Scope 3 and Beyond: Preparing Your Supply Chain for Mandatory Climate Disclosures

In recent years, mandatory climate disclosures have become a growing priority for businesses in Australia. As the pressure for transparency around corporate environmental impacts increases, Australian companies are being held to higher standards in reporting their carbon emissions. This includes not just direct emissions from operations, but also the Scope 3 emissions that come from the broader value chain. Scope 3 emissions, which stem from both upstream and downstream activities, often make up the majority of a company’s total carbon footprint.

For businesses in Australia, preparing for these mandatory climate disclosures requires a clear understanding of new regulatory frameworks and evolving reporting standards. Companies must also develop effective strategies for reducing emissions across their entire supply chain, with a focus on Scope 3. Working with chartered accounting firms and sustainability advisers who understand both the technical reporting requirements and the commercial implications of climate disclosure is one of the most practical steps a business can take before its first mandatory report is due. This article examines why Scope 3 emissions are critical, how to measure them accurately, and the practical steps businesses can take to ensure compliance with Australia’s emerging climate reporting laws.

 

The Significance of Scope 3 Emissions

Scope 3 emissions are the indirect greenhouse gas emissions that occur throughout a company’s value chain. These emissions result from activities such as the production of purchased goods and services, transportation, waste disposal, and even employee commuting. Unlike Scope 1 and Scope 2 emissions, which directly relate to a company’s operations and energy consumption, Scope 3 emissions are often much harder to measure and track, yet they can make up a substantial portion of an organisation’s total carbon footprint. In many cases, Scope 3 emissions can account for up to 90% of a business’s overall emissions.

For Australian companies, understanding and managing Scope 3 emissions is becoming increasingly important due to stricter climate disclosure requirements. New legislation and regulations are pushing businesses to not only measure their direct emissions but also ensure transparency in the emissions generated through their supply chains. Companies that take proactive steps to manage Scope 3 emissions will be better positioned to comply with these regulations and lead in sustainability.

 

Understanding the Challenges of Scope 3 Reporting

Tracking and reporting Scope 3 emissions presents unique challenges for Australian businesses. Unlike direct emissions, which can be measured internally, Scope 3 emissions involve indirect emissions from activities across the entire supply chain. These emissions often come from external suppliers and contractors, making data collection more complex. In many cases, businesses face difficulties in acquiring accurate data from multiple tiers of their supply chain, which can vary in terms of quality and consistency. This lack of standardisation makes reporting Scope 3 emissions a significant hurdle.

Businesses can overcome these challenges with the right tools and strategies. Implementing emissions tracking software and establishing strong relationships with suppliers are key to ensuring transparency in the supply chain. Adopting frameworks such as the GHG Protocol and aligning with Australian climate standards can provide businesses with clear guidelines for data collection and reporting. By addressing these issues head-on, Australian companies can navigate the complexities of Scope 3 emissions and ensure compliance with mandatory climate disclosure requirements. Bentleys’ dedicated ESG and carbon accounting services include registered greenhouse and energy audit capability alongside supply chain emissions work, providing the technical foundation that robust Scope 3 reporting requires.

 

The Growing Need for Transparency in Supply Chains

In today’s business environment, transparency is more important than ever. Stakeholders, including investors, customers, and regulators, are increasingly prioritising access to clear, accurate data on a company’s environmental impact. As Australia strengthens its sustainability regulations, the demand for transparency in Scope 3 emissions has become critical. These emissions, which occur across the supply chain, often account for the majority of a business’s carbon footprint, making it essential for companies to measure and disclose them accurately.

For Australian businesses, Scope 3 emissions transparency is not just about regulatory compliance. It is also an opportunity to demonstrate corporate accountability and strengthen relationships with stakeholders. By addressing emissions throughout their value chain, companies can show a genuine commitment to sustainability. This proactive approach can lead to greater market competitiveness, helping businesses stay ahead of both regulatory requirements and consumer expectations, while contributing to Australia’s broader sustainability goals and climate targets.

 

Navigating Australian Mandatory Climate Reporting

Australia’s approach to mandatory climate reporting is undergoing significant change, with the government rolling out new initiatives to enhance corporate transparency on environmental impacts. These updates align with global frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB), but are tailored to meet the needs of Australian businesses. As a result, companies are now required to disclose not only their direct emissions but also the Scope 3 emissions produced across their supply chains.

This shift in reporting requirements is crucial for Australian businesses to remain compliant with evolving climate regulations. The Australian Accounting Standards Board (AASB) is the body responsible for developing and maintaining the Australian Sustainability Reporting Standards, including AASB S2, and its website provides the authoritative technical guidance that businesses and their advisers need when preparing disclosures. Bentleys’ sustainability reporting update for June 2025 provides a current summary of where the regulatory rollout stands, including recent ASIC enforcement actions on greenwashing claims, and is worth reading before beginning your compliance assessment.

 

Key Reporting Standards to Consider

Several key reporting standards will guide Australian businesses as they prepare for mandatory climate disclosures. The GHG Protocol is one such standard that provides the framework for measuring and managing greenhouse gas emissions. It categorises emissions into three scopes, Scope 1, Scope 2, and Scope 3, allowing businesses to accurately assess their direct and indirect emissions. This protocol ensures that emissions are tracked consistently, which is essential for companies aiming for transparency in their climate reporting.

In addition to the GHG Protocol, Australian businesses must also adhere to the AASB climate standards, which align with the global push for consistent climate-related financial disclosures. These standards ensure that Australian companies are in line with international reporting practices, providing a consistent approach to climate data and emissions reporting. For businesses still getting to grips with what these standards require in practice, our article on ESG reporting requirements and why all Australian companies should understand them covers the key obligations, reporting frameworks, and business benefits of getting disclosures right from the outset.

 

The Importance of Emissions Data Collection

Accurate emissions data collection is essential for Australian businesses to comply with mandatory climate disclosures. As Australia moves toward stricter regulations around environmental transparency, particularly for Scope 3 emissions, companies must ensure they gather reliable data across their supply chains. Without this, businesses cannot accurately report their total carbon footprint or create actionable strategies for emissions reduction.

To establish an effective data collection system, Australian businesses should implement emissions tracking software, which can streamline the process of gathering and analysing emissions data. Collaborating with suppliers to obtain their emissions information is also crucial, ensuring all sources, whether upstream or downstream, are accounted for. With a comprehensive emissions data collection system in place, businesses can not only meet compliance requirements but also identify opportunities for improving sustainability practices throughout their supply chain. The National Greenhouse and Energy Reporting (NGER) scheme, administered by the Clean Energy Regulator, provides a useful starting point for understanding how Australia’s existing emissions data infrastructure operates and how NGER data flows into the new mandatory disclosure framework.

 

Decarbonising the Value Chain

Decarbonising the value chain is a vital strategy for Australian businesses aiming to reduce Scope 3 emissions. By engaging suppliers and other stakeholders, businesses can create more sustainable practices across the entire production and distribution process. This may involve encouraging the use of low-carbon materials, implementing energy-efficient technologies, and improving waste management processes. Through collaboration and support, companies can guide their suppliers toward adopting greener practices, ultimately helping to reduce emissions across multiple stages of the supply chain.

Additionally, Australian businesses can leverage incentives and regulatory frameworks to support value chain decarbonisation. With Australia’s increasing focus on environmental sustainability and the introduction of AASB climate standards, businesses are expected to take responsibility for the emissions in their supply chains. By aligning procurement strategies with decarbonisation goals and seeking out suppliers who prioritise sustainability, businesses can significantly lower their indirect carbon emissions and work towards meeting net zero targets in line with national climate goals. A broader understanding of how financial and sustainability reporting intersect in this context is available in our article on green accounting and what Australian businesses need to know about finance and sustainability.

 

Sustainable Procurement Practices

Sustainable procurement is essential for Australian businesses looking to reduce Scope 3 emissions across their supply chains. By selecting suppliers who actively work towards reducing their environmental impact, businesses can lower the carbon footprint of their products and services. This approach is particularly important in the context of Australia’s growing focus on sustainability, with companies facing stricter environmental regulations and increasing pressure to meet emissions reduction targets.

Incorporating sustainability into procurement practices involves choosing suppliers who implement emissions reduction strategies, use renewable energy, and support eco-friendly production methods. Australian businesses can also look to partners who invest in green technologies and who are committed to continuous improvement in sustainability. By prioritising these criteria, companies contribute to their broader climate goals, ensuring that their supply chains align with the growing demand for environmental accountability and compliance with Australian climate mandates.

 

Building Resilience Through Supply Chain Auditing

Auditing the supply chain for carbon intensity is a critical component for Australian businesses preparing for mandatory climate disclosures. By systematically evaluating emissions at each stage of the supply chain, from raw material extraction to product disposal, businesses can identify significant opportunities to reduce carbon footprints. This process ensures that companies have the necessary data to meet Scope 3 reporting standards, which are increasingly required under Australian climate reporting frameworks, such as the AASB climate standards and guidance from the Australian government.

Regular supply chain audits not only help businesses comply with climate disclosure preparedness but also strengthen their overall sustainability strategy. By identifying high-emission areas and working closely with suppliers to implement carbon reduction measures, companies can mitigate risks and align with Australia’s long-term sustainability goals. These audits also provide transparency, helping organisations demonstrate their commitment to corporate climate accountability and resilience in the face of evolving regulatory requirements.

 

The Role of Emissions Tracking Software

To effectively manage and report Scope 3 emissions, businesses in Australia require reliable emissions tracking software. These tools enable companies to collect data from various suppliers across their supply chains, ensuring that the emissions information gathered is accurate and consistent. In Australia, this is especially important as businesses are increasingly required to comply with local reporting standards, such as the AASB climate standards, and align their operations with the Australian government’s growing focus on climate-related financial disclosures.

Emissions tracking software not only helps with compliance but also provides businesses with valuable insights into their environmental impact. With real-time tracking, companies can identify areas where emissions can be reduced, facilitating efforts to decarbonise the supply chain. This capability is crucial for businesses working towards their sustainability goals, helping them meet emissions reduction targets and contribute to Australia’s net zero transition. The software is an essential tool for ensuring transparency and accountability in Scope 3 emissions reporting.

 

Developing a Decarbonisation Roadmap

A decarbonisation roadmap is a crucial tool for Australian businesses aiming to reduce their carbon emissions in line with sustainability goals. It serves as a comprehensive guide, detailing the steps a company will take to lower emissions across its operations and supply chain. For businesses required to report Scope 3 emissions, this roadmap provides a structured approach to understanding and reducing the indirect emissions generated throughout their value chain.

The roadmap should clearly outline specific emissions reduction targets, measurable milestones, and timelines. It also needs to identify the actions required at each stage of the supply chain, from sourcing materials to product disposal. For Australian companies, aligning the roadmap with local reporting requirements, such as the AASB climate standards, is essential. This ensures compliance with national regulations and provides a clear path for businesses to achieve their net zero goals while demonstrating their commitment to corporate climate accountability.

 

Final Thoughts …

As the Australian government strengthens climate disclosure regulations, businesses must act now to stay compliant and ahead of the curve. The growing emphasis on Scope 3 emissions makes it clear that companies can no longer ignore the environmental impacts of their supply chains. By adopting strategies like sustainable procurement, decarbonising their value chains, and implementing emissions tracking software, Australian businesses can ensure they meet regulatory expectations and make progress towards their net zero goals.

The shift to mandatory climate disclosures is not just a compliance challenge. It is also an opportunity for Australian businesses to lead in sustainability, improve their reputation, and align with global efforts to combat climate change. By taking proactive steps today, companies can position themselves to navigate the complexities of climate reporting and enhance their long-term sustainability strategies. This approach will ensure they are ready to meet the challenges and opportunities of tomorrow’s regulatory landscape.

 

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.

 

FAQs

What is the Australian Sustainability Reporting Standard (ASRS)?

The ASRS refers to the climate-related disclosure standards developed by the Australian Accounting Standards Board (AASB). The primary mandatory standard is AASB S2, which requires entities to disclose climate-related risks, opportunities, and greenhouse gas emissions. The AASB publishes technical guidance and a knowledge hub at aasb.gov.au to assist preparers working through the detail of these requirements.

When does mandatory climate reporting start in Australia?

The regime commenced on 1 January 2025. Reporting is phased into three groups: Group 1 began for financial years starting on or after 1 January 2025, while Group 2 and Group 3 follow from 1 July 2026 and 1 July 2027 respectively.

Is Scope 3 emissions reporting mandatory for Australian companies?

Yes, but there is a phase-in period. Under AASB S2, entities are granted a one-year relief, meaning Scope 3 disclosures typically become mandatory from the second year of an organisation’s reporting obligations.

Which Australian entities fall into Group 1 for climate disclosures?

Group 1 includes large entities that meet two of three criteria: consolidated revenue over $500 million, gross assets over $1 billion, or more than 500 employees. It also includes certain high-level NGER reporters.

What are Scope 3 emissions in an Australian supply chain context?

Scope 3 emissions are indirect greenhouse gas emissions that occur in a company’s value chain. This includes upstream activities like purchased goods and services, and downstream activities such as the processing or use of sold products.

How does the Corporations Act 2001 govern climate reporting?

Recent amendments to the Corporations Act 2001 mandate that in-scope entities must prepare a Sustainability Report as part of their annual financial reporting package, subject to specific director declarations.

What is the role of ASIC in climate-related financial disclosures?

The Australian Securities and Investments Commission (ASIC) is the primary regulator. They provide guidance via Regulatory Guide 280 and monitor compliance to prevent greenwashing and ensure disclosures are not misleading.

What is the “modified liability” period for Scope 3 disclosures?

To assist with the transition, a three-year modified liability regime applies. During this time, only the regulator (ASIC) can take legal action regarding certain disclosures, such as Scope 3 emissions and scenario analysis, protecting directors from private litigation.

Are small and medium-sized enterprises (SMEs) required to report?

While smaller businesses in Group 3 (over 100 employees) eventually face mandates if they have material climate risks, many SMEs will be asked for data by larger Group 1 customers who need the information for their own Scope 3 reporting.

What climate scenarios must Australian companies use for analysis?

Under Australian standards, entities must use at least two scenarios: one consistent with a 1.5°C global warming limit and another high warming scenario (often exceeding 2.5°C) to test business resilience.

How does NGER reporting interact with the new mandatory disclosures?

The National Greenhouse and Energy Reporting (NGER) scheme already requires large emitters to report Scope 1 and 2 data. The new ASRS framework builds on this by adding financial risk analysis and Scope 3 supply chain data.

What is “value chain decarbonisation”?

This is the process of reducing carbon emissions across the entire lifecycle of a product or service, moving beyond a company’s own operations to include the environmental impact of its suppliers and customers.

Do Australian climate reports need to be audited?

Yes. Assurance requirements are being phased in by the Auditing and Assurance Standards Board. Initial reports require limited assurance, moving toward full reasonable assurance for all climate disclosures for financial years commencing on or after 1 July 2030.

How can a business prepare its supply chain for Scope 3 mandates?

Preparation involves mapping the value chain, engaging with primary suppliers to collect emissions data, and implementing data management systems that can withstand external audit. Bentleys’ ESG and carbon accounting team provides registered greenhouse and energy audit services and practical guidance on building the supply chain data frameworks that Scope 3 reporting requires.

What happens if an Australian company does not comply with ASRS?

Non-compliance can lead to civil penalties under the Corporations Act. Furthermore, failing to disclose material climate risks can lead to reputational damage and higher costs of capital from institutional investors.

What is the “Sustainability Report” required by the AASB?

It is a formal document consisting of climate statements, notes to those statements, and a director’s declaration. It must be lodged with ASIC alongside the annual financial report.

Can companies use industry averages for Scope 3 reporting?

Yes, especially in the early stages. AASB S2 allows for the use of reasonable and supportable information available without undue cost or effort, which may include secondary data and industry benchmarks.

What is the difference between Scope 2 and Scope 3 emissions?

Scope 2 covers indirect emissions from purchased electricity or heat used by the business. Scope 3 covers all other indirect emissions in the value chain, such as freight, waste, and employee commuting.

Why is “materiality” important in Australian climate reporting?

Materiality determines what must be disclosed. If a climate-related risk could reasonably be expected to affect the entity’s prospects, cash flows, or cost of capital, it must be reported under AASB S2.

What is the first step for a Group 2 company to prepare?

Group 2 entities should perform a gap analysis now to compare current environmental reporting against ASRS requirements and begin identifying the data owners within their supply chain. Our overview of ESG reporting requirements and what Australian companies need to know provides a practical starting point for businesses beginning that assessment process.