Understanding Scope 3 Emissions
Of all the emissions reporting requirements introduced under Australian Accounting Standards Board Standard S2 (AASB S2), Scope 3 is often the item that requires the most effort. It is also the one that, for most organisations, represents the largest share of their total carbon footprint. This article explains what Scope 3 emissions are, why they are required, what makes them difficult to measure, and what a practical approach to getting started looks like.
What Scope 3 Emissions Are
Greenhouse gas (GHG) emissions are categorised into three scopes under the GHG Protocol Corporate Accounting and Reporting Standard, which is the primary measurement framework referenced by AASB S2 following amendments clarified in December 2025.
Scope 1 covers direct emissions from sources owned or controlled by the organisation — fuel combustion, company vehicles and on-site industrial processes, for example. Scope 2 covers indirect emissions from the generation of purchased electricity, heat or steam. Both are relatively well-understood and comparatively straightforward to measure, as they relate to activities the organisation directly controls.
Scope 3 covers everything else. It encompasses all indirect GHG emissions that occur across an organisation’s value chain, both upstream and downstream, that are not included in Scope 2. The GHG Protocol defines 15 Scope 3 categories, spanning purchased goods and services, capital goods, fuel and energy-related activities, transportation and distribution, waste, business travel, employee commuting, leased assets, processing of sold products, use of sold products, end-of-life treatment of sold products, downstream transportation, franchises, and investments (including financed emissions for financial institutions).
For most organisations, Scope 3 represents between 70% and 90% of their total carbon footprint. For financial services firms, financed emissions (Category 15) can account for over 90% of total emissions. The scale and complexity of what Scope 3 encompasses is often what makes it both important and challenging.
When Scope 3 Reporting Is Required Under AASB S2
AASB S2 provides a one-year grace period for Scope 3 reporting for each reporting group. For Group 1 entities with calendar year-ends, Scope 3 reporting is mandatory from financial years commencing 1 January 2026. For Group 2 entities (those with consolidated revenue of A$200 million or more, gross assets of A$500 million or more, or 250 or more employees), whose first reporting period commenced 1 July 2026, Scope 3 will be mandatory from their second reporting year, most commonly from FY28.
The grace period exists in recognition of the genuine data challenge involved. It does not, however, mean that companies can defer beginning the work. Building the supplier engagement processes, data collection systems and category prioritisation required for credible Scope 3 reporting typically takes six to twelve months at a minimum. Companies that wait until the grace period expires before beginning that work will find themselves under significant pressure.
It is also worth noting that Scope 3 carries a three-year modified liability period from 1 January 2025, meaning enforcement actions during this period are limited to regulator-initiated actions only. This provides some protection against private litigation in the early years, but it does not reduce the obligation to report or the expectation of good-faith effort.
Why Scope 3 Feels Difficult
A significant barrier to Scope 3 reporting is not always data availability in isolation, it can be the absence of a clear end point. The GHG Protocol’s 15 categories open up progressively as a company works through them, and the further into the value chain a company looks, the more emissions sources become visible. The embodied carbon in office furniture is, technically, a valid Scope 3 source under Category 1 (purchased goods and services). For most companies, however, it is not material. The challenge is that without a disciplined materiality assessment conducted upfront, the exercise can feel boundless. That sense of boundlessness is itself a significant barrier to getting started, and it is one of the more underappreciated reasons why Scope 3 remains so difficult in practice.
In our experience, no company has yet achieved a complete and fully quantified Scope 3 inventory across all 15 categories. What leading reporters have done is apply a rigorous materiality lens, identify the categories that are genuinely significant to their business model and sector, and build measurement capability progressively from there. That is the appropriate approach, and it is consistent with what AASB S2 requires.
The GHG Protocol and AASB S2 both accommodate a tiered approach to measurement. Where primary data from specific suppliers or activities is not available, companies can use secondary data approaches including industry average emission factors, spend-based estimation methods, or hybrid approaches that combine primary data for the most material categories with average data for the rest. These methods carry greater uncertainty than primary data, but they are broadly accepted as a starting point and are expected to improve over time as data infrastructure matures.
The Supply Chain Dimension
The most material Scope 3 categories for most organisations involve their supply chains, which means that meaningful Scope 3 reporting ultimately requires supplier engagement. This is where the practical difficulty becomes most obvious.
Suppliers vary enormously in their own reporting maturity. Larger suppliers may already be measuring and disclosing their emissions as part of their own AASB S2 obligations or voluntary frameworks. Smaller suppliers often have no emissions data to provide at all, which means the requesting company must fall back on estimation methods. The accuracy of the resulting Scope 3 figure depends directly on the quality of data that can be gathered across the supply chain.
There is also a commercial relationship dimension that is worth acknowledging directly. A company asking a long-standing supplier for emissions data, health and safety records and modern slavery compliance information simultaneously is placing a significant administrative burden on that supplier, particularly when that supplier is a small business. The flow of compliance obligations down supply chains from large reporting entities to smaller, non-reporting companies is a growing pressure. It connects directly to the policy tension discussed in our earlier article on reporting thresholds, right at the same moment that the government is proposing to exempt smaller companies from mandatory sustainability reporting, the supply chain demands of larger reporting entities are creating an informal compliance pressure that may be just as burdensome. Framing these requests thoughtfully, providing guidance and reasonable timelines, and being selective about what is actually needed for materiality purposes is both good practice and good supplier relationship management.
A Practical Starting Point
For organisations beginning their Scope 3 journey now, the most important first step is a materiality assessment across the 15 categories. This involves estimating, even roughly, where the largest emissions are likely to sit based on the nature of the business, its sector, its supply chain structure and its revenue streams. For a retailer, purchased goods and services (Category 1) and use of sold products (Category 11) are likely to dominate. For a financial institution, financed emissions (Category 15) will almost certainly be the most significant category by a considerable margin. For a professional services firm, business travel (Category 6) and employee commuting (Category 7) may be the priority.
Once the material categories are identified, a phased approach to data collection is appropriate. Begin with the highest-priority categories and the largest suppliers within those categories. Use primary data where it is available and estimation methods where it is not, documenting the methodology and assumptions clearly. Build supplier engagement into procurement processes rather than treating it as a separate compliance exercise.
The GHG Protocol’s Technical Guidance for Calculating Scope 3 Emissions provides detailed category-by-category guidance and is freely available. The Science Based Targets initiative (SBTi) provides sector-specific guidance on which Scope 3 categories are most relevant for different industries, which can also help with prioritisation.
Our View
Scope 3 is the part of the emissions picture that most directly reflects a company’s broader impact on the world and not just what happens within its own walls, but what its purchasing decisions, investment choices and products enable across the entire value chain.
A reason it feels so difficult is partly technical and partly psychological. The technical challenge of data collection across a complex supply chain is real. But the psychological challenge of an exercise with no obvious end point is equally significant. A materiality-first approach can help solve that problem. Starting with the question of which categories are genuinely significant to your business, rather than attempting to measure everything at once, makes the exercise manageable.
Over time, Scope 3 reporting is likely to reshape procurement decisions in ways that go beyond compliance. Companies that can demonstrate low-emissions supply chains will become preferred suppliers to organisations with mandatory reporting obligations. That commercial dynamic is the mechanism most likely to drive genuine supply chain decarbonisation over the medium term. For companies starting this work now, the investment in building Scope 3 data capability is not only a compliance requirement. It is an increasingly important part of how they will be evaluated as a business partner.
Sources
- Australian Accounting Standards Board (AASB), AASB S2 Climate-related Disclosures, September 2024, aasb.gov.au
- GHG Protocol, Corporate Value Chain (Scope 3) Accounting and Reporting Standard, ghgprotocol.org
- GHG Protocol, Technical Guidance for Calculating Scope 3 Emissions, ghgprotocol.org
- Clean Energy Regulator (CER), National Greenhouse and Energy Reporting (NGER) scheme, cleanenergyregulator.gov.au
- ASIC, Regulatory Guide 280 Sustainability Reporting, March 2025, asic.gov.au
- PwC Australia, AASB S2 Unpacked: How Did Australia’s Group 1 Climate Reporting Fare?, March 2026, pwc.com.au
- Anthesis Group, ASRS and AASB S2, updated 2026, anthesisgroup.com
- Eco-shaper, AASB S2 Group 2: Are You in Scope for 2026?, May 2026, eco-shaper.com
- Science Based Targets initiative (SBTi), Corporate Net-Zero Standard and sector guidance, sciencebasedtargets.org
Anabranch ESG Advisory provides independent advice on ESG strategy, climate disclosure, and sustainability reporting. The information in this article is general in nature and does not constitute legal or financial advice.
