An extension of Scope 3 emissions reporting in the UK? Assessing the impact of the Supreme Court's judgment in Finch v Surrey County Council

Why is the Supreme Court's ruling on Scope 3 emissions important?

Scope 3 emissions are those which result from activities within an organisation's value chain but that are not within its direct control. Governments and international bodies are increasingly alive to the benefits, costs and implications of requiring organisations to report on their Scope 3 emissions. See, for example:

• The EU's Corporate Sustainability Reporting Directive ("CSRD") obligates large and listed companies to share information on how they monitor the ESG impact of their business. Reporting on Scope 3 emissions under CSRD is currently voluntary, but it will likely be gradually phased in as a mandatory requirement.
• In October 2023, the UK Government launched a consultation paper on Scope 3 Emissions in the UK Reporting Landscape, which considered the obligations on businesses already in place under CSRD, as well as the potential implementation of IFRS S1 and S2 (the first standards published by the International Sustainability Standards Board ("ISSB") in November 2021). In May 2024, the Department for Business & Trade published a Framework and Terms of Reference for the Development of UK Sustainability Reporting Standards, which considers the implementation of the ISSB standards in the UK.

In Finch, the Supreme Court focused on emissions attributable to the oil extraction facility's value chain, rather than just the emissions attributable to the construction of the expanded facility. The approach taken seems evident of a growing focus in policy on what businesses could (and should) be accountable to report.

However, as is clear from the dissenting opinion of two Supreme Court Judges, the cost and burden on businesses of implementing Scope 3 reporting could be significant. That is not least because collecting Scope 3 emissions data requires input from stakeholders across a business's value chain; stakeholders who may be based in multiple jurisdictions, be unfamiliar with the reporting requirements, and have no resource or expertise to provide the data. There is a fine balance to be struck between the concerns of the economy and of climate, and one that should be arguably left to government rather than the judiciary.

Facts

The appeal related to an application by Horse Hill Developments Limited (the "Developer") for planning permission to retain and extend two existing oil wells and drill four new wells for the purpose of extracting hydrocarbons for commercial production. The project would be carried out over 25 years and was projected to extract 3.3 million tonnes of oil over its lifetime. Planning permission was granted by Surrey County Council (the "Council") following a review of an environmental statement produced by HHDL.

The claim was brought by The Weald Action Group on the basis that the Council had not complied with its obligations under Directive 2011/92/EU of the European Parliament (the "EIA Directive"), implemented by the Town and Country Planning (Environmental Impact Assessment) Regulations 2017 (SI 2017/571). The EIA Directive stipulates that development consent to projects likely to have significant effects on the environment should only be granted after an assessment of direct and (crucially) indirect environmental effects.

The claimant argued that the environmental statement produced by the Developer in accordance with its obligations under the EIA Directive, and relied on by the Council in granting permission, failed to consider the Scope 3 emissions resulting from combustion of the oil extracted from the project.

The Developer's justification for this omission, which was accepted by the Council, was threefold:

1. The processes by which emissions would be released from the oil (i.e. its combustion) were not part of the project;
2. Those processes were outside the Developer's control; and
3. Such processes are regulated by other, non-planning regimes which the Council could assume would operate to avoid or mitigate their potentially negative consequences.

The Supreme Court's majority decision

The majority of the Supreme Court, led by Lord Leggatt, concluded that the Scope 3 combustion emissions were indirect effects and should have been assessed in the Developer's environmental statement. The Supreme Court's reasoning hinged on the idea that, once the oil was extracted, it would initiate a causal chain that must inevitably lead to the oil being burned and releasing greenhouse gas emissions. The fact that the oil would go through intermediary processes (such as refining) did not break the causal chain.

The Supreme Court found that the Council's reasoning for allowing the environmental statement not to consider the Scope 3 emissions was legally flawed:

1. The argument that combustion emissions would be generated outside of the project's boundaries did not preclude them from being indirect effects.
2. The argument that the combustion emissions were outside the Developer's control was rejected on the basis that "if no oil is extracted, no combustion emissions will occur".
3. The argument that the Council should not concern itself with downstream effects because such effects would be dealt with by other regimes did not relieve the Developer of its duty under the EIA Directive to consider the Scope 3 combustion emissions.

The Supreme Court further held that the High Court judge had been wrong to limit the analysis of effects to effects of the "project itself" as the environmental statement required all effects of the project, no matter how remote, to be considered.

The Supreme Court's dissenting opinion

The dissenting opinion of Lord Sales, with whom Lord Richards agreed, rejected the appeal on the basis that:

1. The Council was not competent to decide on issues concerning the balance of national economic objectives against environmental goals, which in his view included the effect of combustion emissions.
2. Requiring developers and local authorities to gather information on all downstream environmental effects of a project would impose a disproportionate burden and cost. By way of example, Lord Sales noted that emissions from an oil refinery would be counted twice: once at the planning stage for the extraction facility and once at the planning stage for the refinery.
3. Under the EIA Directive, "Project" was effectively defined as the specific set of physical works. Therefore, effects should be limited to effects of those physical works (i.e. their construction and operation). On this construction of the regulations, it could never be intended that downstream emissions should be assessed in an environmental statement.

Impact of the judgment

While the judgment does not necessarily foreclose the possibility of planning permission being granted to projects with potentially significant negative indirect environmental effects, developers of fossil fuel projects will now have to consider Scope 3 emissions resulting from their projects at the planning stage. While Lord Leggatt concluded that his judgment should "not open floodgates", the Supreme Court has nonetheless demonstrated its willingness to extend the scope of regulation in favour of comprehensive (and consequently more onerous) environmental reporting. This may well set the agenda for further legal developments outside of planning law, and may also encourage developers to focus their efforts on more environmentally friendly development projects.

In a changing political landscape ahead of the general election, such a judgment will put pressure on the new government to consider its position on Scope 3 emissions reporting, and potentially new legislation. UK national policy aims to balance economic concerns against environmental concerns, yet some may say that this ruling places too great a burden on businesses regarding the assessment of their Scope 3 emissions when legislative mandatory reporting obligations are yet to catch up.