The Risk of Underestimating or Overestimating Scope 3 Emissions

At the start of this year (2025), Australia’s mandatory ESG reporting kicked off through the ASSA 5000 standards, starting with the largest companies first. But eventually, most businesses will be pulled along into carbon accounting. Not just because of the regulation but because your customers will need your carbon data for their own reports.

Your report will becomes their scope 3. Everyone’s reporting chain is linked and many large firms are already doing a dry run this year to get ahead.

Among all of the requirements, Scope 3 is by far the messiest, see What is Scope 3 and why business should care. And for many Australian companies new to this kind of reporting, mistakes will happen — not out of carelessness but because the process is complicated, unfamiliar, and very data-heavy.

In practice, most companies will end up either underestimating or overestimating their emissions. While it may seem “safe” on the surface, they come with very different incentives, risks, and long-term effects. Let’s have a look.

What's happening?

The new reporting rules under ASSA 5000 are rolling out in phases, starting with larger corporations and gradually extending to mid-sized businesses. You can check if your company is in scope using [this calculator].

Even if you’re not formally required to report yet, your larger customers probably already are. And soon enough, they’ll ask for your numbers to plug into their Scope 3.

Climate reports already carry a lot of uncertainty and especially so with Scope 3, which covers emissions outside your direct control: suppliers, business travel, even how your products are used. [See all Scope 3 categories here.]

For SMEs, this is where it gets tricky:

• You might not have the data
• You’re not in control of your supply chain
• You probably don’t have a sustainability team
• And you're unlikely to hire a life cycle analyst just to track freight emissions

So, most companies turn to broad assumptions, default databases, or industry averages. It’s not exactly wrong but it introduces a trade-off between accuracy, defensibility, credibility, and effort.

The Trade-Off

Once it’s time to actually report, most businesses will either underestimate or overestimate their Scope 3 emissions. Not because they’re trying to game the system — but because the data’s messy, and the methods vary. The choice often comes down to how much information you have, who’s watching, and what you're optimizing for: cost, credibility, or compliance.

Each direction has its own trade-offs.

Underestimate

• Attractive
  A lower carbon number can look great on paper, especially to customers or stakeholders. It signals you're "clean" — even if it’s not the full picture.

• Risky
  If challenged by auditors, partners, or the public, underreporting can damage trust and force expensive corrections.

• Short-term
  It helps win business or meet targets now, but makes future reductions harder to prove — or even hit.

Overestimate

• Safe
  Using conservative defaults or industry averages is easy to justify — it's often seen as more defensible under scrutiny.

• Costly
  You may end up paying more for carbon offsets or internal reduction plans than necessary.

• Flexible
  Starting high gives you more room to show improvement next year, especially if you invest in better data or systems.

So What Should SMEs Do?

It really depends on why you're doing this in the first place.
For customers? PR? Regulator? Investor pressure?
That goal should shape how you approach the numbers — and whether you're more likely underestimating or overestimating right now.

Everyone gets it wrong the first time. That’s why I recommend doing a dry run before your first formal report. Just go through the process, even roughly, so you know where the gaps are.

Then for your next report, focus on the biggest factor — where most of your emissions likely are — and start improving data quality there. Not everything at once. Just one step better than last time.

Closing Thought

This stuff isn’t black and white. It’s trade-offs all the way down.

What matters isn’t being perfect — it’s knowing which corner you’re cutting and why.
Because sooner or later, someone will ask. Might as well be ready.