What are Scope 3 emissions? 
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What are Scope 3 emissions?

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 carbon footprint and quantify them through the value chain outside of their direct control. This includes embodied emissions within resources or raw materials that are consumed that are by the organization—paper that is used, waste produced, coffee that is consumed—and the emissions of suppliers.

A 2022 Carbon Disclosure Project study1 found that, for companies that report to CDP, supply chain emissions are the biggest contributor to greenhouse gas emissions. Accounting for an average of 11.4x more emissions as compared to operational emissions.

Reporting and reducing Scope 3 emissions is of most immediate relevance to organizations that report to CDP. Report by using the Global Reporting Initiative (GRI) or the Task Force on Climate-related Financial Disclosures (TCFD) framework. It’s also important for organizations that have committed to the Science Based Targets initiative (SBTi). Which is a partnership of the CDP, the United Nationals Global Compact, the World Resources Institute and the World Wide Fund for Nature.

Due to the complexity and volume of data that is required, Scope 3 calculation and reporting should be addressed in a systematic way. To ensure that companies adhere to the disclosure standards of major ESG reporting frameworks. Successfully disclosing Scope 3 emissions can also help companies address the expectations of their stakeholders, as investors, employees and communities increasingly take interest in organizations’ emissions monitoring and mitigation efforts.

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Scope 3 versus Scope 1 and 2 emissions

GHG emissions are categorized into three groups or “scopes” by the Greenhouse Gas Protocol2 (GHGP or GHG Protocol). A joint initiative of the World Resources Institute and the World Business Council for Sustainable Development. The GHG Protocol is the most widely used carbon accounting tool. Its Scopes 1, 2 and 3 are a way of categorizing the different kinds of carbon emissions a company creates in its operations and wider value chain. These scopes cover the six greenhouse gases as covered by the Kyoto Protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulfur hexafluoride (SF6).3

  • 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 activity 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. For these reasons, controlling Scopes 1 and 2 tends to be the focal point of any organization’s journey toward decarbonization and meeting GHG emissions reduction targets.  

Scope 3 emissions are comparatively more difficult to calculate and control because they are generated by third parties (for example, a supply chain member). For which the reporting company has limited visibility or control. Therefore, the data that is required to calculate an accurate emissions inventory is not easy to access.

Scope 3 emissions categories

Scope 3 emissions are split into 15 categories, which in turn are organized into two types--upstream or downstream emissions in the value chain. This categorization aims to provide more guidance and structure when reporting on the many emissions that fall under this scope.

Upstream Scope 3 emissions are emissions that are related to:

  • Purchased goods and services
  • Capital goods
  • Activities that are related to fuel and energy (not included in Scope 1 or Scope 2 emissions calculations)
  • Upstream transportation and distribution
  • Waste generated in operations
  • Business travel
  • Employee commuting
  • Upstream leased assets

Downstream Scope 3 emissions are emissions that are related to

  • Downstream transportation and distribution
  • Processing of sold products
  • Use of sold products
  • End-of-life treatment of sold products
  • Downstream leased assets
  • Franchises
  • Investments

To fully adhere to the GHGP standards, organizations must report total emissions from all relevant categories that are 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 have a different Scope 3 category mix than a real estate investment trust that only invests in existing constructions.

Reporting Scope 3 emissions
GHGP Guidance

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 Standard4. Which includes guidance to help companies understand the full extent and impact of their value chain emissions on climate change so they can focus their decarbonization efforts.

Organizations can leverage this GHGP guidance to: (1) prepare accurate Scope 3 inventory reports by using standard approaches and principles. (2) develop effective strategies for managing and reducing Scope 3 emissions. And (3) maintain consistent and transparent public reporting of their corporate value chain emissions.

Scope 3 accounting and reporting
Choosing emissions categories and data types

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 category. A technical note that is released by CDP5 offers guidance on the categories relevant to specific industries. For instance, agricultural commodities should report emissions from purchased goods and services, processing of sold products and use of sold products. Transport services should report emissions from fuel and energy-related activities and upstream transportation and distribution, as well as purchased goods and services.

This guidance notwithstanding, companies may find themselves best served working with consultants or knowledgeable internal staff to determine the boundaries of Scope 3 reporting.

Selecting calculation methodologies

When calculating emissions, organizations look to deliver as accurate an emissions inventory as possible. In the case of Scope 1 and 2 emissions, calculations typically involve applying primary source data—such as energy use to a location-specific emissions factor. This approach relies on organizations having access to primary source data and granular emissions factors. This level of data granularity is often not available for Scope 3 calculations. To address this challenge, the GHG Protocol describes 13 calculation methods and sets out decision trees to help users select calculation methodologies for each Scope 3 category.

Building a data foundation

The data that is required for Scope 3 emissions accounting is determined by the Scope 3 emissions categories and the emissions calculation method selected. And this data can be significantly more extensive than that required for Scope 1 and 2 emissions. It often includes unstructured data that is held in third-party or siloed systems.

Data types may cover the amount that is spent on products or product types and services (spend data), supplier Scope 1 and 2 data, volumes of goods that are purchased, and types of services received. Along with this activity data, organizations must also source and capture emissions factors. In cases where there isn’t sufficient data available, the GHG Protocol’s Scope 3 Calculation Guidance6 recommends using proxy data.

Reporting and disclosing emissions

Several ESG reporting frameworks and standards allow for, or require, the setting of Scope 3 emissions targets and disclosure of performance. Major reporting frameworks such as CDP, GRI, ENERGY STAR and GRESB offer different resources, including educational materials and tools, to aid companies with their GHGH emissions data disclosures and submissions.

Companies may also choose to take advantage of software-as-a-service (SaaS) solutions that organize GHG emissions data. Those offering prebuilt templates that are aligned with the major reporting frameworks can help make reporting easier and more efficient. Solutions featuring analytics tools can help provide insights on emissions reduction opportunities, driving performance improvement.

Engaging suppliers to drive improved performance

“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)

Improving sustainability performance in the value chain stretches well beyond tracking and reporting Scope 3 emissions. Along with emissions performance, organizations are increasingly working to track and drive improved performance on a multitude of other ESG metrics across their value chain, particularly within their supply chain.

In this regard, organizations often start by using high-level Scope 3 emissions inventory to identify hotspots in their product life cycle emissions. That is, all the emissions that are that are associated with the production and use a specific product “from cradle to grave,” according to the GHG Protocol. However, to drive emissions reductions in those hotspots, organizations need actionable, granular data, moving beyond spend-based data and calculation methods to activity-specific or supplier-specific data inputs and more accurate calculation methods.

A report7 by the World Economic Forum and Boston Consulting Group outlines the following framework organizations can use to tackle emissions in their supply chains:

  • Create transparency: Build value chain emissions baseline and exchange data with suppliers; set ambitious targets on Scopes 1 and 2 and publicly report progress.

  • Optimize for CO2: Redesign products for sustainability; design a value chain/sourcing strategy for sustainability.

  • Engage suppliers: Integrate emissions metrics in procurement standards and track performance; work with suppliers to address their emissions.

  • Push ecosystems: 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 organization.

Once companies obtain more granular performance data, they can use it to inform supplier-level emissions reduction activities. Taking such steps can help them forecast, plan, and track progress toward achieving goals to reduce environmental impact and progress toward achieving goals such as net zero emissions.

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Guide to Scope 3 emissions reporting

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.

What is net zero?

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.

What is decarbonization?

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.

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1Scoping Out: Tracking Nature Across the Supply Chain” (link resides outside ibm.com), CDP, March 2023.

2 Greenhouse Gas Protocol (link resides outside ibm.com).

3Kyoto Protocol – Targets for the first commitment period” (link resides outside ibm.com), United Nations Climate Change.

4Corporate Value Chain (Scope 3) Standard” (link resides outside ibm.com), Greenhouse Gas Protocol.

5CDP Technical Note: Relevance of Scope 3 Categories by Sector” (link resides outside ibm.com), CDP.

6Technical Guidance for Calculating Scope 3 Emissions” (link resides outside ibm.com), Greenhouse Gas Protocol.

7Net-Zero Challenge: The supply chain opportunity” (link resides outside ibm.com), World Economic Forum in Collaboration with Boston Consulting Group, January 2021.