With climate disclosure mandated and companies looking to understand more about their overall exposure to climate risk, they are embarking on Scope 3 emissions reporting.
However, they are facing various challenges in measuring their Scope 3 emissions. They’re short on resources to do so, and they have to deal with a lack of accurate data and the absence of a standardised methodology.
Nonetheless, an understanding of the importance of Scope 3 emissions and the challenges in measuring those emissions is required for companies to start their journey in preparing for the net zero transition. Although Scope 3 emissions are indirect emissions, and are in fact the direct emissions of others, companies do have significant influence on these emissions and their exposure to transition risks of climate change may be greater in these indirect areas.
This post is part 1 of a series on how companies can measure their Scope 3 emissions. Follow us on LinkedIn to be notified when new posts are out, or subscribe using the form at the bottom of the post.
What are Scope 3 emissions?
According to the GHG Protocol Corporate Standard, Scope 3 emissions are all indirect emissions (not included in Scope 2) that occur in the value chain of the reporting company, including both upstream and downstream emissions.
- Scope 1 emissions are direct emissions from owned or controlled sources. This includes both stationary combustion sources such as boilers, diesel generators, and mobile combustion sources such as the petrol used in company vehicles.
- Scope 2 emissions are indirect emissions from the generation of purchased energy (i.e., electricity, heating, cooling).
- Scope 3 emissions are all other indirect emissions (not included in Scope 2) that occur in the value chain of the reporting company as a result of the company’s operations, including both upstream and downstream emissions.
In other words, Scope 3 emissions are all other indirect upstream and downstream greenhouse gas emissions that occur in the company’s value chain.
In order to quantify overall impacts on GHG emissions in a holistic sense, a company should consider all emissions sources within its value chain. For example, upstream emissions attributable to purchased supplies and services, capital goods, fuel and energy related activities, waste generated in operations, transportation and distribution activities, as well as employee commuting and business travel.
Downstream emissions could include those from processing, transportation and distribution of products sold, use and end-of-life treatment of products sold, leased assets and franchises, and investments.
Why are Scope 3 emissions important?
1. They are a huge part of most companies’ emissions
According to the CDP (formerly the Carbon Disclosure Project), Scope 3 emissions typically account for 75% of a company’s GHG emissions, and can reach close to 100% for certain industries (e.g. financial services and capital goods). For industries utilising raw materials (e.g. real estate, construction, metals and mining, agriculture commodities), Scope 3 encompasses 90-95% of a company’s value chain.
Take Apple for an example: only 1% of its emissions fall under Scope 1 and 2 given that the company relies on renewable energy for all its facilities. The remaining 99% come from its Scope 3 emissions, with the majority (71%) coming from product manufacturing alone.
Apple’s experience shows that it is insufficient for companies seeking to claim carbon neutrality or net zero to focus on its operational emissions; Scope 3 emissions must be measured and tackled as well.
2. They are a valuable risk-management tool
Mapping Scope 3 emissions allows companies to understand their emission hotspots (i.e. carbon-intensive inputs / products), and which parts of their value chain are inherently more vulnerable to risk from increasing resource prices and a changing regulatory landscape, such as carbon taxes and the tightening of efficiency standards.
With respect to climate change risks more broadly - especially transition risks of climate change - Scope 3 emissions are a critical consideration. Upstream Scope 3 emissions are exposed to policy risk while downstream Scope 3 emissions are exposed to market, technology, legal and social licence risk. In addition, the ability to access debt or equity funding in future is dependent on value chain emissions performance and a clear path to net-zero emissions across the value chain.
A robust risk management framework thus necessitates a solid understanding of your company’s value chain emissions and is critical to future business strategy.
3. They can help unlock business opportunities in a low-carbon economy
As the world transitions to a low-carbon economy and countries commit to net-zero targets, governments and investors are increasingly focusing on value chain emissions. Successful businesses that are planning to last well into the future will be focusing their efforts on forecasting risks and opportunities in this rapidly changing landscape.
Taking Scope 3 emissions into account enables companies to identify areas for business innovation and industry and supplier collaboration, leading to transformative change and providing first-mover competitive advantages to the leaders of the future.
For instance, Walmart’s Project Gigaton initiative aims to reduce or avoid 1 billion metric tons (a gigaton) of GHG emissions from product supply chains by 2030 by incentivising suppliers to access renewable energy sources and set science-based targets via creative supplier financing models and collaboration with various partners.
4. Their disclosure is being mandated
Initially a voluntary set of recommendations, the Task Force on Climate-related Financial Disclosures (TCFD) has now become part of the regulatory framework in many jurisdictions, including the European Union (EU), Singapore, Canada, Japan and South Africa. New Zealand and the United Kingdom are mandating climate risk disclosures in line with the TCFD by 2023 and 2025 respectively.
As part of the 2021 update to TCFD, it was also stated that all organisations should consider disclosing Scope 3 GHG emissions, on top of the mandated Scope 1 and 2 emissions disclosure. Where Scope 3 emissions are a material source of climate risk, they must be quantified and used to inform the calculation of financial impacts of climate change.
In a similar vein, under the US Securities and Exchange Commission (SEC)’s March 2022 climate-related rule proposal, public companies would be required to disclose their Scope 3 emissions when they are material to the organisation - or where the organisation has set a target that includes Scope 3 emissions.
Although these disclosure frameworks do refer to disclosing Scope 3 emissions where they are material - and companies themselves make the determination on whether they are material are not; given that Scope 3 emissions typically form the majority of an organisation’s value chain emissions, it would be challenging to make a robust case that they are not material.
Challenges of measuring Scope 3 emissions
Despite the clear benefits and importance of Scope 3 measurements, there are real challenges in measuring value chain emissions. Based on our years of consulting experience, recurring pain points typically include:
1. Lack of reliable, accurate and specific data
In measuring a company’s upstream purchased goods and services emissions, there are varying levels of data accuracy and specificity. In an ideal world where all companies are reporting on their Scope 1-2 and product life cycle emissions, we would be able to rely on supplier-specific, item-specific emissions to calculate a company’s upstream value chain emissions.
However, in reality, organizations often struggle to collect relevant and sufficiently granular primary data from their suppliers. This results in the adoption of secondary data, which may come from industry averages or spend-based emission factors.
While all emissions are estimates, relying on spend-based / global industry-averages instead of supplier-specific and location-specific emission factors mean that actual emissions estimates could be wildly off-base. The actual uncertainties associated with emissions data and emissions factors varies, but it would not be unusual to have uncertainties well over +/- 50% for industry average factors and +/- 100-150% for spend factors.
Uncertainties arise from trying to develop factors that cover a broad range of industries and processes, from boundary setting in life-cycle assessment and other studies or from temporal issues (i.e. emissions factors are generated at a point in time that may have been some years ago). With spend factors, because they are generated from total emissions for a sector within a country (or globally) and divided by the value of trade in that sector, the uncertainties are much higher.
The Partnership for Climate Aligned Finance (PCAF, 2020) focuses specifically on financial institutions, providing a scope 3 emissions calculation methodology for investment (category 15) emissions. It assigns different reliability scores to different types of data, as follows:
There is of course a vested interest for companies to use the most granular data available and limit the use of spend factors and other high-level averages when it comes to generating actionable insights that inform a decarbonization pathway. When using spend data for example, the only way to see a drop in these emissions is to spend fewer dollars. The more companies can engage with supply chains and actually have a flow of data informing actual (and potentially real-time) emissions intensity of upstream and downstream emissions, the better decisions can be made with respect to supplier or product substitution.
2. Lack of resources
Calculating value chain emissions often requires personnel with technical expertise in carbon measurement, formal data management plans, and established data quality processes. For most small and medium enterprises (SMEs), hiring consultants or manpower for this task presents a huge barrier to action, given competing demands and business priorities.
From our past experience and conversations with clients, we find that this could take anywhere between $70k to > $700K, depending on the size of the project. The longer and broader the supply chain, the more mammoth the task.
Companies just starting out in carbon measurement often find that data collection alone is a time-consuming and manual process, taking as much as 6-9 months for data collection, as key data owners and data sources have to be identified from within and without the organisation.
3. Lack of standardised methodology
While the GHG Protocol Scope 3 standard and calculation guidance provides some orientation for companies seeking to calculate their value chain emissions, it nonetheless leaves many practical questions unanswered.
The use of supplier-specific, hybrid, average, and spend-based methodologies all come with their own assumptions and data uncertainties, and the calculation approaches selected should be transparently disclosed to stakeholders, especially when it results in variations in emissions estimates across years.
Another point to consider: as a result of COVID-19, working remotely has become more normalised – how then should a company account for work-from-home emissions of its employees? Under the GHG Protocol Scope 3 Calculation Guidance, it is merely stated that companies may include emissions from teleworking under employee commuting, but no guidance is given for how to calculate this. While some organisations have published their own methodologies (see EcoAct, Anthesis, or Green Element), they are by no means standardised. This doesn’t just apply to emissions associated with working remotely, almost all Scope 3 categories within the GHG Protocol guidance have multiple calculation methodologies available and several options for what is considered to be acceptable. Scope 3 emissions calculations under the GHG Protocol are necessarily flexible and generally not as prescriptive as Scope 1 emissions calculations.
Wrapping Up: Starting now is necessary
The pressure on businesses to act on TCFD’s recommendations to report on their climate strategy and disclose Scope 1-3 emissions will only increase with time. Despite the challenges around Scope 3 measurement, thousands of forward-looking companies recognise the importance of such disclosure to their stakeholders. As data improves and methodologies are standardised over time, it is necessary to start early to prepare for the net zero transition we need for a liveable future.
In the next post of this series on how companies can measure their Scope 3 emissions, we walk through how companies can get started with Scope 3 measurement.
We recognise that Scope 1-3 emissions disclosure, and carbon management more broadly, is an iterative journey. Whether you are beginning the first step or well advanced in your decarbonisation journey, Unravel Carbon is keen to partner with you to identify your emissions hotspots, set credible, science-based decarbonisation targets, and identify optimal solutions for a net zero pathway. Get in touch with us.
