Measuring Scope 3 Emissions

Scope 3 Carbon Accounting

Companies are faced with a daunting level of complexity when trying to assess Scope 3 emissions because they take place outside of organizational boundaries and cannot be measured directly. This is on top of the fact that there is no straightforward and standardized way to calculate scope 3 like there is for scopes 1 and 2. Ultimately there is no one-size-fits-all all approach to scope 3 reporting, but what is important is that firms get started, even while using incomplete data. This allows firms to make mistakes and learn from them in preparation for more rigorous expectations in the future. Small iterative steps, while promoting full transparency around calculation methodologies are key. 

Steps to Get Started:

1. Understanding Scope 3 Categories: Scope 3 emissions are categorized into 15 distinct areas as defined by the Greenhouse Gas Protocol, a widely used international framework. These categories range from purchased goods and services, capital goods, and fuel- and energy-related activities not included in Scope 1 or 2, to transportation and distribution, waste generated in operations, business travel, employee commuting, use of sold products, end-of-life treatment of sold products, leased assets, and investments. Understanding these categories is vital to identifying where emissions occur within your value chain.
2. Review the accounting standards and methods: Even if you plan to work with a consultant to guide your inventory process, it is recommended to take the time to review the accounting standards and methods, starting with the GHG Protocol Technical Guidance for Scope 3 Emissions.
3. Preliminary Inventories and Defining Boundaries: Conduct a preliminary Scope 3 inventory to identify emission hotspots to know where to focus (you will need to define the boundaries of your operations, map out your value chain, and undertake a Scope 3 inventory, likely starting by using estimation until you can gather more robust data). Determine the scope of your measurement. Will you assess the entire value chain or focus on specific categories or activities? This decision will depend on your business operations, industry, and where you can most effectively influence emissions reductions. When it comes to mapping the value chain, a common approach is to select your top product(s) by revenue and identify the suppliers for key components, focusing on areas where you might anticipate that there would be high emissions. If you are not sure where to focus, start by identifying your most significant direct suppliers, customers, and end users.
4. Select a Base Year: A meaningful and consistent comparison of emissions over time requires that companies set a performance datum with which to compare current emissions. Setting a base year is essential to be able to observe and account for changes and trends in your emissions.
5. Determine the Relevance of Scope 3 Categories: Not all Scope 3 categories may be relevant to a particular reporting company. You will need to go through a structured process to understand the different Scope 3 categories and determine which are relevant for your company.
6. Scope 3 Data Collection and Estimations: In this step, you will estimate the emissions associated with each activity in your value chain. This may involve engaging with suppliers, distributors, and customers to obtain relevant data. Where possible use public data, pulling from data that has been disclosed to entities like CDP or Ecovadis. Ideally, a company should be using primary data collection directly from supply chain partners with the largest spend and highest emissions. However, in the early stages, this data is often unavailable and most companies begin by making estimates using proxy data based on published emission factors. There are several methods for calculating Scope 3 emissions, including the use of emission factors, spend-based approaches, and physical-quantity methods. The choice of method will depend on the category of emission, the nature of your business, and the availability of data. The GHG Protocol guides the different methods to measure and calculate your emissions based on data availability: Technical Guidance for Calculating Scope 3 Emissions.
7. Supplier and Customer Engagement: If firms want to move beyond estimated emissions and industry average data to the use of robust primary data, they will have to rely on their suppliers to be able to collect data. Collecting this data directly from suppliers through surveys or collaborative platforms to assess emissions associated with purchased goods and services can be challenging, but it is not impossible. Increasingly, companies are asking their suppliers to disclose their emissions using the CDP Supply Chain questionnaire. Requiring suppliers to provide data during the supplier qualification process is another way to encourage emissions data sharing in advance. In addition, suppliers may have several customers asking for the same information in a variety of formats. If your supplier has measured their emissions using a reputable methodology aim to be flexible in accepting this. Companies can also work towards reducing their scope 3 emissions by setting supplier and customer engagement targets. For instance, your company could commit to supporting a specific percentage of suppliers (as a percentage of spend or GHG emissions) to set their science-based targets within five years from the date the company’s target is submitted to the SBTi for validation. This could be through providing training, support, tools, and other resources to help them measure their emissions, report, and set reduction targets. Firms can also adjust their procurement processes to value products and services that have a lower footprint and/or companies that have set credible climate targets. Common ways to do so are by including decarbonization and data sharing expectations in your supplier code of conduct and in your contractual agreements.
8. Reporting Transparency in Calculating Emissions: Different activities will have different calculation methodologies (emission factors, assumptions made, etc.). You will need to carefully document all these assumptions for subsequent years and when amendments and improvements in data quality are made. Reporting on the degree of uncertainty of estimates and other indicators of reliability is also important to provide full transparency to stakeholders.

Anticipating the Challenges of Scope 3 Measurement: 

1. Data Availability and Access: Data access is often a significant challenge. Your value chain partners may be very early in their own journeys of accounting for their emissions and/or you may lack control or influence, especially as you get further up or down your value chain.
2. Consistency and Comparability: The methods of measurement related to Scope 3 emissions are significantly less mature than the measurement of Scope 1 and 2 emissions. It is common to experience considerable diversity in your data sources and their underlying assumptions. Therefore it is important to view any Scope 3 estimates as a baseline for internal comparison of a company’s own GHG emissions over time, and not as a comparison between different companies. Even the GHG Protocol- the most widely used accounting standard for greenhouse gas emissions- itself only offers high-level guidance, and openly acknowledges the difficulty in aggregating and comparing Scope 3 emissions. The lack of a detailed methodology for Scope 3 is a cause for concern for most firms.
3. Limitations to Data Estimation: At early stages, Scope 3 data is generated from fragmented, incomplete, and voluntary disclosures that often rely on estimates based on emissions factors. Many companies are forced to rely on industry averages to estimate their Scope 3 emissions, which may not be representative of the context or jurisdiction in which they occur. While data that relies on industry averages may help to identify where to direct further effort, your organization should be cautious in relying on it to support strategic decision-making.
4. Reporting on Non-material Categories: There are a total of 15 activity categories falling under the umbrella of Scope 3 emissions. Companies persistently choose to report on certain activities not because they are material or relevant, but because the data is easier to collect than other activities. Business travel is often the most reported category amongst corporations despite it typically accounting for less than 1% of most firms’ total emissions. Categories that are typically more material like the use of sold products require more effort to account for and are ignored by companies.
5. Liability Associated with Incomplete Data: Disclosing estimates and imperfect Scope 3 data could result in repercussions for companies in the form of private litigants and reactions from stakeholders. While regulations may include safe harbors for scope, firms still need to take action to mitigate and control the reactions from stakeholders through transparency in how they are calculating Scope 3 and using science-based targets. Regardless of regulatory requirements, there is increasing market pressure to disclose. Corporations that are worried about the quality of their Scope 3 data and the possibility of facing legal challenges should be aware that many regulators and standard setters are making it clear that they do not expect large swathes of detailed and perfect Scope 3 data overnight. Most requirements for Scope 3 that are cropping up in rules around the globe, come with generous provisions for estimation, phase-ins, safe harbors, and other reliefs.

More About WatchWire

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To learn more about WatchWire and its capabilities, you can visit our website, blog, or resource library, request a demo, or follow us on LinkedIn, Instagram, or Twitter to keep up-to-date on the latest energy and sustainability insights, news, and resources.