Understanding Scope 3 Emissions: Why Comprehensive Accounting Matters

What are Scope 3 Emissions?

The concepts of Scope 1, Scope 2, and Scope 3 emissions were first introduced by the Greenhouse Gas Protocol (GHG Protocol) in 1998, in partnership with the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). By monitoring the three scopes of carbon emissions, companies can develop an effective corporate climate strategy to reduce their carbon footprint. 

However, most companies only account for Scope 1 and Scope 2 emissions. In fact, only 15% of companies report on their Scope 3 emissions.

It’s because the broad definition makes Scope 3 emissions often several times more complicated to track compared to the combined Scope 1 and Scope 2 emissions. The detailed calculation methodology can be traced back to the GHG Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard.

Scope 3 measures indirect greenhouse gas emissions and covers a wide range of activities, with a total of 15 categories:

Scope 3 Emissions in Supply Chain

Although Scope 3 involves 15 categories, the categories along the supply chain represent the greatest complexity and are the most critical to address. Accounting for Scope 3 emissions along the supply chain and across product portfolios can help comprehensively manage climate risks and opportunities. 

The upstream scope 3 emissions of the supply chain alone already cover four tiers of the supply chain. Each of them creates carbon emissions through the transportation of goods, including freight transport and distribution logistics by road, rail, air, or sea.

Sipply Chain Emission Tiers

What makes the carbon footprint even harder to trace is that Scope 3 covers international trading, and the producers may be located in different countries, each with varying transportation standards and capacities for measuring carbon emissions in production.

It’s essential to have a sustainability framework and advanced tracking through data collection along the supply chain for Scope 3 accounting.

The Benefits of Addressing Scope 3 Emissions in Supply Chain

Climate Risk Management: 

Companies that effectively reduce Scope 3 emissions can combat climate change caused by the greenhouse effect of carbon emissions. Scope 3 can represent over 90% of a company's scope 1, 2 and 3 emissions. If climate change cannot be mitigated, the supply chain can be impacted by the physical risks of climate change, such as flooding, drought, and heatwaves.

Stakeholder Expectations: 

Investors, customers, and regulators are increasingly demanding traceability and transparency regarding environmental performance. Supply chain oriented solutions for cybersecurity have become more important. Addressing Scope 3 emissions can enhance a company’s reputation and meet stakeholder expectations for sustainability. 

Regulatory Requirement: 

Understanding and managing Scope 3 emissions can help organizations prepare for tightening regulations in the future. The EU and the UK have launched regulations to regulate corporate carbon emissions in line with the country’s commitment to net zero. In EU member states, the Corporate Sustainability Reporting Directive (CSRD) requires companies to disclose their Scope 3 emissions. In the UK, the PPN 06/21 Carbon Reduction Plan and the UK TCFD Regulations are in effect. 

Product Innovation: 

By tracking Scope 3 emissions, organizations can optimize their product design in addition to enhancing supply chain management. With Scope 3 emissions data, companies can enhance material selection, product design, and supplier selection in their supply chain to redesign their products, saving costs and promoting an eco-friendly perspective.

In fact, complying with Scope 3 emissions can also help organizations meet the voluntary standards. The sustainability framework, including ISO 14064, the Carbon Disclosure Project (CDP), the Science Based Targets Initiative (SBTi), and the Task Force on Climate-related Financial Disclosures (TCFD), requires reporting on Scope 1, Scope 2, and Scope 3 emissions.

End note

As our world moves toward a more sustainable future, addressing Scope 3 emissions becomes critical for organizations. By recognizing the significance of Scope 3 emissions and implementing effective management strategies, companies can not only enhance their environmental performance but also drive innovation, improve stakeholder relations, contribute to global climate goals, and adapt to diverse regulatory requirements. More, be a leading business in the industry for long-term business growth.