How are accounting firms reporting Scope 3 emissions in 2024?

As Scope 3 emissions – indirect emissions from a company’s value chain – usually account for more than 70% of a firm’s emissions, there is increasing global recognition that they need to be included in climate disclosure frameworks.  

In the EU, for example, the Corporate Sustainability Reporting Directive (CSRD), which will mandate both Scope 3 disclosure and third-party audits for almost 50,000 companies in the bloc over the coming years, came into effect on January 1, 2024. 

While global industry turns to accounting firms to navigate this complex landscape amid rising regulations, there is also more scrutiny on the firms to maintain credibility by leading the way.  

Mark Lumsdon-Taylor, partner and head of ESG at MHA, which is an independent UK member of Baker Tilly International states, “I think that, if accounting firms are not navigating and showing the transparency of their journey from where they are today, 2024, then clients that we are tendering for and effectively trying to win business from – whether it's audit, assurance or advisory – will challenge our credibility, because we should be leading the way in what we do.” 

“I think not doing it is not doing it at your peril, but greenwashing it, which is very easy to do, shouldn't be done. You should just map out the steps because we know it's going to take us a couple of years to get it where we want it.” 

Lumsdon-Taylor adds: “The other side of it is that we should be doing the right thing. Look at the accountancy principles, number one and number two – ethics and integrity – we should be doing it.” 

In addition, as a provider of services across borders, accounting firms are also situated in the Scope 3 emissions of international clients subject to differing regulations. 

As Rachael Dagger, national ESG manager at MHA and also a trained B corp consultant, explains: “As we are in our client's supply chain, they're going to be shining the mirror back at us, and we need to be able to hold ourselves accountable.” 

As per the Science-Based Targets Initiative (SBTi), the global body for corporate emissions standards, any reporting organisation must disclose their Scope 3 emissions if they account for 40% or more of total emissions. 

The International Sustainability Standards Board’s (ISSB) new International Financial Reporting Standards specific to climate – IFRS S1 and S2 – also became active from 1 January 2024 and include Scope 3. The UK is set to implement new UK Sustainability Reporting Standards based on IFRS 1 and 2 from 2026, and the standards are also being considered for adoption by countries including India, Australia, Singapore and Japan.  

While the US Securities and Exchange Commission’s new rule leaves out Scope 3 reporting, California’s SB 253 mandates it for companies within the state, which is the world’s fifth-largest economy. Nevertheless, only 15% of companies report on Scope 3 emissions, according to Deloitte’s 2024 Sustainability Action Report. 

According to the GHG protocol on Scope 3, there are 15 distinct categories of indirect emissions distributed across a company’s upstream and downstream operations.  

Not all apply to accounting, and the Big 4 have some differences in their approach. KPMG, for example, primarily includes purchased goods and services, capital goods (both of which account for the majority of its Scope 3 emissions), fuel and energy-related activities, and business travel (Categories 1, 2,3, 6 and 7) for Scope 3. 

Dagger says: “The biggest ones for accountancy firms will be your IT services and your business travel. They are the two which are going to be the most difficult to address and calculate those Scope 3 emissions, but also the most difficult to reduce without drastically changing how we operate as businesses.” 

In FY 2023, for example, PwC UK reported total emissions of 376 tonnes of CO2 equivalent from Scope 1 and 2, direct emissions from operations and energy, respectively, while Scope 3 emissions accounted for a staggering 38,151 tonnes of CO2 equivalent, primarily attributed to business travel.  

“I think, bluntly, the bigger the firm, the more investment they're putting in,” says Lumsdon-Taylor. “I think it’s a question of resource, and it’s quite a big project. It's also aligned to regulation.” 

MHA, for example, is a Tier 2 regulated firm aligned to the Task Force for Climate-related Disclosures and is in the process of developing a Scope 3 framework to meet a goal of net zero by 2030.  

To drive ESG action, MHA has invested in an internal ESG team that isn’t client-facing. Lumsdon-Taylor says: “They're effectively an overhead, bluntly, but that overhead is generating effective change that will not only save the firm a lot of money, but it will also drive credibility.” 

Dagger, who heads the internal team, emphasises that it must be a collaborative effort and says: “It is essential that whoever's collating the data has strong relationships with IT, finance, facilities, HR, marketing, etc – all of those central operations teams who are integral to getting that data collected accurately, because you need to look out to all of those sources to find out where the Scope 3 emissions are. It is also important to engage your people, so making sure that employees are fully aware of what the firm’s net-zero journey is, what the definition of net zero is, what the end goal is – just having them be part of the conversation.” 

Dagger also highlights that the strongest position for an accounting firm to be in when working on Scope 3 emissions is to be the “voice of influence” when it comes to reduction of emissions, from acting as a trusted adviser to big clients, to working on internal ESG initiatives to echo values and create a ripple impact.

“That's embedding it into our strategy, embedding it into our due diligence, embedding into our risk assessments, our risk registers, which is something we actively do,” she says. 

MHA has been scrutinising its own supply chains, Lumsdon-Taylor says. 

“We have said goodbye to certain suppliers because they don't conform, and our expectation with the supply chain is such that they have to get on the journey,” he explains. “We've also engaged new supply, sometimes more costly than existing, but we know in the long term or the medium term, in effect, it will pay back.” 

While the Scope 3 emissions of a product’s lifecycle don’t yet apply to accounting firms, Lumsdon-Taylor points to a possibility of change. 

“That's an argument that could be part of Scope 3 as well,” he says. “So, not only do we look at our client's emissions, but also what the cost of auditing is – our services – because that's our product, right? 

“Firms don't do that at the minute. It's something that we've planned into our strategy more towards 2030 – what does the green audit look like?” 

Lumsdon-Taylor notes that there is still some uncertainty, such as in quantifying the impact of an accounting firm’s brokering of certain deals or syndication and advisory services on bank lending portfolios, for example. 

“It is a grey area currently in terms of how we should be reporting the impact we have on our clients as accountancy service providers, and how we should report that, because there is a danger of double counting,” he says.

“It is very hard to navigate the endpoint of our services, so I think it needs to be done in stages. The role of accounting firms will need to be defined clearly as regulations move forward.” 

Main image: Mark Lumsdon-Taylor, partner and head of ESG at MHA