Corporate responsibility and carbon accountability have seen a massive uptick in discussions around Scope 3 emissions. Businesses, policymakers, and environmentalists alike are focusing on Scope 3, diving deeper into what it is and why it's vital. In this guide, we break down the concept of Scope 3 emissions, its categories, how it relates to Scope 1 and 2, and the importance for companies (regardless of their industry, size and locations in which they operate) to actively measure and reduce Scope 3 emissions.
What are Scope 3 emissions?
Scope 3 emissions, commonly referred to as ‘value chain emissions,’ encompass all indirect emissions that occur in a company's value chain, excluding those from Scope 1 and 2. These emissions arise from sources not owned or directly controlled by the reporting organisation but are related to its activities, such as business travel, employee commuting, and third-party distribution. As defined by the GHG Protocol Standard Scope 3 emissions are divided into 15 categories.
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How do Scope 3 emissions impact a company's overall carbon footprint?
Scope 3 emissions constitute the lion's share of a company's overall carbon footprint, with some assessments indicating they can account for up to 90% of the total greenhouse gas emissions (GHGs). Given their vast origins, these emissions paint a comprehensive image of a business's environmental footprint, encompassing the full spectrum of its value chain.
Recent studies have highlighted the profound impact of the supply chain on these emissions, revealing they are, on average, an astonishing 11.4 times higher than operational emissions—a figure more than double previous estimates. This increase is attributed to suppliers refining their emission accounting protocols.
In today's business climate, addressing emissions throughout the entire value chain, including Scope 3, is rapidly becoming the norm. Yet, realising this ambition necessitates robust engagement at all levels of the supply chain. The impending environmental risks in supply chains signal significant economic implications. Suppliers project these risks could culminate in a financial setback of US$1.26 trillion over the next five years. Should these costs be transferred to corporate buyers, the additional expenditure could reach approximately US$120 billion.
Complying with the GHG Protocol has been pivotal in this shift, empowering companies to both measure and influence their suppliers' climate commitments. Yet, challenges persist. While transparency rises, action, particularly in cascading environmental initiatives down the supply chain, is lacking. More companies must inspire leadership in their supplier networks, ushering in a cascade of positive environmental action—a key ingredient for a resilient and thriving global economy.
What are upstream and downstream emissions from Scope 3?
According to the GHG Protocol Corporate Value Chain Accounting and Reporting Standard, Scope 3 emissions are segmented into two main groups: upstream and downstream activities. The 15 categories of emissions under Scope 3 can be classified based on their alignment with these two groups. Understanding these categories can help businesses pinpoint where the most significant emissions occur in their value chain and tailor their mitigation strategies effectively.
Upstream emissions
Upstream emissions encompass all the greenhouse gas emissions produced before the products or raw materials arrive at the company's doorstep. This often includes emissions from the extraction of raw materials, their subsequent production and processing, and the transportation of these materials to the company.
Examples of upstream activities:
- Extraction and production: Mining activities for metals like iron or aluminium produce significant amounts of GHG emissions due to the energy-intensive processes and machinery involved.
- Agricultural activities: Growing crops like soy or cotton can generate emissions from the use of fertilisers, machinery, and land conversion.
- Transport: Shipping raw materials globally, whether by sea, air, or road, leads to emissions due to fuel combustion. For instance, transporting crude oil from extraction sites to refineries can lead to significant CO2 emissions.
Downstream emissions
Downstream emissions refer to those GHGs emitted after the company's services/product has been sold and are typically associated with the end use, disposal, and treatment of these products/services once their life cycle is complete.
Examples of downstream activities:
- Service/product usage: Consumer electronics, like smartphones, have emissions associated with their use. Charging these devices or using data centres and networks to support their functions contributes to downstream emissions.
- End-of-life treatment: Discarding products such as plastics can lead to emissions if they're not recycled or are improperly disposed of, especially if they end up in landfills where they produce methane as they decompose.
- Transport and distribution: Emissions can also be generated when products are transported from retailers to consumers. This includes, for example, the delivery trucks of e-commerce platforms transporting goods to the end customers.
In conclusion, by delineating between upstream and downstream emissions, companies can get a holistic view of their environmental footprint across the entire value chain. By focusing on high-emission areas, they can make more informed decisions on where to implement carbon reduction strategies.
What are the 15 emissions categories of Scope 3?
As established previously, the 15 categories within Scope 3 emissions encompass both upstream and downstream activities. To facilitate understanding, these categories are broken down as follows:
Upstream activities
1. Purchased goods and services relate to the extraction, production, and transportation of goods and services a company buys. In simpler terms, emissions from making and moving products and services the company acquires.
2. Capital goods relate to the extraction, production, and transportation of capital goods purchased or acquired by the reporting company in the reporting year. In other words, emissions from the creation and transport of big company purchases, like machinery.
3. Fuel and energy-related activities (not included in Scope 1 or 2) correspond to emissions from:
- Making and moving fuels used by the company.
- Producing the electricity the company buys.
- Power loss in transmitting that electricity.
4. Upstream transportation and distribution involves transportation and distribution of products among suppliers and the company. Simply put emissions from moving goods between the company and its suppliers.
5. Waste generated in operations relates to waste sent to landfills and wastewater treatments. Waste disposal emits methane (CH4) and nitrous oxide (N2O), which cause greater damage than CO2 emissions. It refers to the disposal and treatment of waste created by the company. In simpler terms, emissions arise from handling and disposing of the company's waste.
6. Business travel centres on employee travels for work using non-company vehicles (e.g. planes, trains, cars). Essentially, emissions from company-related travel, excluding company-owned modes of transport.
7. Employee commuting concerns the daily travel of employees between their homes and workplaces. Simply, emissions from staff's daily commutes.
8. Upstream leased assets refer to emissions from assets the company leases but don't count in its direct emissions. In simpler terms, emissions from using assets the company rents but doesn't own.
Downstream activities
9. Downstream transportation and distribution pertains to the movement and storage of products the reporting company sells in the reporting year. This includes the journey between the company's operations and the end consumer when not financed by the company, as well as retail and storage in vehicles and facilities that the company doesn't own or control. In simpler terms, emissions from moving and storing the company's products in places and by methods not directly owned by the company.
10. Processing of sold products refers to the transformation of the company's sold intermediate products for end-use. In other words, emissions when the company's products are processed or altered before final use.
11. The use of sold products concerns the emissions when consumers use the company's products. Simply, emissions from end-users using the company's products.
12. End-of-life treatment of sold products refers to emissions from the disposal or recycling of the company's sold products. In simpler terms, emissions are when the company's products are discarded or recycled.
13. Downstream leased assets are assets the company rents to others and their associated emissions. Essentially, emissions from assets that the company leases out.
14. Franchises refers to the operations of franchises in the reporting year, which don't fall under the direct emissions categories of Scope 1 and Scope 2. Essentially, emissions from business activities at franchised outlets that function under the company's brand but are not directly managed by the company.
15. Investments pertain to the functioning of investments in the reporting year, encompassing equity, debt investments, and project finance, which are not covered in Scope 1 or Scope 2 emissions. In simpler terms, emissions are linked to the company's financial investments in other businesses or projects.
How does Scope 3 differ from Scope 1 and 2?
Scope 1 emissions are direct emissions coming from sources owned or controlled by the company, such as burning fossil fuels or company vehicles. Scope 2 emissions are indirect and arise from the consumption of purchased electricity, steam, or other energy sources. While Scope 1 and 2 are more about the organisation's direct actions, Scope 3 revolves around the entire value chain.
Why measure Scope 3 emissions?
Scope 3 emissions, encapsulating a company's entire value chain, stand as a pivotal component of a comprehensive carbon footprint analysis. Measuring these emissions offers an expansive lens through which a company can truly fathom its environmental influence. This measurement is not just a mere nod to sustainability, it's an actionable insight into the intricate web of operations, relationships, and practices that shape a business. Here's why measuring Scope 3 emissions is integral:
1. Holistic environmental understanding: Evaluating Scope 3 emissions provides businesses with a bird's-eye view of their entire environmental impact. From the extraction of raw materials to the end-of-life disposal of products, companies can gauge the breadth and depth of their carbon footprint.
2. Identification of emission hotspots: It highlights significant emission sources, enabling businesses to pinpoint areas that need urgent attention and intervention. Whether it's in the procurement of raw materials or the distribution of final products, having this knowledge equips companies to strategise effectively.
3. Risk and opportunity assessment: By understanding their value chain emissions, businesses can foresee potential risks—be they regulatory, reputational, or operational. Conversely, they can also spot opportunities, such as the potential for innovative low-carbon products or operational efficiencies that can reduce costs.
4. Credibility and transparency in reporting: As stakeholders, including investors and consumers, increasingly demand transparency, measuring and reporting on Scope 3 emissions can bolster a company's credibility. It signals a genuine commitment to sustainability and an acknowledgement of the company's role in the larger environmental ecosystem.
5. Engaging value chain partners: Understanding Scope 3 emissions provides a framework for businesses to engage with their suppliers and partners more proactively. It can lead to collaborative efforts in GHG management and sustainability initiatives, fostering stronger, more aligned relationships.
6. Driving strategic business objectives: Beyond the evident environmental benefits, measuring Scope 3 emissions aligns with core business objectives. By identifying GHG reduction opportunities, setting targets, and tracking performance, companies can unearth potential cost savings. Public reporting, in turn, can enhance corporate reputation, furthering stakeholder trust and potentially opening doors to new business opportunities or partnerships.
In essence, the endeavour to measure Scope 3 emissions, while rooted in environmental consciousness, is deeply interwoven with a company's strategic vision, operational efficacy, and stakeholder relationships. In an increasingly eco-aware global market, this measurement is not just a nicety—it's a business necessity.
Is it mandatory to calculate and report on Scope 3 emissions?
While Scope 1 and 2 reporting are mandatory for many companies under specific regulations, Scope 3 reporting remains largely voluntary. However, as stakeholder demand for transparency increases, many organisations are choosing to report on Scope 3 emissions to provide a comprehensive carbon footprint view. Also, companies succeeding in measuring and reporting all three scopes will get a substantial competitive advantage.
How to set decarbonisation targets for Scope 3 emissions?
Supply chain emissions have become the focal point of decarbonisation strategies. Scope 3 emissions are significantly higher than direct emissions, being on average 11.4 times larger. To mitigate global emissions and accelerate the transition to a net-zero economy, businesses must aggressively decarbonise their entire supply chain.
The Science-Based Targets initiative (SBTi) offers a comprehensive framework for companies aiming to set ambitious and meaningful decarbonisation goals. Here’s a deep dive into the methodology proposed by the SBTi:
Supplier engagement targets
Supplier engagement targets serve as one of the four methods companies can use to create Scope 3 targets. Essentially, these targets stipulate the segment of a company's emissions that will be addressed by their suppliers establishing science-based emission reduction goals soon. An illustrative example is: ‘Company X commits that 85% of suppliers by spend, encompassing purchased goods and services as well as the use of sold products, will set science-based targets by FY 2024.’
To align with SBTi's criteria:
- Companies must set Scope 3 targets, encompassing supplier engagement targets or reduction goals, which cumulatively cover a minimum of 67% of their total Scope 3 emissions.
- These targets become imperative if Scope 3 emissions exceed 40% of a company's combined total of Scope 1, 2, and 3 emissions.
Engaging supply chains on the decarbonisation journey
The effort and resources required to initiate a supplier engagement program can be extensive. However, tracking progress might be relatively straightforward once these targets are set. To fulfil a supplier engagement goal, companies should actively collaborate with their suppliers to ensure their targets comply with SBTi's criteria.
This engagement process is designed to create a virtuous cycle. The more entities in the supply chain that act on climate change, the more data becomes accessible. This rich data pool facilitates the formation of precise targets and effective reduction strategies, simplifying the path for others to set similar objectives.
Selecting the right suppliers for the right target
Addressing emissions from the supply chain paves the way for robust supplier engagement. This process can significantly enhance efficiency, transparency, and resilience throughout the value chain. As stakeholders like investors, customers, and employees intensify their demand for corporate responsibility, focusing on supply chain emissions can boost credibility.
Companies are faced with the daunting task of halving emissions by 2030 and achieving net-zero before 2050. To accomplish this, proactive engagement with supply chain actors is paramount. This means nurturing a supply chain that’s not only resilient to climate impacts but is also proactive in setting science-based targets.
The SBTi guide serves as a foundational resource for businesses collaborating with their suppliers to systematically address supply chain emissions. Moreover,
Calculating Scope 3 emissions
Before embarking on the journey of setting supply chain emission reduction targets, companies must conduct a thorough Scope 3 greenhouse gas (GHG) inventory, adhering to the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard.
Value chain mapping: This entails a meticulous review of every Scope 3 category as outlined in the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard. Companies need to pinpoint all upstream and downstream activities pertinent to each category.
Scope 3 screening: This phase involves an initial estimation of emissions across all Scope 3 categories. This helps determine the most significant categories, identify the best reduction opportunities, and align them with the company’s objectives. The typical method employed for this is the Environmentally Extended Input-Output (EEIO) conversion based on procurement spend data. However, other techniques such as industry averages can also be utilised.
The GHG protocol Corporate Value Chain (Scope 3) Standard
The GHG Protocol Corporate Value Chain (Scope 3) Standard provides a standardised framework for companies to measure and report their Scope 3 emissions. It offers guidelines on data collection, calculation methodologies, and reporting practices to ensure accuracy and consistency in Scope 3 emissions reporting.
Why reduce Scope 3 emissions?
Reducing Scope 3 emissions is integral for a sustainable future. It not only contributes to a healthier environment but also:
- Enhances brand reputation and stakeholder trust
- Mitigates supply chain risks
- Opens up potential for innovation and new market opportunities
- Demonstrates corporate responsibility and commitment to sustainability
Use carbon accounting software to manage your Scope 3 emissions
Scope 3 emissions, given their expansive nature covering the entire value chain, present unique challenges to companies aiming for comprehensive carbon accountability. Traditional methods, like manual spreadsheets, can be cumbersome, error-prone, and might not adequately capture the intricacies of Scope 3 emissions data.
The transformational shift in the business landscape now revolves around digital solutions. Progressive companies are increasingly turning to specialised carbon accounting software. Such tools not only promise precise data capture but also streamline the entire process of carbon accounting. By automating data collection and analysis, these platforms negate human error and ensure consistent and reliable results.
Plan A stands out as a frontrunner in the decarbonisation field. Offering a scientific SaaS platform, it aligns with the most stringent scientific standards and methodologies, ensuring that businesses can collect data with unmatched accuracy. The platform's end-to-end solutions encompass automated CO2 emissions calculation, strategic carbon reduction planning, and audit-proof ESG reporting. With Plan A, companies can embark on a holistic sustainability journey, addressing not just Scope 1, but also the multifaceted Scope 2 & 3 emissions - thanks to their dedicated suppliers’ module, enabling users to collect and measure supplier’s data seamlessly.
Harnessing Plan A's advanced sustainability software allows businesses to gain a deeper insight into their entire emissions profile. The platform ensures that businesses can efficiently measure, mitigate, and communicate their carbon impacts across all scopes. Its end-to-end carbon analysis capabilities empower businesses to decarbonise their operations, meet ESG regulations, and transparently share their progress with stakeholders. Furthermore, Plan A's dedicated team of sustainability and carbon accounting experts guarantees a smooth and insightful journey for their clients towards a greener future.
Scope 3 emissions, while complex, offer a comprehensive lens through which to view a company's carbon footprint. By understanding, measuring, and actively working to reduce these emissions, organisations can make significant strides in their sustainability journey, promoting a healthier environment and a brighter future for all. As discussions around climate change continue, the importance of Scope 3 will only grow, making it crucial for businesses to embrace and act upon it now.