Guide to Scope 3 Emissions Reporting

Read the Full Report: Guide to Scope 3 Emissions Reporting 

 

Investors are increasingly scrutinizing ESG performance – and looking for companies to rise to the challenge.

There has been exponential growth in organizations calculating and reporting emissions from their directly owned or controlled business activities (Scopes 1 & 2).  And now there is a rising interest in the carbon we are not counting, that from all indirect impacts of an organization both upstream and downstream. These emissions occur as a consequence of business operations from sources that are not owned or controlled by that business directly – such as from the supply chain, transport to operational sites or to customers, product use, and end-of-life treatment.

Research indicates that 5.5x more emissions come from the supply chain alone, so any organization that’s serious about decarbonization should report and reduce Scope 3 emissions.

Reporting and reducing Scope 3 emissions is of most immediate relevance to organizations who report to CDP or have committed to Science Based Targets; and it has the most impact for organizations that operate in one of the eight supply chains that account for over 50% of global emissions – namely food, construction, fashion, fast-moving-consumer-goods, electronics, automotive, professional services and freight.

Scope 3 reporting provides the opportunity for companies in key industries to multiply their carbon reduction impact by decarbonizing their supply chains.

Here’s how to approach Scope 3 calculation and reporting in a systematic way.

What are Scope 3 emissions?

 

GHG emissions are divided into scopes for calculation and reporting under the GHG Protocol Corporate Standard.

Scope 1 includes all “direct” emissions from an organization, which includes company vehicles, fugitive emissions from manufacturing processes and fuel combustion onsite (such as burning gas to produce heat).

Scope 2 encompasses “indirect” emissions from the consumption of purchased electricity, heat or steam.

Scope 3 requires organizations to look for implications of carbon emissions outside of their direct physical footprint, quantifying emissions through the value chain outside of the organization’s direct control. This includes embodied emissions within resources consumed by the organization — paper used, waste produced, coffee consumed — and also the emissions of any suppliers, which are especially important to organizations that produce physical products.

Scopes 1 and 2 are the most controllable scopes for GHG accounting and reduction, and the focal point of any decarbonization journey. But for leading organizations under investor pressure and looking to expand their impact, Scope 3 emissions provide the opportunity to reach other emitters in their value chain – such as suppliers and customers – and influence them to reduce their emissions, too.

Scope 3 and Supply Chain Emissions

 

Much of the discussion on Scope 3 focuses on the supply chain, and is sometimes referred to as ‘supply chain emissions’. This is because, according to a 2020 World Economic Forum and BCG report, just eight supply chains (food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight) account for over 50% of global emissions – with a significant share indirectly controlled by only a few companies.

Furthermore, supply chain emissions account for 5.5 times more emissions on average than a company’s direct emissions. This figure is even higher in retail, hospitality, manufacturing, and food, beverage and agriculture.

This statistic is a reminder that organizations must consider climate impacts beyond the sphere of their own direct operations if they wish to make a difference.

For reporting purposes, under the guidance of the GHG Protocol, Scope 3 emissions consist of 15 categories and fall into either ‘upstream’ or ‘downstream’ emissions types.

Upstream Scope 3 Emissions 

 

1. Purchased goods and services
2. Capital goods
3. Fuel- and energy-related activities
4. Upstream transportation & distribution
5. Waste generated in operations
6. Business travel
7. Employee commuting
8. Upstream leased assets

Downstream Scope 3 Emissions

 

1. Downstream transportation & distribution
2. Processing of sold products
3. Use of sold products
4. End-of-life treatment of sold products
5. Downstream leased assets
6. Franchises
7. Investments

For example, vehicle manufacturers who produce fossil-fuel-powered cars would expect a significant portion of Scope 3 emissions to come from downstream category 11, “use of sold products”, whereas in food and beverage / FMCG manufacturing, a significant portion of emissions would come upstream from category 1, “purchased goods and services”. Within the commercial real estate sector, a real estate firm that develops buildings will have a very different Scope 3 category mix than a real estate investment trust that only invests in existing buildings.

Scope 3 reporting: the challenge and opportunity

 

Scope 3 emissions present a significant opportunity for organizations to engage their suppliers to accelerate decarbonization globally. Supply-chain measures put in place by relatively few end-consumer companies can yield a significant flow on affect by reducing emissions for numerous organizations in the supply chain.

But not without hard work. There are significant barriers that exist to report and reduce scope 3 emissions. The following challenges are most commonly cited:

• Difficulty establishing boundaries between scopes
• Difficulty capturing reliable data in a systematic and auditable way across numerous suppliers and locations
• Difficulty selecting emission factors to derive accurate calculations
• Challenges engaging with suppliers to both report and reduce emissions

Though robust and detailed processes for Scope 3 reporting are not standard practice among organizations today, we expect Scope 3 accounting to become more mature and widely adopted, following the same steep trajectory we’ve seen with Scope 1 and 2.

Any organization that’s looking to lead in decarbonization should report and reduce Scope 3 emissions. 

 

While significant in emissions impact, especially for organizations that report to CDP or have committed to a Science Based Target, the process of sourcing and accurately capturing data for Scope 3 can be a challenge. The breadth of the data types can be large, and the size and complexity should not be underestimated. There’s no escaping Scope 3 emissions – but getting a technology partner in place early in the process can simplify and streamline the process.

 

Read the Full Report: Guide to Scope 3 Emissions Reporting