Is reporting Scope 3 emissions about to become mandatory for corporate real estate?
The world’s financial markets are moving to force companies to report on Scope 3 emissions.
Cloaked in confusing acronyms and complex organisations it is moving under the radar but don’t underestimate its significance.
The situation now
According to the UK Green Building Council (UKGBC), Scope 3 emissions can amount to 85% of a commercial real estate company’s total carbon footprint.
Reporting Scope 3 in the UK is currently voluntary but is regarded as best practice among some disclosure frameworks.
In contrast, reporting Scope 1 and 2 emissions is mandatory for larger companies under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022. Those with a turnover exceeding £500m and 500 employees must report emissions in line with the Task Force on Climate-related Financial Disclosures (TCFD). Non-compliance can result in fines up to £50,000.
What is changing?
This is where it gets complicated.
The TCFD is a framework created by the Financial Stability Board (FSB) to help companies disclose and assess climate-related risks and opportunities. The FSB’s members are the G20 countries and their associated financial institutions.
The FSB is replacing the TCFD at the end of this year and climate-related disclosures for companies will instead be overseen by the International Sustainability Standards Board (ISSB).
Two new standards have been created for this purpose - IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures.
Crucially, IFRS S2 mandates the collation and reporting of Scope 3 data.
The ISSB advises that these standards are not just another ESG benchmark but “sustainability translated into an accounting language” and are required to build more resilient economics.
The UK’s response
It is up to each G20 country to endorse FSB mandates. The UK government is currently consulting on the creation of UK Sustainability Disclosure Standards (SDS) through two committees. A decision will be made by July 2024, but the indicators are that it will adopt both international standards without amendments.
The Department for Business and Trade has said they will “only divert from the global baseline if absolutely necessary”. The ‘big four’ accountancy practices of Deloitte, EY, KPMG and PwC, in their submissions, have also pushed for full adoption of the standards.
Additionally, both the Conservatives, in the government’s 2023 Green Finance Strategy, and Labour, in its Green Prosperity Plan, have outlined visions to make the UK the global sustainable finance centre of the world. It’s difficult to see how that could be done without adhering to international reporting standards.
Other drivers
Mandatory reporting of Scope 3 emissions is already in place in Europe under the EU Corporate Sustainability Reporting Directive (CSRD). Large EU companies (including EU subsidiaries of a UK parent) have to report their emissions in 2025 for the 2024 financial year in line with the European Sustainability Reporting Standards .
Smaller, non-EU companies will become subject to CSRD from 2028 if the net turnover generated in the EU exceeds EUR 150 million and they have a subsidiary/office in the EU generating EUR 40 million in revenues.
The implications in the real estate sector will be wider than this though. Smaller companies are already finding that to remain within certain supply chains or tender for new work, larger clients are imposing Scope 3 reporting requirements upon them.
It is also highly likely that mandatory reporting requirements will, over the coming years, apply to smaller companies as it is this data which will help countries evidence their move to net zero by 2050.
The impact on the UKs corporate real estate market
The net effect will be an increased need for good quality ESG data and an increased demand for grade A accredited space, of which there is already a serious undersupply. We can also expect to see more litigation over who should pay for the works needed to lower the carbon impact of a building.
To avoid this landlords and tenants should start redefining their relationship from adversarial parties protecting distinct interests to collaborators.
Only by working together can emissions be reported accurately and moves to drive them down implemented cost-effectively.
However, this will require amending leases, and associated documentation. The focus needs to shift from data sharing to collaboration in terms of planning and costing of works.
About the authors
Andrew Cooper is a Founding Director of PropTech company EDGE APM and Director of EVORA EDGE, an engineering and sustainability consultancy. Keith Davidson is an Environment Partner and Will Scott is Real Estate Partner with law firm Irwin Mitchell.
This article first appeared in EG.
