Untangling Scope 3 emissions: A comprehensive overview for business

Historically, businesses have primarily focused their efforts on measuring emissions originating within their own operational boundaries, sometimes overlooking emissions that extend beyond their immediate activities—those stemming from the goods they purchase or from the disposal of the products they sell, for example. 

For most companies, these emissions, often termed value chain emissions, exceed operational emissions (Scope 1 and 2) and are more challenging to calculate and manage. 

As a result, to meet Paris Agreement targets and achieve a zero-carbon economy, understanding and addressing these emissions, which fall under the umbrella term Scope 3 emissions, is essential.  

What are Scope 3 emissions?

As an internationally accepted framework for greenhouse gas emission accounting, The Greenhouse Gas Protocol divides emissions into three categories. 

Scope 1 includes emissions directly generated from sources a company owns or controls, while Scope 2 encompasses indirect emissions stemming from purchased energy use. 

The most complex remainder, or Scope 3, is where the rubber hits the road. While Scope 1 and 2 lie within an organisation's control, Scope 3 includes all remaining indirect emissions in an organisation's upstream and downstream operations. These include emissions stemming from raw materials processing or components used in manufacturing or those associated with the use and disposal of the company's final product. 

Not only is it the most challenging to measure, but it also proves to be the most difficult to manage. Adding to the complexity, it stands as the largest emissions class, dwarfing all other emissions categories. 

The value of reporting Scope 3 emissions

It is estimated that more than 70% of the world's economy has committed to achieving net zero emissions by 2050, including 21% of the world's 2,000 largest public companies. For a substantial number of businesses, Scope 3 emissions account for more than 70% of their total carbon footprint. According to the United Nations Global Compact, Scope 3 emissions are 11 times higher than Scope 1. It is becoming evident that committing to net zero necessitates a resolute effort to tackle and mitigate these emissions.  

As businesses face mounting pressure from customers and business partners alike—many of whom share this commitment—to play an active role in reducing GHG emissions, they are increasingly compelled to advance sustainable sourcing and uncover cost-saving opportunities and efficiency gains as they build resilience throughout their value chain.  

Similarly, investors increasingly expect companies to disclose this information. As a result, the proportion of public companies providing disclosures on Scope 3 emissions has increased to 35%. 

How to calculate Scope 3 emissions

Since the measurement of Scope 3 emissions is more complex and considerably less mature than Scope 1 and 2, the GHGP published the Scope 3 Standard to assist businesses in calculating emissions across the entire value chain. 

While Scope 3 emissions typically account for three-quarters of a company's emissions, their importance varies widely across sectors. For some industries, like the financial sector, they can approach 100% of the total, reflecting the service-oriented nature of the industry. 

Also, some industries are more significant contributors than others. It is estimated that the supply chains of eight industries, including food, construction, fashion, FMCG, electronics, and automotive, collectively contribute to half of the world's total GHG emissions.  

The Scope 3 Standard lays out requirements and guidance for organisations to prepare and publicly report a GHG emissions inventory, encouraging a collaborative approach and joint effort from suppliers and customers working together to address climate impact across the entire value chain.  

The standard recognises emissions from 15 categories of Scope 3 activities, including both upstream and downstream operations. These encompass emissions sources like suppliers of purchased goods and services, transportation, employee commuting, waste disposal, and the utilization of the company's final products. 

When calculating these emissions, the first step is to take stock of your total GHG inventory and understand your whole value chain to identify the threshold of Scope 3 materiality—typically as a percentage of total emissions inventory. 

Next, you need to categorise emissions into different categories that include both upstream emissions from purchased goods and services and downstream emissions from transportation and distribution, the use of products sold, waste disposal, and many more. 

Then, it is necessary to identify potential data sources—keeping in mind to use primary data where appropriate—and you are equipped to calculate and report Scope 3 emissions. 

There are four methods to calculate Scope 3 emissions. 

Spend-based uses secondary data to estimate these emissions, as it takes the cost of purchased goods and services and multiplies them by a corresponding emission factor to calculate total Scope 3 GHG emissions. The GHG Protocol has a list of secondary data sources. 

Similarly to the spend-based method, the average data method uses secondary data, but instead of financial data, it employs material weight data to calculate emissions.  

The supplier-specific method includes collecting operational data from suppliers, identifying the appropriate emissions factor, and converting the activities to emissions. This method is highly specific to a company's supply chain and is typically used by companies with the most advanced carbon reporting practices. 

The hybrid method is a combination of spend, activity, and supplier-specific methods. It uses supplier-specific and activity-based data wherever available, supplementing any data gaps with industry averages.  

Where does Scope 3 emissions reporting sit in the broader ESG context?

The ESG reporting framework serves as an essential tool for companies, enabling them to disclose critical data about their business operations, focusing on environmental, social, and governance (ESG) aspects. 

Within this framework, carbon reporting is now a firmly established area, guided by the GHG Protocol's division of greenhouse gas emissions into three scopes. 

While the mandate for reporting Scope 1 and 2 emissions is non-negotiable, voluntary but complex tracking of Scope 3 emissions is gaining traction, providing increased data accessibility that benefits ESG investors. 

How HLB can help

If you aim to transform your company into a thriving and socially responsible entity, HLB is here to help. 

We offer sustainability advisory services tailored to assist businesses in achieving both compliance and growth as they progress toward a more sustainable future. Our experienced experts will help you develop, monitor, and evaluate effective sustainability initiatives and strategies while addressing ESG issues to foster enhanced business practices and generate positive impact and tangible outcomes.