FTSE 100: Scope 3 Disclosure

This article is part of our ongoing series examining FTSE 100 companies’ ESG disclosures, leveraging Root’s advanced LLM frameworks. This week, we have focused on Scope 3 reporting, the most challenging aspects of greenhouse gas (GHG) disclosures.

Introduction to Scope 3

Scope 3 emissions refer to indirect emissions that occur across a company’s value chain, both upstream and downstream. These emissions are categorised into 15 distinct categories, encompassing activities such as purchased goods and services, employee commuting, transportation and distribution, and end-of-life treatment of sold products. Unlike Scope 1 and Scope 2 emissions, which are directly under a company’s control or purchased by it, Scope 3 emissions are significantly harder to calculate, as they rely heavily on data from suppliers, customers, and other third parties.

As shown in the graphic above of the GHG Protocol breakdown, Scope 3 emissions cover a vast array of activities beyond a company’s immediate operations. This complexity makes Scope 3 the most challenging area of GHG accounting, requiring robust data collection and modelling approaches to ensure accuracy. Despite these challenges, Scope 3 reporting is essential for a comprehensive understanding of a company’s environmental impact, given that these emissions often constitute the majority of a business's carbon footprint.

Scope 3 Disclosure FTSE 100 Analysis

Root’s analysis of Scope 3 disclosures in the FTSE 100 highlights both progress and areas for improvement.

The majority of companies report some level of Scope 3 emissions, with many also setting reduction targets. Notably, some companies have already reported reductions in at least part of their Scope 3 emissions since the last reporting year, indicating that efforts to address these indirect emissions are underway.

However, this progress is tempered by a lack of third-party verification, as illustrated by the accompanying graphic. Only 48 FTSE 100 companies currently subject their Scope 3 emissions to external verification, raising questions about the transparency and accuracy of these figures. Without independent verification, there may be inconsistencies or inaccuracies in reported data, impacting stakeholders’ confidence in the disclosures.

Scope 3 Category Breakdowns

Root's analysis of the specific Scope 3 categories reported by FTSE 100 companies reveals interesting patterns.

As shown in the above graphic, Category 3 (fuel- and energy-related activities not included in Scope 1 or Scope 2) is one of the most commonly disclosed categories, partly due to its inclusion in the UK’s SECR reporting requirements. This category is closely tied to a company’s own operations and is more straightforward to calculate compared to other Scope 3 categories.

Category 1 (purchased goods and services) is another highly reported category and an area of growing interest, given its connection to supplier engagement. Companies are increasingly recognising the importance of working with suppliers to reduce emissions throughout the supply chain, a trend that is reflected in the uptake of Category 1 reporting. In Root's broader ESG analytical framework we track the supplier engagement strategies being implemented across 1,000s of companies.

Employee-related categories, such as Category 6 (business travel) and Category 7 (employee commuting), are also noteworthy. Engaging with the workforce on emissions reduction initiatives not only enhances Scope 3 reporting but also strengthens a company’s overall sustainability strategy. Encouraging sustainable commuting options or reducing business travel can have a tangible impact on a company’s emissions profile.

Category 11 (use of sold products) holds particular significance for traditional high emitters, including fossil fuel companies, as it captures emissions from the end-use of their products. Reporting on this category provides valuable insights for stakeholders, particularly in industries where product-related emissions constitute a significant portion of a company’s environmental impact.

What This Means for Stewardship

The current state of Scope 3 reporting within the FTSE 100 provides a foundation for investor engagement, but there are clear areas for improvement. Investors should advocate for more robust verification processes to enhance the credibility of Scope 3 data. Consistent and rigorous methodologies will help ensure that reduction targets are not only ambitious but also achievable.

While FTSE 100 companies have made strides in Scope 3 reporting, gaps remain, particularly in newer regulatory environments like the EU and USA. Investors can play a key role in promoting a standardised approach to Scope 3 disclosures, pushing for more comprehensive and accurate data across global markets.

Root’s tools can support stewardship teams by offering data-driven insights that pinpoint disclosure gaps, benchmark companies against leading frameworks, and identify areas for engagement. Using advanced LLM frameworks, Root enables teams to assess the quality and completeness of Scope 3 reporting, evaluate verification practices, and track progress against climate targets. These insights equip investors to advocate for higher standards in ESG reporting, ensuring companies are transparent, accountable, and aligned with climate commitments.

Disclaimer: The data content is generated using Generative AI and Large Language Models (LLMs), which may introduce inaccuracies. Our FTSE 100 series analysis focuses solely on the annual reports of these companies. It is important to note that some companies may publish additional information on their ESG disclosures and strategies in other reports not covered in this analysis. Therefore, this analysis should not be considered a comprehensive or definitive source of information.