Corporate climate disclosure rules are under development in several jurisdictions, with California and the European Union (EU) leading the way. A controversial and unresolved matter in this area is the inclusion and measurement of Scope 3 emissions—i.e., indirect emissions from a company’s supply chain.
This blog post—the second in a set of two exploring corporate climate disclosures—compares different methodologies that have been proposed for calculating scope 3 emissions in the US and EU. For background information on recent developments in corporate climate disclosures in those jurisdictions, see the first post in the series here.
Why Scope 3 Emissions are Critical
The Greenhouse Gas Protocol (GHG Protocol) originally set the international standard for measuring and reporting corporate emissions by distinguishing among three types of emissions. Scope 1 comprises direct greenhouse gas emissions from sources that are owned or controlled by the company. Scope 2 covers indirect emissions from the generation of purchased energy consumed by the company. Scope 3 emissions are all other indirect emissions that occur in a company’s value chain. This last category includes both “upstream” emissions, for example, associated with products or services the company acquires from others and “downstream” emissions, for example, derived from the use of its products by others. For example, fossil fuel companies’ Scope 3 emissions include those resulting from the burning of the coal, oil, and/or gas they sell. For these and many other companies, Scope 3 emissions account for a large percentage of their total emissions.
Disclosure of Scope 3 emissions data is critical because it helps to measure companies’ exposure to transition risk. For example, investors can use the data to assess whether a company depends on a value chain that is highly emissions intensive, and thus may be impacted by the regulatory and market changes associated with the transition to a low-emissions economy. Excluding Scope 3 emissions data from corporate disclosures can create incentives for companies to categorize certain emissions as Scope 3 rather than 1 or 2 and thus lead to underreporting of emissions. It can also incentivize companies to outsource emissions-intensive activities rather than eliminating their reliance on them, and leave investors (and others) with an inaccurate picture of a company’s emission impacts. On this last point, certain products such as electric vehicles can produce more Scope 1 and 2 emissions during the manufacturing stage but produce less Scope 3 emissions through their life cycle. If Scope 3 emissions are excluded, companies that produce vehicles reliant on fossil fuels may appear more climate-friendly than electric vehicle companies.
Critics of including Scope 3 emissions data in corporate reports argue that it is not fair to hold a company responsible for emissions that belong to another company, which has more control over them. But both companies are either directly or indirectly responsible for the emissions and they can both take distinct and mutually reinforcing actions to reduce them. This proves especially relevant if the Scope 3 emissions of the company derive from activities in third countries with weak or non-enforceable climate rules. Investors demand and overwhelmingly support rules requiring Scope 3 emissions disclosures, and 48% of large-cap firms already disclose such emissions. Other companies are facing pressure to do the same.
International consensus is building on the inclusion of at least some categories of Scope 3 emissions in corporate reports. As initially proposed, the Securities and Exchange Commission (SEC) rule on corporate climate disclosures required companies to disclose Scope 3 emissions in certain circumstances, but that requirement was omitted from the final rule adopted in March 2024. As discussed in my previous post (here), the SEC rule now faces an uncertain future, but California has adopted its own disclosure requirements. The California regime requires reporting of Scope 3 emissions starting in 2027 for companies with an annual revenue of more than $1 billion. In the EU, the Corporate Sustainability Reporting Directive (CSRD) requires disclosure of relevant Scope 3 emissions, with reporting starting in 2025 for the largest EU companies, and being gradually implemented for other multinational corporations in the upcoming years. This is consistent with a larger shift in EU law towards considering Scope 3 emissions in environmental impact assessments.
International Sustainability Standards Board (ISSB) standards align with California and the EU by also requiring Scope 3 emissions disclosure, although they are undergoing amendments, which would clarify and ease these requirements. The global trend is thus to include Scope 3 emissions, with discussions centering on which categories of Scope 3 emissions should be reported and how such emissions should be measured.
The Need for Comparable Data
The global trend for the inclusion of Scope 3 emissions in mandatory reporting is clear. Now we require a transatlantic consensus on how to measure and disclose Scope 3 emissions so that data can be compared across jurisdictions. Consistency across jurisdiction would also help companies avoid double-filing in different formats within a fragmented regulatory landscape.
A first step in the convergence, previously proposed in the Climate Law Blog, is that less ambitious rules recognize disclosures under more stringent standards as acceptable. This reduces cost for companies and encourages greater disclosure. On September 2, the California Air Resources Board (CARB) confirmed it will allow the filing of reports that conform to the ISSB, other international standards, or reporting rules for other US entities or foreign jurisdictions, proving California’s willingness to improve international coherence.
Narrowing Down Scope 3 Disclosures through Materiality
Scope 3 is a very broad category of emissions and both soft law and nascent regulation generally prompt companies to report only “relevant” Scope 3 emissions. Corporate disclosure regulation talks about “material” emissions as a substitute for the term “relevant” emissions. Defining what is material has often proved challenging and has created a jurisdictional divergence between the EU and the US.
The EU regime is designed around the double materiality principle, which requires assessing not only how emissions financially impact the corporation, but also how corporate emissions impact people and the environment. Current amendments during the so-called Omnibus process, while watering down other climate disclosure rules, have not altered this principle and the CSRD still requires double materiality. The definition is more expansive and calls for a wider range of information than its US counterpart, which relies on single materiality. Single materiality considers emissions relevant only if they have financial repercussions for the company and its investors.
California’s Climate-Financial Related Risk Act (SB 261) includes an express materiality definition, following a single materiality criterion. However, the broader Corporate Climate Data Accountability Act (SB 253), which applies beyond the financial sector, does not have any language constraining disclosures to materiality. This could potentially mean that all Scope 3 emissions could be subject to reporting regardless of materiality. However, at a public workshop held by CARB on 29 May 2025, this idea faced significant opposition. The feedback signaled the possibility that CARB, in implementing SB 253, will develop guidance to determine which Scope 3 disclosures are material. CARB is expected to issue its proposed rulemaking in the first quarter of 2026, which would open a period of public consultation. Whether and how materiality is included is likely to be a key issue in the discussions.
Overall, divergence between the US legal term of materiality and the EU legal term of double materiality has created some legal debate and practical challenges. The vagueness of both terms is likely to create uncertainty for companies. In practice, companies might streamline their disclosure to the most stringent double materiality standard to gain efficiency and avoid legal risks of interpreting the single materiality qualifier too narrowly.
Balancing Granularity with Undue Burden for Reporting Companies
Regulators mandating Scope 3 emissions disclosures are also grappling with other issues. One relates to the level of detail required for Scope 3 disclosures. Scope 3 emissions fall into several subcategories (such as upstream transport, downstream use, and capital goods) and can be further broken down into multiple datapoints. Greater granularity means investors can understand emissions not only at the aggregated company level, but broken down by product or activity, and in the best scenarios by supplier. This level of granularity allows for development of a much more precise decarbonization strategy, but it can be challenging it achieve. Obtaining such granular data may be difficult for both the reporting company and its business partners up and down the value chain, including small and medium enterprises with little or no experience. More granularity can also make auditing more difficult and time consuming. Regulators and others have often struggled with how to balance the benefits and drawbacks of disclosing highly granular data.
Notably, Europe is revising the European Sustainability Reporting Standards (ESRS) under a new goal of simplification of corporate rules. The ESRS are essential because the CSRD relies on these standards to define the methodology for mandatory climate disclosures. In July 2025, the proposed revision of ESRS was released, which reduces the number of mandatory reporting datapoints by 57% and eliminates all voluntary datapoints. This reduction of granularity is meant to alleviate the burden for companies and promote the operability of the standards.
The revised ESRS also introduces a novel exemption for reporting when disclosure will cause the company “undue cost or effort,” which goes to the core of critiques over Scope 3 disclosures. ESRS will allow the use of estimates instead of real data for the reporting corporation’s value chain, depending on the availability and reliability of the data. ESRS will also be less strict about quantitative data (consisting of numerical and measurable values like GHG emissions in metric tons) and allow more qualitative data instead (consisting of descriptive information such as the company’s strategy for decarbonization or narrative explanations of the materiality assessment), which is meant to reduce reporting burden and cost on companies while sacrificing partially the accuracy of the disclosures. The changes should help to promote realistic and more easily enforceable rules, but also have the potential to create loopholes. The public consultation on these proposed amendments to ESRS recently closed, and the new European standards should be available by the end of 2025. The amendments to these technical standards are likely to go forward, in line with the significant cuts to the CSRD during the Omnibus process (see the previous post in this series explaining the changes, here).
Reliable Data and Assurance
Ensuring the reliability of reported Scope 3 emissions data is critical. Legislation can require distinct levels of assurance on the reporting from an auditor or other competent provider to ensure the data provided is reliable. Two options are “limited assurance”—i.e., where the auditor is simply required to verify that they are not aware of any information that makes the report significantly inaccurate—and “reasonable assurance”—where the auditor is required to issue a positive statement that the report meets predefined criteria. Limited assurance is simple and less resource-intensive, but provides fewer guarantees.
The EU, in the CSRD, has opted for limited assurance for all emissions data, including Scope 3, and indicated it would reconsider, by 2028, whether a reasonable assurance standard is feasible for auditors and companies. Recent proposed amendments, still being negotiated, are considering dispensing with the reevaluation for reasonable assurance altogether.
In California, SB 253 requires limited assurance beginning in 2026 and reasonable assurance beginning in 2030 for Scope 1 and 2 emissions. However, for Scope 3 emissions, CARB will evaluate the appropriateness of third-party assurance and require limited assurance only, beginning in 2030. Fears over the burden and technical feasibility of the reasonable assurance standard are comprehensible for Scope 3 emissions, but require companies, auditors, standard setters, and enforcing authorities to keep developing and improving best practices for reliable data.
A Complex but Needed Calculation
Corporations can no longer neglect the climate risk stemming from their value chains. The inclusion of Scope 3 emission requirements in the corporate climate disclosure rules adopted in the EU and California is further proof of their importance. However, significant uncertainties remain on how to accurately account for Scope 3 emissions, with divergences among jurisdictions. Enforcement agencies will have an opportunity to provide further details and demonstrate international cooperation through expected guidance to be released throughout 2026 and beyond.
Joint dialogue on evidence and future enforcement experiences can facilitate convergence among jurisdictions. The role of the ISSB as an intermediary between major regulators, like the EU and the US, can be key to providing consistency and reducing administrative burden for companies, while ensuring reliable and high-quality reporting.