These emissions have typically been hidden from view, but are increasingly coming into the spotlight.
By Junying Lou
Increasingly, companies are starting to expand their focus on greenhouse gas emissions from their core operations under Scope 1 and 2 to also include greenhouse gas emissions from their value chain (Scope 3 emissions) to better manage climate-related risks and opportunities.
But what exactly are scope 3 emissions?
In short, Scope 3 emissions are everything other than emissions from companies’ direct operations and purchased energy. This includes all indirect emissions from both upstream and downstream and can be classified into 15 different categories, as shown in the graph below.
Figure 1: 15 Categories of Scope 3 emissions (WRI & WBCSD, 2011).
For most sectors, scope 3 emissions are far larger than scope 1 and 2 combined. The Carbon Disclosure Project’s (CDP) recent research shows that on average, companies’ supply chain emissions are 5.5 times greater than their scope 1 and 2 emissions (CDP, 2019).
Scope 3 calculation: a journey that has to start somewhere
Scope 3 measurement and management can be daunting for most companies because the data coverage is comprehensive while the data sources fall out of companies’ direct control. Collecting this data requires collaboration with companies’ value chain partners. Paia typically advises companies to start by drafting a Scope 3 emission management plan to guide in screening the most material Scope 3 emissions, collecting relevant data and setting goals. Compared to Scope 1 and 2 emissions, the Scope 3 emissions quantification is more complex and uncertain and requires an iterative approach to refine data accuracy.
The next step: reducing scope 3 emissions
The end goal of knowing the full climate impact from across the value chain is to inform business decisions in what they purchase, produce and put into the market, and steer companies and their value chain to a sustainable direction.
Companies that have gained a robust understanding of their Scope 3 emissions can leverage different emission reduction approaches to minimise the climate impact in their value chain.
Best practices to reduce scope 3 emissions include implementing internal carbon pricing, extending product life span, procurement practices that prefer low carbon suppliers. The table below shows carbon reduction approaches for each Scope 3 category, as recommended by the Science Based Targets initiative (SBTi).
Figure 2: Levers for reducing scope 3 emissions by category (Science Based Targets initiative et al., 2018)
So why should companies care about their Scope 3 emissions?
As more governments announce their plans to reach carbon neutrality, the risks associated with rapidly evolving energy and carbon regulations are mounting. For example, if a company sources carbon-intensive materials and products, the future energy and emission costs absorbed by suppliers can significantly increase the costs of goods paid by the company. For other companies that sell energy-intensive products, they may well expect more stringent energy efficiency regulations as well as negative consumer sentiment towards their products.
Additionally, companies may also face reputational and even litigation risks if they fail to understand the climate impacts in their value chain.
Where there is a risk, there is an opportunity. Through prudent Scope 3 emission management, companies stand to benefit from improved efficiency and substantial cost saving in their supply chain. CDP recently reported a total of US$19.3 billion annual supplier financial savings associated with actions to reduce carbon emissions (CDP, 2019).
Understanding scope 3 emissions also drives innovation along the value chain and helps companies build competitive advantages as the world decarbonises. Companies that can reap carbon reduction opportunities along the value chain and offer low-carbon solutions are more likely to enjoy an increased market share and enhanced customer loyalty in the resource-scarce future.
As countries and organisations look to build back better post-pandemic, many signs are pointing towards an increased focused on Scope 3 reporting. As many may be aware, 2020 saw a series of net-zero commitment announcements by countries and corporations. We can only expect that these commitments will trickle down along the value chain, impacting various companies.
Quantifying and managing Scope 3 emissions is challenging and we are here to help, contact us today to know more about Scope 3 emissions and how you can effectively measure and manage them.
CDP. (2019). CDP Supply Chain Report 2018/19. https://6fefcbb86e61af1b2fc4-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/004/072/original/CDP_Supply_Chain_Report_2019.pdf?1550490556
Science Based Targets initiative, Navigant & the Gold Standard. (November 2018). Value change in the value chain: best practices in scope 3 greenhouse gas management. https://sciencebasedtargets.org/resources/legacy/2018/12/SBT_Value_Chain_Report-1.pdf
World Resources Institute (WRI), & World Business Council for Sustainable Development (WBCSD). (September 2011). Corporate Value Chain (Scope 3) Accounting and Reporting Standard. https://ghgprotocol.org/sites/default/files/standards/Corporate-Value-Chain-Accounting-Reporing-Standard_041613_2.pdf