Supply Chain Reporting: Scope 3 and Value Chain Disclosure in Australia

For most Australian organisations, supply chain and value chain emissions and impacts represent the most material sustainability challenges. Under AASB S2 reporting requirements, Scope 3 (indirect, value chain) emissions must be disclosed where material. This guide explains Scope 3 emissions, value chain disclosure, supplier engagement approaches, and how to manage reporting challenges.

For comprehensive ESG strategy context, see our complete ESG guide for Australian businesses.

Understanding Scope 3 Emissions

Definition and Scope

Scope 3 emissions are all indirect emissions in an organisation’s value chain not included in Scope 1 or 2. The GHG Protocol, which is the basis for AASB S2 emissions standards, categorises Scope 3 into 15 categories:

Upstream Scope 3 (value chain before the organisation)

• Category 1—Purchased Goods and Services: Emissions from extraction, production, and transport of goods and services the organisation purchases
• Category 2—Capital Goods: Emissions from production of capital equipment purchased
• Category 3—Fuel and Energy-Related Activities: Emissions from extraction and production of fuels and energy purchased (but not the energy itself, which is Scope 2)
• Category 4—Upstream Transportation and Distribution: Emissions from transport of purchased products before the organisation receives them
• Category 5—Waste Disposed in Operations: Emissions from waste generated at the organisation’s facilities and sent for disposal (landfill, incineration, etc.)
• Category 6—Business Travel: Emissions from travel by employees on behalf of the organisation
• Category 7—Employee Commuting: Emissions from employee commuting to and from work
• Category 8—Upstream Leased Assets: Emissions from operations of leased facilities (landlord responsibility)

Downstream Scope 3 (value chain after the organisation)

• Category 9—Downstream Transportation and Distribution: Emissions from transport of sold products from the organisation’s facility to customer
• Category 10—Processing of Sold Products: Emissions from processing of sold intermediate products by customers
• Category 11—Use of Sold Products: Emissions from end-user use of sold products (often the most significant for consumer goods companies)
• Category 12—End-of-Life Treatment of Sold Products: Emissions from disposal or recycling of sold products
• Category 13—Downstream Leased Assets: Emissions from use of leased-out assets
• Category 14—Franchises: Emissions from franchise operations
• Category 15—Investments: Emissions from organisations in which the parent has invested

Materiality of Scope 3

For many organisations, Scope 3 is the most material emissions category. However, significance varies by industry:

• High Scope 3: Manufacturing/consumer goods (Category 11—product use often dominates), logistics, consulting services (business travel)
• Moderate Scope 3: Retail, financial services, technology (focus on purchased goods, capital goods, business travel)
• Lower Scope 3: Heavy industrial, mining, utilities (Scope 1 & 2 often dominate, though supplier emissions matter)

AASB S2 requires Scope 3 disclosure where material. Materiality assessment should consider the absolute and relative magnitude of Scope 3 to the organisation’s total emissions.

Scope 3 Measurement Approaches

Supplier-Provided Data

Best practice: Request emissions data directly from major suppliers and customers.

Approach:

• Identify top 20% of suppliers by spending or impact (Pareto principle)
• Request Scope 1 & 2 emissions data (and Scope 3 if applicable to supplier’s business)
• Provide guidance on calculation methodology (GHG Protocol Scope 1/2)
• Set deadlines and follow up if data not provided

Advantages: Most accurate emissions data, builds supplier engagement on climate

Disadvantages: Low response rates (particularly first request), limited supplier climate maturity, time-consuming

Spend-Based Calculation

Method: Apply industry-average emission intensity factors to supplier spending.

Formula: Supplier spending ($) × Emission intensity factor (tCO₂e per $) = Scope 3 emissions

Sources of emission intensity factors:

• EEIO (Economic Input-Output) databases—provide emission factors for broad product categories
• Supplier databases (e.g., Carbon Trust, Ecoinvent)
• Industry associations or research organisations

Advantages: Comprehensive coverage (all suppliers), reasonably quick to calculate, uses actual spending data

Disadvantages: Less accurate than actual supplier data, industry averages may not match specific supplier performance

Hybrid Approach

Best practice: Combine approaches for coverage and accuracy.

• Obtain actual data from top 20% of suppliers by spending (represents 80% of emissions)
• Use spend-based calculation for remaining suppliers
• Gradually increase actual data coverage over time

Activity-Based Calculation

Method: Use activity data (e.g., tonnes of product purchased, distance transported) multiplied by emission factors.

Example: Tonnes of plastic purchased × emission factor for plastic production = Scope 3 emissions from purchased goods

Advantages: More accurate than spend-based for commodities, transparent methodology

Disadvantages: Requires detailed activity data not always available

Scope 3 Materiality and Disclosure

Determining Materiality

Scope 3 is material if:

• Scope 3 emissions exceed 10% of total (Scope 1 + 2 + 3) emissions
• Scope 3 in specific category is large relative to the organisation’s business model (e.g., product use emissions for consumer goods)
• Stakeholders or investors specifically request Scope 3 disclosure
• Scope 3 risks are significant (supplier emissions affecting price, regulatory risk, reputational risk)

Required Disclosure Under AASB S2

Where Scope 3 is material, AASB S2 requires:

• Quantification of Scope 3 emissions (in tCO₂e)
• Description of methodology used (supplier data, spend-based, activity-based, assumptions)
• Identification of which Scope 3 categories are included
• Explanation of which categories are excluded and why (if immaterial)
• Progress toward Scope 3 targets (if targets set)

Transparency on Limitations

AASB S1 allows qualitative disclosure where quantitative data limited. If Scope 3 data is estimated or incomplete:

• Disclose estimation methodology and assumptions
• Quantify impact of assumptions (e.g., “using average EEIO factors introduces estimated ±20% uncertainty”)
• Explain efforts to improve data (e.g., “engaging top 20 suppliers to provide actual emissions data”)
• Commit to data improvement over time (e.g., “Target: obtain actual emissions from 50% of suppliers by 2026”)

Supplier Engagement for ESG Disclosure

Comprehensive Supply Chain Engagement

Beyond emissions, AASB S1 and GRI require disclosure of supply chain ESG practices:

• Labour practices: Wages, working conditions, forced labour, child labour
• Health and safety: Workplace incident rates, safety practices
• Environmental: Water, waste, biodiversity impacts
• Governance: Ethics, anti-corruption, compliance

Supplier Engagement Strategy

Step 1: Identify material suppliers

• Map supply chain by category (raw materials, components, services)
• Prioritise by spending, risk, or strategic importance

Step 2: Set expectations

• Communicate ESG expectations in supplier code of conduct
• Include ESG criteria in RFQ/procurement process
• Make ESG compliance a contract requirement

Step 3: Collect data

• Include ESG questionnaire in onboarding or periodic surveys
• Request certifications (ISO 14001, SA8000, B Corp, etc.) as evidence
• Conduct audits of high-risk suppliers

Step 4: Monitor and improve

• Track supplier ESG performance over time
• Provide feedback and improvement support
• De-list or reduce business with non-compliant suppliers

Scope 3 and Supply Chain Reporting Challenges

Challenge: Limited Supplier Data

Problem: Many suppliers, particularly small-to-medium enterprises, don’t measure emissions or ESG performance.

Solution:

• Start with top suppliers; build data gradually
• Provide guidance to help suppliers measure and report
• Use reasonable estimates (spend-based, activity-based) while working to improve
• Set targets for supplier data improvement

Challenge: Scope 3 Variability and Assumptions

Problem: Scope 3 estimates rely on industry averages or assumptions, reducing accuracy year-to-year comparability.

Solution:

• Document assumptions and methodologies thoroughly
• Use consistent assumptions year-to-year to enable comparison
• Quantify impact of major assumptions on reported emissions
• When methodology changes, restate prior-year comparatives to maintain consistency

Challenge: Scope 3 Boundary Decisions

Problem: Complex supply chains make it unclear what should be included in Scope 3.

Solution:

• Document organisational boundary (which subsidiaries, operations are included)
• Identify and document which Scope 3 categories are applicable and included
• For excluded categories, explain why (not applicable, immaterial, etc.)

Frequently Asked Questions

Is Scope 3 mandatory under AASB S2?

AASB S2 requires Scope 3 disclosure where material. Organisations must assess materiality and disclose. If Scope 3 is immaterial to the organisation, disclose that assessment and explain why it’s not material.

What if we can’t measure Scope 3 accurately?

Use reasonable estimation methods (spend-based, activity-based) and clearly disclose methodology, assumptions, and limitations. AASB S1 allows qualitative disclosure where quantitative data unavailable. Plan to improve data collection over time.

How do we persuade suppliers to provide emissions data?

Frame as partnership—show how suppliers benefit from emissions management (cost reduction, competitive advantage). Provide data collection guidance. Start with large suppliers where business incentive is strongest. Gradually work down to smaller suppliers.

Should we disclose all 15 Scope 3 categories?

No. Disclose material categories. For a manufacturing company, purchased goods, capital goods, and product use might be material; employee commuting or franchises might not be. Tailor to your business model.

Can we combine Scope 3 categories in our report?

Yes, for reporting clarity. Group related categories (e.g., all upstream categories together). However, document which categories are included in each group for transparency and future assurance.

Moving Forward with Scope 3 Reporting

Scope 3 emissions and supply chain ESG disclosure represent significant but manageable challenges for Australian organisations. Starting with available data, using reasonable estimates, and progressively improving supplier engagement creates a sustainable reporting approach. Transparency about limitations builds credibility; commitment to improvement demonstrates genuine climate ambition.

Ready to develop your Scope 3 and supply chain disclosure strategy? Book a Free ESG Strategy Session to map your value chain and plan supplier engagement and data collection.