Should Scope 3 emissions reporting become mandatory? An empirical analysis of European listed companies

To effectively respond to the threats generated by global warming, collective actions are needed at the global level, which includes the responsibility of companies in the economy. For companies to be able to consider their emissions, they need guidelines in terms of measurement, reporting and disclosure. The Greenhouse Gas Protocol classifies the emissions in three categories called scopes. Scope 3 emissions, also called value chain emissions, are indirect emissions resulting from the activities of a company, but from sources that are not owned or controlled by this company. Those Scope 3 emissions represent the majority of emissions generated by an entity and are therefore necessary to correctly represent its carbon footprint. The urgent need of tackling climate change has led to increasing pressure from different stakeholders such as governments, investors and lenders, suppliers, and customers on companies to compute and disclose their greenhouse gas emissions. There is a growing attention from these actors to base their decisions according to environmental factors such as carbon emissions. However, Scope 3 emissions are the object of much controversy and discussions, mainly because of its non-mandatory dimension and its complex and ambiguous measurement. Within this context, the following research analyses the relationships between Scope 3 emissions and the two other scopes of emissions of companies belonging to the MSCI EMU index. To do so, a quantitative approach was conducted to test the independency of Scope 3 emissions. With the help of statistical models such as correlations, regressions, cluster analysis, as well as robustness checks, the results mainly demonstrate the independence of scope 3 versus scopes 1 and 2 emissions. This outcome supports the argument for mandatory scope 3 reporting for companies as it brings additional value. Regarding this mandatory dimension, attention should also be paid to the feasibility of what the Scope 3 calculation represents in the sense of not penalizing companies. Therefore, the mandatory dimension of Scope 3 emissions disclosure should be adapted to the size, sector, and structure of companies but still with a predefined uniform methodology and framework.