Scope 3 emissions

What Is Scope 3 Emissions?

Scope 3 emissions refer to all indirect greenhouse gas (GHG) emissions that occur in a company's value chain, both upstream and downstream, excluding those covered by Scope 2. These emissions are not directly owned or controlled by the reporting company but are a consequence of its activities. Understanding and managing Scope 3 emissions is a crucial component of modern Environmental, Social, and Governance (ESG) investing and corporate sustainability reporting. While a company may control its direct emissions, the vast majority of its overall carbon footprint often lies within its extended supply chain.

History and Origin

The concept of classifying corporate greenhouse gas emissions into distinct "scopes" originated with the Greenhouse Gas Protocol (GHG Protocol). This initiative was established in the late 1990s as a partnership between the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) to address the need for a standardized approach to GHG accounting and reporting¹⁵. The first edition of the GHG Protocol Corporate Standard, which introduced the initial framework for Scope 1 and Scope 2 emissions, was published in 2001¹⁴.

Recognizing that a significant portion of a company's environmental impact extends beyond its operational boundaries, the GHG Protocol expanded its framework. In 2011, it published the Corporate Value Chain (Scope 3) Standard. This addition provided detailed guidance for businesses to assess emissions across their entire value chain, identifying where to focus emission reduction efforts¹³. Since then, the GHG Protocol standards, including the framework for Scope 3 emissions, have become a globally recognized benchmark for corporate carbon accounting and are utilized by a wide array of companies and reporting programs worldwide¹².

Key Takeaways

• Scope 3 emissions are indirect greenhouse gas emissions that occur in a company's value chain, both upstream and downstream.
• They often represent the largest portion of a company's total carbon footprint, frequently accounting for over 70% of total emissions¹¹.
• Calculating and reporting Scope 3 emissions is complex due to reliance on data from third-party suppliers and customers.
• Despite challenges, tracking Scope 3 emissions is vital for comprehensive climate risk management and achieving net-zero emissions targets.
• Regulatory frameworks, such as those in the European Union and California, increasingly require the disclosure of Scope 3 emissions.

Interpreting Scope 3 Emissions

Interpreting Scope 3 emissions involves understanding their magnitude, sources, and implications for a company's overall environmental impact and financial risk. Unlike direct emissions from a company's operations, Scope 3 emissions are inherently more challenging to quantify due to their indirect nature and reliance on data from external entities within the supply chain management process. However, these emissions often represent the largest share of a company's total greenhouse gas output, sometimes exceeding 70% of total emissions¹⁰.

A high level of Scope 3 emissions typically indicates a significant environmental impact embedded within a company's products, services, and broader operations. For investors and stakeholders, understanding these emissions provides crucial insight into a company's true sustainability performance and its exposure to future regulatory, reputational, and operational risks associated with climate change. Companies with a robust understanding and proactive management of their Scope 3 emissions are often viewed favorably, as it demonstrates a comprehensive approach to environmental stewardship and corporate social responsibility.

Hypothetical Example

Consider a large clothing retailer, "EcoThread Apparel," that aims to assess its full carbon footprint. While EcoThread directly controls the emissions from its headquarters (Scope 1) and purchased electricity for its stores (Scope 2), a substantial portion of its environmental impact comes from its extensive value chain.

To quantify its Scope 3 emissions, EcoThread Apparel would look at categories such as:

1. Purchased goods and services: Emissions from the production of raw materials (e.g., cotton farming, polyester manufacturing) and the fabrication of garments by its suppliers. If EcoThread buys fabric from a mill, the emissions from that mill's energy consumption and manufacturing processes would fall into this category.
2. Upstream transportation and distribution: Emissions from shipping raw materials to its factories and finished goods to its distribution centers.
3. Business travel: Emissions from employees flying for meetings or to visit factories.
4. Employee commuting: Emissions from employees traveling to and from work.
5. Waste generated in operations: Emissions from the disposal and treatment of waste produced at EcoThread's offices and stores.
6. Downstream transportation and distribution: Emissions from delivering finished clothes to customers.
7. End-of-life treatment of sold products: Emissions from the disposal or recycling of garments once customers are finished with them.

By meticulously gathering data, even if estimated using emissions factor methodologies, across these categories, EcoThread Apparel can identify "hotspots" in its value chain. For instance, if the production of raw materials accounts for 60% of its total Scope 3 emissions, EcoThread can then focus its efforts on collaborating with its fabric suppliers to implement more sustainable practices, thereby reducing its overall impact and enhancing its sustainability initiatives.

Practical Applications

Scope 3 emissions analysis has several practical applications across various sectors:

• Supply Chain Optimization: Businesses use Scope 3 data to identify high-emission areas within their supply chain. This enables them to collaborate with suppliers on more sustainable practices, innovate product design, and improve operational efficiency. For example, a consumer goods company might work with packaging suppliers to reduce emissions from materials and production.
• Investment Decisions: Investors increasingly integrate Scope 3 emissions data into their due diligence and portfolio analysis. Companies demonstrating strong Scope 3 management may be viewed as less risky and more resilient in the face of evolving climate regulations and consumer preferences. This contributes to the broader field of sustainable finance.
• Regulatory Compliance and Disclosure: While the U.S. Securities and Exchange Commission (SEC) notably omitted a universal Scope 3 disclosure requirement from its recent climate rule, due to concerns about compliance costs and data reliability, other jurisdictions like the European Union and California do mandate its reporting⁹. This creates a complex regulatory landscape that companies must navigate. Robust Scope 3 data allows companies to meet these diverse disclosure obligations and manage their regulatory risk.
• Stakeholder Engagement: Reporting on Scope 3 emissions provides transparency for various stakeholder engagement groups, including customers, employees, and advocacy organizations. This transparency can enhance brand reputation and foster trust. Stakeholders, including financial institutions, are increasingly interested in a company's full climate impact to inform decisions and drive change⁸.

Limitations and Criticisms

Despite their importance, the assessment and reporting of Scope 3 emissions face significant limitations and criticisms. The primary challenge stems from the inherent complexity and reliance on data from numerous external entities that a company does not directly control. This often leads to issues with data quality and consistency, making accurate measurement difficult and resource-intensive for companies⁷. Many organizations struggle to collect granular, verifiable data from their vast and often fragmented supply chains, frequently resorting to estimations rather than precise measurements⁶.

Critics also point to the potential for "double counting" of emissions, where the Scope 3 emissions of one company might be the Scope 1 or 2 emissions of another. While accounting standards aim to mitigate this, the interconnectedness of global supply chains makes it a persistent concern. Furthermore, the lack of a universal, legally binding global standard for Scope 3 reporting, combined with varying regional requirements, can create compliance burdens and inconsistencies in disclosed data. This was a key reason why the SEC ultimately decided to exclude a mandatory Scope 3 reporting requirement from its final climate disclosure rule, citing concerns over "compliance costs, as well as the consistency and reliability of scope 3 data"⁵.

Companies also face challenges in incentivizing their suppliers to provide the necessary data or to reduce their own emissions, as there might be a lack of direct financial or regulatory pressure on these upstream entities. This can hinder a company's ability to effectively manage and reduce its overall Scope 3 emissions.

Scope 3 Emissions vs. Scope 1 and 2 Emissions

The distinction between Scope 1, Scope 2, and Scope 3 emissions is fundamental to greenhouse gas accounting:

While Scope 1 and 2 emissions represent a company's direct operational impact, Scope 3 emissions encompass the broader, often more substantial, environmental footprint embedded throughout its entire value chain. Companies often confuse these categories, particularly distinguishing between indirect emissions from purchased energy (Scope 2) and other indirect value chain emissions (Scope 3). Clear delineation helps in accurate reporting and effective risk management strategies.

FAQs

What are the 15 categories of Scope 3 emissions?

The GHG Protocol identifies 15 categories of Scope 3 emissions, divided into upstream and downstream activities. Upstream categories include purchased goods and services, capital goods, fuel- and energy-related activities (not included in Scope 1 or 2), upstream transportation and distribution, waste generated in operations, business travel, and employee commuting. Downstream categories include downstream transportation and distribution, processing of sold products, use of sold products, end-of-life treatment of sold products, leased assets (downstream), franchises, and investments.

Why are Scope 3 emissions so difficult to measure?

Scope 3 emissions are difficult to measure primarily because they involve collecting data from entities outside a company's direct control, such as suppliers, customers, and logistics providers. This often means relying on third-party data, which can vary in quality, availability, and consistency. The complexity of global supply chains, diverse data collection methods, and the sheer volume of transactions contribute to the challenge³.

Are companies required to report Scope 3 emissions?

The requirement to report Scope 3 emissions varies by jurisdiction and company type. In the United States, the SEC's final climate disclosure rule (as of March 2024) does not universally mandate Scope 3 disclosure for public companies². However, jurisdictions like the European Union (through the Corporate Sustainability Reporting Directive - CSRD) and the state of California do require Scope 3 reporting for certain companies¹. Many companies also voluntarily report Scope 3 emissions as part of their broader corporate social responsibility or ESG initiatives.

How do Scope 3 emissions relate to net-zero targets?

Achieving net-zero emissions targets typically requires companies to address their Scope 3 emissions comprehensively. Since Scope 3 often represents the largest portion of a company's carbon footprint, ignoring these emissions makes a credible net-zero claim nearly impossible. Companies aiming for net-zero must develop strategies to reduce emissions across their entire value chain, often through supplier engagement, product innovation, and circular economy initiatives.

What is the difference between upstream and downstream Scope 3 emissions?

Upstream Scope 3 emissions are indirect emissions related to the goods and services a company purchases or acquires. Examples include the extraction and production of raw materials, manufacturing of components, and transportation of goods to the reporting company. Downstream Scope 3 emissions are indirect emissions related to the goods and services a company sells. Examples include the transportation and distribution of products to customers, the use of sold products by consumers, and the end-of-life treatment of those products.