Navigating Scope 3 Emissions: Challenges and Solutions

Due to the state of global climate change, and our scramble to halt global warming to just 1.5° C, companies are increasingly being held accountable for their GHG emissions. The GHG emissions associated with a company’s activities are generally sorted into the categories of Scope 1, 2, or 3, a system developed by the Greenhouse Gas Protocol reporting standard. 

What Are Scope 1, 2, and 3 Emissions?

• Scope 1: Direct GHG emissions that originate from sources, or property, owned by the company. These could include the emissions from a furnace used to heat an office building or power a company vehicle. 

• Scope 2: Indirect GHG emissions that are associated with company energy consumption. This would include any electricity purchased from the electric grid by the company to power computers, lights, air conditioning units, machinery, and any other energy consuming activity. 

• Scope 3: Any other indirect GHG emissions that occur as a consequence of company activities but do not come from a source that the company owns or controls. Examples include emissions from an employee commuting to work or the entire lifecycle of a product that a company buys or sells.
  

While Scope 1 and 2 emissions are generally straightforward to report, Scope 3 emissions are the most challenging to measure. However they typically represent the most significant contribution of GHG emissions that a company makes. In 2023, the Carbon Reduction Project reported that corporate Scope 3 emissions were, on average, 26 times greater than the combined Scope 1 and 2 emissions.  

To put it simply, ignoring Scope 3 undermines climate progress and reporting these emissions is critical to staying on track towards a 1.5° C global temperature warming goal. 

What Makes Scope 3 Reporting So Difficult? 

Data Collection Challenges

• Scope 3 measurements rely on data from suppliers and other third-party partners, such as government statistics, industry averages, and regulatory disclosures. This secondary data may be based on estimates or unknown methodologies with varying levels of value placed on data accuracy. 

• Supply chain data availability varies greatly across regions and industries. Smaller firms with fewer material, and personnel, resources are less inclined to collect abundant and accurate data. 

Complex Supply Chains

• The complexity of global networks, subcontractors, and multi-tier suppliers can make it difficult to identify all of the relevant points in the supply chain that should be reported on.

• The further down the supply chain that a supplier is from the reporting, the more challenging data collection and communication become.

Methodological Uncertainty

• Currently, there is no standardization of data collection or calculation methods. For example, firms often use the spend-based calculation method when more accurate data is unavailable. In this method, a carbon emissions factor, derived from industry standards and generalized research, is assigned to a good or service and then multiplied by the total money spent on that good or service.
  
  The resulting value is the total estimated GHG emissions associated with that good or service for each company. Because these are just estimates, and due to the fact that the spend-based model does not use standardized emissions factors, this method introduces a substantial amount of uncertainty to Scope 3 calculations.  Other methods such as life-cycle assessments, activity-based, and hybrid calculations may also use similar versions of estimation facing their own levels of uncertainty. 

• The risk of double-counting emissions is a common concern of Scope 3 calculations. However, the consequences of reaching a global warming of 1.5° C far outweighs the potential consequences of overestimating some Scope 3 emissions. One way to avoid double counting is to track Scope 3 progress over time, instead of absolutes, and to report on progress goals only. 

Resource Intensiveness

• The complexity of some value chains means that the entire Scope 3 disclosure process can take a long time to complete. Data collection, reporting, target setting, and meaningful reductions may realistically take 2-3 years for some firms. This lengthy process requires a significant investment in tools, consultants, staff training, and financial resources.

The Business Case for Reporting Scope 3 Emissions

Despite the challenges, a strong business case exists for reporting Scope 3 emissions. This is a question many corporate sustainability boards, professionals, and investors are asking. The benefits include: 

Material to Climate Impact

The largest share of emissions in most industries- reporting Scope 3 means you are reporting on your true emissions total, not just a fraction.

Regulatory Pressure

Emerging global rules, such as the EU Corporate Sustainability Reporting Directive (CSRD) and California SB 253/261, require that companies report on their Scope 3 emissions. This reporting encourages suppliers and downstream partners to report and reduce their own emission as well.

Investor and Customer Expectations

ESG ratings, shareholder demands, and financing can all be tied to carbon reduction. Markets penalize all GHG emissions but even more so, penalize for not disclosing any emissions at all (Matsumara et al). Additionally, B2B buyers and consumers want transparency, making Scope 3 data a key differentiator.

Strategic and Operational Advantage

Evaluating the full supply-chain can present opportunities to address inefficiencies and cost savings in operational improvements. Future-proofing against carbon taxes and supply chain risks can make a company more resilient. Contributing Scope 3 data can lead to better overall industry data, which in turn can lead to more accurate measurements and incentives to decarbonize the supply chain. Finally, brands can position themselves at the forefront of ESG leadership to set themselves apart from competitors. 

Getting Started with Scope 3 Reporting

For companies of all sizes, getting started with Scope 3 reporting can seem daunting. Here are some practical steps to begin the process:

• Perform a materiality assessment to identify key Scope 3 categories that are most relevant to your business.

• Start by using estimates and spend-based calculation methods. You can refine over time with better data.

• Engage your suppliers. Relationship building encourages collaboration and more accurate data collection. 

• Leverage data management platforms for consistency.

• Set science-based targets that include Scope 3.

• Look for data that  may have already been collected, such as legal documents or climate risk assessments completed during real estate transactions.

Partner with OBATA to Master Your Scope 3 Reporting

With a longstanding experience in corporate reporting OBATA can help you begin your Scope 3 reporting journey today. We can help you navigate data collection, set targets, and build a strategy that works for you.

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