14 May 2024

Sustainability regulations 101: A guide for freight forwarders

The landscape of global logistics is going through a seismic shift as it becomes more sustainable. In addition to consumers, governments are increasingly focused on reaching their net zero commitments. One of the key ways they’re doing this is by leveraging legislation to compel businesses to take the necessary steps to calculate and reduce their carbon emissions. This shift is putting pressure on stakeholders throughout the supply chain — including freight forwarders — to take a more active role in measuring and providing better visibility of the emissions produced from their customers’ supply chain activities. 

For many freight forwarders, there’s still a significant knowledge gap around how regulations will impact their customers and what they can do to help them meet their carbon reporting obligations. 

This guide will enable you to bridge that knowledge gap, providing you with the details you need to understand the evolving landscape of sustainability regulations. It will give you an overview of which emissions you need to measure to help shippers meet their reporting obligations, the status of relevant reporting regulations and how you can provide an added service to shippers. 

Scope 3 emissions and freight forwarders

It’s important to understand why freight forwarders need to concern themselves with shippers’ emissions. It’s all to do with the requirement for shippers to report their scope 3 emissions. Scope 3 emissions refers to indirect greenhouse gas (GHG) emissions that occur throughout a company's value chain, including the transportation of purchased goods and materials. For example, an automotive manufacturer that produces vehicles in India but then exports them to the UK might be responsible for reporting the emissions that result from the shipment of vehicles (scope 3) in addition to emissions produced in production and other processes (scope 2). 

Do freight forwarders need to report customer scope 3 emissions?

You’re probably wondering why forwarders like you should concern yourself with shippers’ carbon reporting requirements. And you’d be right to question that — freight forwarders are not legally responsible for reporting their customers’ scope 3 emissions. 

However, in the traditional forwarder-shipper relationship, shippers face a complete lack of visibility and accessibility to the shipment data that is needed to report the corresponding carbon emissions. As forwarders have unique access to this data, they’re uniquely positioned to provide shippers with visibility of their scope 3 emissions so they can meet carbon reporting regulations.

Carbon reporting presents opportunities for freight forwarders

There are major opportunities to be had in helping shippers meet carbon reporting regulations.

Carbon reporting legislation means it’s inevitable that all shippers will at some point need to report their carbon emissions — whether now or in the near future. The penalties — in the form of fines — are so high, that ensuring a high standard of reporting is essential to mitigate any risk to the business. Very much like the GDPR legislation in the EU, businesses will be taking carbon reporting requirements very seriously.

This is where there’s a unique opportunity for freight forwarders. By providing comprehensive carbon reporting as part of their service, freight forwarders will be able to solve a key pain point for shippers. The value of providing this service cannot be understated, and freight forwarders that provide carbon reporting as part of their offering will undoubtedly gain an advantage over their competitors and win more tenders in the process.

Which carbon reporting regulations will impact forwarders’ customers?

In this section, we’ll explore each of the key regulations that will impact freight forwarders’ customers. However, before diving into the specific regulations, we'll first explain the International Sustainability Standards Board’s (ISSB) IFRS S2 guidelines and how they impact carbon reporting regulations.

The ISSB IFSR S2 and its impact on carbon reporting regulations

The International Sustainability Standards Board was created at COP26 by the trustees of the International Financial Reporting Standards (IFRS) foundation with the intention of providing a “high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets.” 

In June 2023, the ISSB published its IFRS S2 guidelines that recommend governments adopt a global baseline for sustainability reporting standards, including reporting scope 3 emissions.

While meeting the ISSB IFRS S2 guidelines isn’t mandatory for governments, some of the globe's biggest markets, such as the UK, EU and Australia, have signalled their intent to create sustainability reporting legislation in line with the guidelines. The high likelihood of scope 3 emissions becoming a requirement for businesses in several regions across the globe further solidifies the need for freight forwarders to be prepared.

Read more about what the ISSB IFRS S2 guidelines mean for freight forwarders in our blog: ISSB IFRS S2: How will it impact freight forwarders?

Key carbon reporting legislation impacting freight forwarders

Understanding which regulations apply in the regions your customers operate in will be crucial to helping them avoid penalties and ensure transparency. Here's a breakdown of key regulations requiring scope 3 carbon emissions reporting for shippers.

Passed legislation:

EU Corporate Sustainability Reporting Directive (CSRD)

  • Region: EU
  • Status: Passed
  • Included scopes: 1, 2, and 3
  • Who needs to report?
    • Large companies: Over 250 employees OR €40 million revenue OR €20 million assets.
    • Listed companies: Publicly traded with 10+ employees OR €20 million+ revenue (including smaller companies).
    • Non-EU companies: Generating €150 million+ in the EU with an EU subsidiary/branch meeting size thresholds.
  • When does reporting start?:  2025 for 2024 emissions.
  • Penalty for not reporting: Failure to comply results in fines of €10 million or 5% of revenue, whichever is higher.

The EU’s CSRD is the most advanced carbon reporting regulation requiring shippers to report their scope 3 emissions. Having come into effect from January 1 2024, it sets out a comprehensive phasing in of scope 3 reporting, starting with companies that already fall under the reporting requirements of the Non-Financial Reporting Directive (NFRD). By 2027, small and medium EU businesses must start reporting, and by 2029, all non-EU businesses in scope must report their scope 1, 2 and 3 emissions.

You can find out more about CSRD and how it will impact your customers in our blog post: CSRD requirements for freight forwarders: Preparing shippers for emissions reporting.

California Climate Corporate Data Accountability Act (SB 253)

  • Region: California (USA)
  • Status: Passed 
  • Included scopes: 1, 2, and 3
  • Who needs to report?
    • Companies with over $1 billion in revenue operating within California
  • When does reporting start?:
    • Scopes 1 and 2: 2026 for 2025 emissions.
    • Scope 3: 2027 for 2026 emissions.
  • Penalty for not reporting: Fines of up to $500,000, although fines for improper scope 3 reporting won’t be enforced until 2030.

The California SB 253 was passed in October 2023 and comes into effect from 2026 onwards. Significantly, it requires companies to have their emissions calculations verified by a registry or 3rd-party auditor. The law was passed in conjunction with the Climate-Related Financial Risk Act (SB 261), which requires businesses to detail climate-related financial risks in biennial reports.

US Securities and Exchange Commission (SEC) Climate Disclosure Rule

  • Region: USA
  • Status: Passed (The validity of this legislation is currently being contested by 9 Republican-led states.)
  • Included scopes: Scopes 1 and 2. Scope 3 reporting not required at this time.
  • Who needs to report?
    • Large and medium publicly traded companies registered with the SEC with one of the folowing:
      • Revenue exceeding $1.2 billion
      • $700 million in float or registered 
      • $1 billion in debt.
  • When does reporting start?: 2027 for 2026 emissions.
  • Penalty for not reporting: While no penalties are outlined, the SEC has enforcement authority which may include fines and other sanctions.

The US SEC climate disclosure regulation was passed on March 6 2024, but was greatly scaled back compared to what had previously been proposed. Opposition from businesses during the consulting phase led to the removal of the requirement for scope 3 reporting, although it is still recommended. Without the requirement for scope 3 reporting in the US, shippers moving goods in the region are unlikely to approach their forwarders for emissions reporting unless they’re doing so on a voluntary basis. The SEC has paused its climate rule until further notice as the legality of the legislation is challenged in an appeals court.

Upcoming climate disclosure regulations:

UK Sustainability Disclosure Requirements (SDS)

  • Region: UK
  • Status: Draft
  • Included scopes: Likely to include scopes 1, 2 and 3 as the UK government has suggested it will follow ISSB advice.
  • Who will need to report?
    • It’s expected that large companies will be required to start reporting their 2025 emissions from 2026 onwards, while SMEs will be phased in during the following years.
  • When does reporting start?: Expected to be 2026 for 2025 emissions.
  • Penalty for not reporting: No penalties are outlined yet, but the UK SDS is expected to include heavy fines and potential restrictions for companies that fail to correctly report emissions.

The UK SDS will likely follow recommendations from the ISSB IFRS S2, meaning that scope 3 emissions reporting will be required. A decision on the draft proposal is expected in July 2024. The UK’s Streamlined Energy and Carbon Reporting (SECR) currently recommends scope 3 carbon reporting but doesn't make it a requirement. The UK SDS would build upon SECR, bringing it in line with the updated ISSB recommendation.

To find out more about UK SDS and how it will impact freight forwarders, read our blog post, UK SDS: An opportunity for freight forwarders.

Australian Treasury Laws Amendment Bill 2024: Climate-related financial disclosure

  • Region: Australia
  • Status: Draft
  • Included scopes: As it stands, this will include scopes 1, 2 and 3 as the Australian government has suggested it will follow ISSB advice.
  • Who will need to report?
    • Qualifications on who needs to report are split into 3 “groups”. To meet the criteria, businesses need to satisfy 2 of the 3 parameters listed below.
      • Group 1: AUD$500+ million annual revenue, 500+ employees, entities of AUD$1 billion+
      • Group 2:  AUD$200+ million in revenue annually, 250+ employees, entities of AUD$500 million+
      • Group 3:  AUD$50+ million in revenue annually, 100+ employees, entities of AUD$25 million+
  • When does reporting start?*:
    • Group 1: 2025-2026 financial year for 2024-2025 emissions
    • Group 2: 2026-2027 financial year for 2025-2026 emissions
    • Group 3: 2027-2028 financial year for 2026-2027 emissions

*Scope 3 disclosure requirements start 1 year after the initial disclosure deadline for each group. 

  • Penalty for not reporting: After the initial transitional phase when no liability cases will be brought against businesses that don’t report, the Australian Accounting Standards Board (AASB) will be able to issue fines and penalties against non-compliant businesses, although specific fines have not yet been outlined.

The Australian climate-related financial disclosure bill is yet to be passed, but the draft is very comprehensive and expected to be approved in 2024. Much like the EU CSRD and the UK SDS, it takes into account the recommendations of the ISSB IFRS S2, meaning scope 3 emissions reporting will be included.  

The outlook for climate-disclosure regulations

This is not an exhaustive list and regulations are subject to change, but it highlights just how comprehensive carbon emissions disclosure requirements will be in the very near future. Other markets such as Brazil are also introducing climate disclosure regulations which will impact a large number of businesses. We expect that once any teething problems and initial issues are ironed out, there will be a wave of climate disclosure requirements across multiple regions — what we’re seeing right now is just the tip of the iceberg.

Where will climate regulations go in the future?

Right now, governments are passing climate disclosure regulations to take stock of the environmental impact of businesses, but the next logical step will be to incentivise those businesses to make efforts to cut their emissions output and penalise those that don’t. While this is still quite far off, legislation like CBAM in the EU, which effectively places a carbon tax on high-emissions non-EU-produced goods, have already hinted at the approach some governments may take.

In this sense, the current regulations can be seen as just the first step in a series of legislation aimed at helping reach the UN’s target set in the Paris Treaty.

How can freight forwarders add carbon emissions reporting to their services?

With such extensive carbon reporting legislation coming into force, there’s no doubt that shippers will be asking freight forwarders to help them measure and report their supply chain emissions. To do this, forwarders have several options:

1. Calculate shipper carbon emissions manually

2. Build their own carbon emissions measurement platform

3. Use 3rd-party carbon reporting software

Attempting to calculate emissions manually is usually a freight forwarder's first port of call, but many we’ve spoken to say that manually calculating emissions is highly complex and time-consuming and provides inadequate results for customers. There are similar issues with building your own in-house calculator as it can be expensive and time-consuming. This option is usually reserved for large enterprise freight forwarders with vast amounts of resources and capabilities to create these software solutions from scratch.

For forwarders that have customers asking for carbon emissions measurements to meet climate-related disclosure requirements, the most economical option is to use a 3rd-party software solution. There are many solutions out there on the market that specialise in measuring shipper’s scope 3 emissions and can be integrated into your shipper portal via API with little to no developer resources. 

Carbon reporting made easy with Pledge

At Pledge, we’ve created a solution that makes it easy for forwarders to measure their shippers’ supply chain emissions. We have an API that’s designed for forwarders to easily integrate carbon reporting directly into their shipper portal, helping customers meet their carbon reporting requirements. But we also know that not all forwarders will require fully integrated carbon reporting — especially if they only have one or two customers asking for this service.

To meet this demand, we’ve also built a platform so users can drag and drop CSV or Excel files directly into the Pledge platform. The platform then auto-populates the correct fields, taking the effort out of creating carbon calculations for customers. Offering multiple methods of easily getting data into the Pledge platform is one of the ways we’re making providing value to shippers with carbon reporting services more accessible to freight forwarders.

Freyt World has joined forces with Pledge to tackle sustainability challenges within the logistics sector, via the recently launched Freyt Emissions Calculator. This partnership is motivated by the growing emphasis from consumers and governments on achieving net zero emissions. A significant strategy in this pursuit involves the encourage the freight to measure and lessen their carbon footprint, highlighting a proactive approach to environmental responsibility in the industry.