Scope 3 emissions are a category of greenhouse gas (GHG) emissions originating from business operations by sources that are not directly owned or controlled by an organization, such as supply chain, transportation, product usage, or disposal. Also referred to as value chain emissions, they are the hardest to measure and reduce.
Specifically, Scope 3 requires organizations to look for instances of carbon emissions outside of their direct physical footprint and quantify them through the value chain outside of their direct control. This includes embodied emissions within resources or raw materials consumed by the organization—paper used, waste produced, coffee consumed—and the emissions of any suppliers, which are especially important to organizations that produce physical products.
The Carbon Disclosure Project (CDP) (link resides outside ibm.com), estimates that Scope 3 emissions account for 75% of companies’ greenhouse gas emissions on average (PDF 677 KB; link resides outside ibm.com) and typically constitute the largest portion of a company’s carbon footprint. Further, supply chain is the biggest contributor of Scope 3 emissions—accounting for 11.4 times more emissions (PDF 1.8 MB; link resides outside ibm.com) as compared to other operational emissions—in a company’s value chain.
There has been exponential growth in organizations calculating and reporting emissions from their directly owned or controlled business activities—Scopes 1 and 2. And now there is rising interest in the carbon we haven’t been counting, which comes from all indirect impacts of an organization, both upstream and downstream. These emissions result from business operations by sources that are not owned or controlled by that business directly, such as from the supply chain, transport to operational sites or to customers, product use, and end-of-life treatment. Research indicates that 5.5 times more emissions come from the supply chain alone, which is a large portion of the emissions profile for many organizations.
Reporting and reducing Scope 3 emissions is of most immediate relevance to organizations that report to CDP or have committed to the Science Based Targets initiative (SBTi). They also have the most impact for organizations that operate in one of the eight supply chains that account for over 50% of global emissions1—namely food, construction, fashion, fast-moving consumer goods (FMCG), electronics, automotive and freight.
Due to the complexity and volume of data required, Scope 3 calculation and reporting must be addressed in a systematic way with the support of specialist software such as that provided by IBM Envizi.
GHG emissions [Link to learn page] are categorized into three groups or 'Scopes' by the Greenhouse Gas Protocol (GHGP) (link resides outside ibm.com)—the most widely-used carbon accounting tool. Scopes 1, 2 and 3 are a way of categorizing the different kinds of carbon emissions a company creates in its operations, and its wider value chain. These scopes cover the six greenhouse gases as covered by the Kyoto Protocol (link resides outside ibm.com)—Carbon dioxide (CO₂), Methane (CH₄), Nitrous oxide (N₂O), Hydrofluorocarbons (HFCs), Perfluorocarbons (PFCs), Sulfur Hexafluoride (SF₆).
Scope 1 includes all direct emissions from an organization, such as company vehicles, emissions from manufacturing processes, and fuel combustion on site, such as burning gas to produce heat.
Scope 2 encompasses indirect emissions from the consumption of purchased electricity, heat, or steam. Scope 3 includes all other indirect emissions that occur in a company’s value chain and include instances of carbon emissions outside of their direct physical footprint. Scope 3 emissions for one organization are often the Scope 1 and 2 emissions of other companies in its value chain.
Scope 1 and 2 emissions are often easier to calculate since relevant carbon data is readily accessible to the reporting company. These emissions are also easier to control by switching from purchased energy sources to renewable energy or electric vehicles. Scopes 1 and 2 are also the most controllable scopes for GHG accounting and reduction, and the focal point of any decarbonization journey. Scope 3 emissions are comparatively more difficult to measure and control because they are generated by third parties (e.g., a supply chain partner or investment holding) for which the reporting company has limited visibility or control. Additionally, under the GHGP, Scope 1 and 2 emissions are mandatory to report, whereas Scope 3 emissions reporting is voluntary.
Scope 3 emissions are split into 15 categories, which in turn are organized into two types--upstream or downstream emissions in the value chain. The GHGP created these categories to provide more guidance and structure when reporting on the many emissions that fall under this scope.
Upstream Scope 3 emissions are emissions related to
- Purchased goods and services
- Capital goods
- Activities related to fuel and energy (not included in Scope 1 or Scope 2)
- Upstream transportation and distribution
- Waste generated in operations
- Business travel
- Employee commuting
- Upstream leased assets
Downstream Scope 3 emissions are emissions related to
- Downstream transportation and distribution
- Processing of sold products
- Use of sold products
- End-of-life treatment of sold products
- Downstream leased assets
To fully adhere to the GHGP standards, organizations must report emissions from all relevant categories listed above. It is also important to note that relevant categories may vary greatly—both between and within industries.
For example—automobile companies manufacturing fossil fuel–powered cars would see a significant portion of their scope 3 emissions originating from downstream Category 11, ‘use of sold products’, whereas Fast Moving Consumer Goods (FMCG) firms would find most of their emissions coming from upstream Category 1, ‘purchased goods and services’. Within the commercial real estate sector, a real estate firm that constructs new buildings will have a very different Scope 3 category mix than a real estate investment trust that only invests in existing constructions.
Measuring Scope 3 emissions across the entire value chain can be complex, especially for organizations just getting started. To aid in this process, the GHGP issued the Corporate Value Chain (Scope 3) Accounting and Reporting Standard (link resides outside ibm.com) which includes guidance to help companies understand the full extent and impact of their value chain emissions on climate change so that they can focus their decarbonization efforts.
Organizations can leverage this GHGP guidance to:
- prepare accurate Scope 3 inventory reports using standard approaches and principles
- develop effective strategies for managing and reducing Scope 3 emissions
- maintain consistent and transparent public reporting of their corporate value chain emissions
With over a decade of experience supporting sustainability leaders to streamline ESG reporting against all scopes, IBM Envizi recommends the following approach to simplify Scope 3 accounting and reporting.
Step 1: Determine which Scope 3 emissions categories and data types are most material to your organization’s footprint and which are in your power to change.
One of the biggest challenges is establishing the boundaries for Scope 3 data—determining which emissions categories to report, and the suppliers and data types within each. The most relevant Scope 3 emissions categories vary greatly both between and within industries. We recommend working with consultants or knowledgeable internal staff to apply the “relevance test” to determine the boundaries of Scope 3 reporting.
Step 2: Establish a strategy for capturing the best information in the most efficient way to achieve the highest levels of accuracy.
After you determine the boundaries of your Scope 3 reporting, the next step is to determine where you can source the data. A consultant can help assess whether you have access to primary or secondary activity data and where this data can be sourced. For example, you might already have data on purchased goods and services in your organization’s accounting system, or you might be able to source data directly from your suppliers.
Step 3: Calculate emissions for each category using the most appropriate emissions factors and assessment methodologies based on the quality of data available.
Each category of Scope 3 emissions demands different emissions factors and calculation methods. For example, for Category 1—purchased goods and services—if you only have access to spend data (dollar value) without a volume, quantity, or weight for an item, you’d use the spend-based method and apply an emissions factor to the dollar value to derive your emissions calculation for that supplier. In cases where you have a cradle-to-grave emissions factor from the supplier, you can apply the supplier method.
Step 4: Disclose, communicate and track progress with reporting templates and custom reporting tools.
IBM Envizi organizes your GHG emissions data into a single source of truth and streamlines submissions to common sustainability guidance and reporting frameworks such as CDP, GRI, ENERGY STAR and GRESB, with prebuilt templates aligned to their requirements. In addition, IBM provides insight to drive performance improvement in the form of internal reports that highlight emissions reduction opportunities, workflow management tools such as Kanban boards to encourage clear tracking and accountability for data capture tasks, and performance reports that keep key stakeholders informed of progress.
“While Scope 3 emissions are outside an organization’s direct control, the organization may be able to affect the activities that result in the emissions. The organization may be able to influence its suppliers or choose which vendors to contract with based on their practices.”
— United States Environmental Protection Agency (EPA)
According to McKinsey (link resides outside ibm.com), by 2021 nearly 240 companies have signed up for the Science Based Targets initiative (SBTi) (link resides outside ibm.com)—an independent organization promoting climate action in the private sector—and 94% of these firms have committed to reducing emissions linked to their customers and suppliers. As part of the SBTi’s Net Zero Standard framework, companies commit to reducing their emissions by 50% before 2030 and achieving zero emissions by 2050.
A recent report (PDF 5.7 MB; link resides outside ibm.com) by the World Economic Forum and Boston Consulting Group outlines the following framework organizations can use to tackle emissions in their supply chains.
- Build value chain emissions baseline and exchange data with suppliers.
- Set ambitious targets on Scopes 1–2 and publicly report progress
Optimize for CO₂
- Redesign products for sustainability.
- Design value chain/sourcing strategy for sustainability.
- Integrate emissions metrics in procurement standards and track performance.
- Work with suppliers to address their emissions
- Engage in sector initiatives for best practices, certification and advocacy.
- Scale up “buying groups” to amplify demand-side commitments.
Enable your organization
- Introduce low-carbon governance to align internal incentives and empower your
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With over a decade of experience helping sustainability leaders streamline ESG reporting against all scopes, IBM Envizi recommends this GHGP-approved approach to simplify Scope 3 accounting and reporting.
Net zero means the point at which global net human-caused GHG emissions, including CO2 and CH4, have been cut to as close to zero as possible with any remaining residual emissions permanently removed from the atmosphere.
Decarbonization is the term used for the removal or reduction of greenhouse gases into the atmosphere and most organizations are adopting decarbonization measures to switch to a lower-carbon economy.