Scope 3 Emissions: What They Are & Why They Matter for Your Business
Unlocking 90% of Your Impact: What are Scope 3 Emissions & Why They Matter
Have you ever gone through the trouble of looking at where the carbon footprint of a firm actually is? It's probably not something you might initially suspect. While some firms are struggling to reduce emissions from company activities and electricity use, the real beast, the one that can account for 70% to 95% of their total climate impact, lurks just behind the radar. We are talking, naturally, about Scope 3 emissions.
These off-site emissions, also known as "value chain emissions," are now the exclusive focus for companies racing towards net-zero. It's a challenging, global puzzle, but getting familiar with and tackling your Scope 3 emissions isn't only about regulation; it's about savvy business, genuine action on the climate, and creating a more resilient future. Trust me, what I want to know is exactly how much room there is for change here, in this sometimes-drear category.
What in the world Are Scope 3 Emissions?
Bust down the jargon, why don't we? The GHG Protocol Corporate Standard, in effect the global guide to greenhouse gas (GHG) reporting, neatly bundles a company's emissions into three 'scopes'.
• Scope 1 emissions are direct, the material that flows directly out of a company's owned or controlled sources – e.g., the fuel burned by company trucks or operations. It's the smoke from your own stacks.
• Scope 2 emissions are indirect emissions that are caused by the production of purchased electricity, steam, heat, or cooling. They happen at the power plant but are directly attributed to your company's energy choices.
• Scope 3 emissions? Oh, that's the biggie. These are all other indirect emissions that show up in a company's entire value chain – both upstream (before your operations) and downstream (after your products are out of your hands). It's all emission that a company doesn't have or control directly but is still connected to its business.
Here's a mind-bender: One firm's Scope 1 or Scope 2 emissions are another firm's Scope 3 emissions. Take a shampoo manufacturer, for example. The greenhouse gases from the factories of its suppliers (its Scope 1) become the shampoo firm's Scope 3 emissions from purchased goods. And here's the kicker: 70% of a shampoo's carbon impact comes from its consumer use, due to the hot water needed to rinse it out. That is one gigantic downstream Scope 3 effect!
The GHG Protocol categorizes these Scope 3 emissions into 15 categories, which provide a systematic method of accounting for them. These categories are subdivided into:
Upstream Emissions (associated with goods and services bought):
1. Goods and services purchased: Emissions from producing everything you consume, from raw materials to IT services. This is typically a gigantic category.
2. Capital goods: Emissions from building long-lived things like buildings and machinery.
3. Fuel- and energy-related activities: Upstream emissions from the fuels and electricity that you purchase, including transmission and extraction losses.
4. Upstream transport and distribution: Emissions from third-party transport of imported goods.
5. Waste during operations: Emissions from third-party disposal of your firm's waste.
6. Business travel: Business travel by firm employees not in firm-owned cars.
7. Employee commuting: Emissions from commuting to and from work by firm employees.
8. Upstream leased assets: Emissions from leased assets over which you have no control.
Downstream Emissions (traced back to sold goods and services):
9. Downstream transportation and distribution:
Emissions from delivery of your sold goods to consumers.
10. Processing sold goods: Third-party emissions from processing your sold-through goods.
11. Use of sold goods: Customers' emissions using your goods – huge for electronics or vehicles.
12. End-of-life treatment of sold goods: Emissions from disposal or recycling upon customer use.
13. Downstream leased assets: Emissions from assets leased by you to others and owned by you.
14. Franchises: Emissions from your franchisees' operations. 15. Investments: Emissions associated with your company's investments, especially important for banks and other financial institutions.
The Impact of "Other Indirect Emissions" Why They Really Hit Home
So what's all this commotion about Scope 3 emissions, then? Just briefly, for most companies these emissions represent the overwhelming majority of their carbon footprint. Can you picture Kraft Foods finding out that value chain emissions represented over 90 percent of their overall emissions? That's a huge figure, and it means that not reducing these indirect effects is missing enormous opportunities to make a difference.
It's actually a "collective effort," to use a phrase from Christine Lagarde. Climate change is not something that can be fixed by any one of us. By considering Scope 3 emissions, companies get the full picture, which prevents them from contracting out the most emissions-driving activities and inadvertently "cutting" their footprint on paper but the real problem elsewhere.
Other than sheer scale, Scope 3 emissions also deliver true business value. It enables end-to-end risk assessment, so that businesses can identify their exposures to carbon taxes or supply chain collapse. It drives innovation, as companies are incentivized to engage with suppliers and customers together in collaborative efforts towards shared responsibility for decarbonization. And, quite simply, it fills the "GHG gap" – for the first time, it puts in place the tools that enable businesses to act on their full scope of corporate value chain and product emissions.
Given that these value chains frequently cross country borders, the same standard global measure for measuring and managing Scope 3 emissions becomes increasingly vital. It's a universal language for climate action, with everyone working from the same sheet music.
There's no place for confusion on this.
The (Sometimes Messy) Reality: Why Measuring Scope 3 Emissions is a Challenge
Now, I'm not going to lie to you, it's difficult to quantify Scope 3 emissions. It's often cited as the biggest barrier for companies who want to set science-based ambitious targets. The biggest delay is the
reliance on third-party data.
• Data availability and quality are a major issue. Most suppliers, especially the small ones, just don't have their own emissions data figured out, so companies have no option but to go for secondary data like industry averages, which aren't always as reliable. It's an ongoing process of updating data over time.
• Supplier engagement is a monumental task. Imagine trying to get thousands of suppliers, often across different countries and cultures, to share their emissions data! Many might be hesitant due to cost, confidentiality, or simply a lack of resources.
• Methodological complexities also add to the complexity. The GHG Protocol contains a number of different calculation methods, and choosing the right one for each of the 15 categories can be complicated, leading to mixed reporting unless dealt with extremely carefully. There is also widely documented absence of unambiguous "best practice guidance," a little like flying blind.
There is also the elephant in the room: double counting. The only issue others have is that if many companies report the same emission as one of their Scope 3 emissions, it skews the global picture. Here's the thing: In one company's inventory, Scope 1, 2, and 3 are mutually exclusive of each other – no double counting there, which rocks. But in different firms of a value chain, a single emission will be counted by multiple firms as Scope 3 emissions. For example, emissions from transporting goods between a manufacturer and a retailer might appear in both their Scope 3 inventories.
But here's why it doesn't matter and is really a part of the process: This "double counting" facilitates action at the same time. All companies, from the power plant to the home appliance store, have different opportunities to affect and reduce those emissions. So, though we don't want to add up Scope 3 emissions for companies so we can calculate regional-wide emissions, it is perfectly okay for individual companies to report them to stakeholders to encourage reductions and track progress.
Turning Obstacles into Legendary Victories: Why Scope 3 Emissions Absolutely Matter to Your Company's Future
Don't let these nuances trick you, though. Ignoring Scope 3 emissions is simply no longer feasible. The momentum, my friend, is unmistakable.
• Policymakers are Getting Tougher: This is gigantic! The voluntary reporting days are over; mandatory disclosure is the wave of the future. The EU's Corporate Sustainability Reporting Directive (CSRD) requires listed companies to report material Scope 3 emissions beginning in 2025. The G7- and G20-supported International Sustainability Standards Board (ISSB) is introducing standards that will mandate Scope 3 emissions disclosure if material. The UK, China, India, and Australia are already on board or will be on board with the standards. Even California has mandated Scope 3 emissions reporting for large companies doing business in the state. And if your Scope 3 emissions make up more than 40% of your total footprint (which they typically will!), initiatives like the Science Based Targets initiative (SBTi) require you to include them in your goal of reduction.
• Thorough Risk Management: You cannot evaluate your entire climate risks unless you quantify Scope 3 emissions. That involves comprehending possible carbon taxes on your suppliers, supply chain disruptions from climate-related events, or changes in consumer demand for less carbon-intensive products.
• Aligning with Stakeholder Expectations: Investors, regulators, and customers alike are asking for transparency around Scope 3 emissions. Having a solid Scope 3 approach boosts your company reputation and accountability via public disclosure, which is a major score.
• Realizing Reduction Opportunities and Cost Savings: This is the gold! Calculating Scope 3 emissions reveals "hot spots" – those business activities contributing most to emissions within your value chain. By making an investment of effort in this space, business can achieve actual reductions, both in their own operations but also in value chains everywhere. This has the additional benefit of more effective use of energy, less waste, and potentially reduced costs. In 2021, CDP's Global Supply Chain Report found that close to 1.8 billion metric tons of GHG emission reductions resulted in over US$29 billion saved!
• Gaining a Competitive Edge and Leadership: Companies actively working on Scope 3 emissions have the potential to differentiate themselves in an expanding eco-conscious market. It's an opportunity to set the path forward and to demonstrate leadership in your sector.
A Practical Roadmap: Overcoming Your Scope 3 Emissions Journey
Okay, so we have an understanding of Scope 3 emissions and why they are so critical. But how do we actually implement this? It definitely looks daunting, but there is a clear process. EcoAct suggests a structured six-step approach: Scope > Measure > Analyse > Target > Act > Report.
Let's walk through some of the key strategies:
1. Strongen Your Data Game: This is a foundation. You'll likely start with estimates and secondary data, but you want to get increasingly accurate and complete by heading toward primary data from your suppliers. Tools like Arbor's AI-driven carbon accounting software can estimate emissions quickly, enhance accuracy with region-level data, and fill out data gaps.
2. Engage Your Suppliers, Big Time: Since paid-for goods and services (Category 1) are likely to account for the lion's share of upstream emissions, engaging with suppliers is essential. It's not control, it's influence and partnership.
• Talk and partner: Be clear about your goals and expectations.
• Develop capability: Give training and means to help suppliers measure and reduce their own footprints.
◦ Encourage and integrate: Use preferential procurement terms or bonuses, and carbon performance as a purchasing criterion. Telefónica, an international telecommunications group, successfully implemented a climate engagement program with its key suppliers in order to help them set ambitious reduction targets.
3. Innovate Through Product Design: Your product choices have enormous downstream consequences.
◦ Lifecycle Assessment (LCA): Meet the whole carbon footprint of your product from "cradle to grave." This includes raw materials emissions, manufacture, transport, storage, sale, use, and disposal.
◦ Create for circularity and efficiency: Make products which need less energy to utilize and are long-lasting, maintainable, and can be recycled. Barcodetrade is a pioneer in circular economy, extending the life of barcode technology by repairing, remanufacturing, leasing, and repurchasing, reducing e-waste as well as carbon footprints significantly.
◦ Employ lower-carbon alternatives.
4. Drive Internal Action: Don't forget your own teams! Training and bonuses can reduce emissions from business travel (Category 6) and worker commuting (Category 7). Consider prioritizing virtual meetings over flying or encouraging public transport usage.
Conclusion: It's Time to Act (Seriously!) on Scope 3 Emissions
Time's short. The urgency of limiting global warming to 1.5°C demands radical decarbonisation, and there is no option for achieving net-zero but to face up to Scope 3 emissions. Companies are increasingly being held accountable for their indirect, as much as their direct, effects.
Yes, Scope 3 emissions measurement and management is a daunting proposition, and likely the most challenging aspect of business climate strategy. But what I most find inspiring is that this challenge is one huge opportunity. It's an opportunity for global collaboration, innovation, and leadership across markets and geography.
By integrating Scope 3 emissions management into your broader strategy, investing in the right tools, and actively working with your entire value chain, you're not only preparing for upcoming regulations; you're building a more resilient, more efficient, and more credible business that truly contributes to a sustainable future. It's time to measure what truly matters and bring ambition into real-world climate action.