scope 3 emissions to report against these targets.
- Influencing industry approach: Companies may consider proactively engaging with regulators, industry bodies and other companies to develop frameworks and approaches to calculate Scope 3 emissions while approaches are in the early stages of maturity.
Key challenges and considerations
Measuring and reporting Scope 3 emissions present several challenges:
- Data:
- Availability: Lack of access to reliable data from supply chains, making it difficult to accurately quantify emissions.
- Third-party data: Increasing reliance on third-party providers to obtain ESG data and information. Providers such as IBM Envizi, MSCI, and Moody’s offer data on supplier emissions and other relevant metrics.
- Complexity of value chains:
- The diverse nature of supply chains complicates the tracking of emissions across various activities and stages.
- Companies must also consider their supply chain boundary – i.e., how far up and down the supply chain needs to be included in their Scope 3 disclosure.
Methodology:
- Calculating Scope 3 emissions involves multiple data sources and capture processes. Companies must consider which of the 15 Scope 3 categories are relevant and determine the appropriate approach for each.
- There is currently no universally accepted methodology for calculating Scope 3 emissions, leading to inconsistencies in reporting and benchmarking.
- Many insurers are collaborating with industry groups and initiatives, such as the Partnership for Carbon Accounting Financials (PCAF), to develop harmonised approaches for assessing and disclosing financed emissions, although these methodologies are still in development and not available for all Scope 3 Categories. We note that there was a PCAF public consultation published in December 2024 on new guidance and methods for financial institutions measuring and reporting Category 15 emissions[5]. Consultation closed in February 2025 with output pending at the time of writing.
- Resourcing:
- Gathering and analysing the necessary data can be resource-intensive, requiring significant time.
- Calculating Scope 3 emissions requires specialised knowledge and skills, which are often scarce. Companies need to develop or acquire the technical expertise necessary to accurately measure and report these emissions.
How actuaries can help with Scope 3 emissions
In the evolving regulatory landscape, understanding a company’s Scope 3 emissions footprint is becoming increasingly important. Actuaries can leverage their expertise to support the industry in developing methodologies as well as working with organisations to measure and report on Scope 3 emissions. Some examples of where actuaries can assist include:
- Methodology development: Collaborate with environmental scientists, engineers, and other experts to contribute to standardised Scope 3 methodologies
- Data analysis and modelling: Interpret data across multiple sources (including third-parties) to model Scope 3 emissions.
- Determine calculation inputs: Develop unbiased assumptions and judgments for estimating emissions.
- Target setting and monitoring: Apply ‘Actuarial control cycle’ concepts to set, review and monitor Scope 3 emission targets.
- Risk assessment: Quantify financial implications and assess risks associated with Scope 3 emissions for better decision-making.
As industry practice in this area is still developing, actuaries assisting in climate disclosures (including the measurement of Scope 3 emissions) should be monitored for future guidance and industry practice.
References
[1] World Resources Institute & World Business Council for Sustainable Development. (2011). Corporate value chain (scope 3) accounting and reporting standard: Supplement to the GHG protocol corporate accounting and reporting standard. https://ghgprotocol.org/sites/default/files/standards/Corporate-Value-Chain-Accounting-Reporing-Standard_041613_2.pdf
[2] Australian Accounting Standards Board. (2024, September). Australian sustainability reporting standard AASB S2 climate-related disclosures. https://standards.aasb.gov.au/aasb-s2-sep-2024
[3] International Sustainability Standards Board. (2025, April 28). Exposure draft: Amendments to greenhouse gas emissions disclosures (amendments to IFRS S2). IFRS Foundation. https://www.ifrs.org/projects/work-plan/amendments-to-disclosure-of-greenhouse-gas-emissions-s2/
[4] Australian Accounting Standards Board. (2025, April 29). Proposed relief for specific GHG emissions disclosures. AASB News. https://www.aasb.gov.au/news/proposed-relief-for-specific-ghg-emissions-disclosures/
[5] Partnership for Carbon Accounting Financials. (2024, November). New guidance and methods for public consultation: For financial institutions measuring and reporting scope 3 category 15 emissions. https://carbonaccountingfinancials.com/files/2024-consultation/PartA-Methods2024-Master-01-3.pdf
