Investors are increasingly scrutinizing ESG performance – and looking for companies to rise to the challenge.
There has been exponential growth in organizations calculating and reporting emissions from their directly owned or controlled business activities (Scopes 1 & 2). And now there is a rising interest in the carbon we are not counting, that from all indirect impacts of an organization both upstream and downstream. These emissions occur as a consequence of business operations from 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.
Reporting and reducing Scope 3 emissions is of most immediate relevance to organizations who report to CDP or have committed to Science Based Targets; and it has the most impact for organizations that operate in one of the eight supply chains that account for over 50% of global emissions – namely food, construction, fashion, fast-moving-consumer-goods, electronics, automotive, professional services and freight.
Scope 3 reporting provides the opportunity for companies in key industries to multiply their carbon reduction impact by decarbonizing their supply chains.
Here’s how to approach Scope 3 calculation and reporting in a systematic way, and how sustainability software like Envizi can help.
Table of contents
- What are Scope 3 emissions?
- Scope 3 and Supply Chain Emissions
- Scope 3 reporting: the challenge and opportunity
- Four steps to calculate and report on Scope 3 Emissions
- How to reduce Scope 3 emissions
- Simplify Scope 3 Emissions Reporting with ESG software
- ESG and sustainability reporting software benefits
What are Scope 3 emissions?
GHG emissions are divided into scopes for calculation and reporting under the GHG Protocol Corporate Standard.
Scope 1 includes all “direct” emissions from an organization, which includes company vehicles, fugitive emissions from manufacturing processes and fuel combustion onsite (such as burning gas to produce heat).
Scope 2 encompasses “indirect” emissions from the consumption of purchased electricity, heat or steam.
Scope 3 requires organizations to look for implications of carbon emissions outside of their direct physical footprint, quantifying emissions through the value chain outside of the organization’s direct control. This includes embodied emissions within resources consumed by the organization — paper used, waste produced, coffee consumed — and also the emissions of any suppliers, which are especially important to organizations that produce physical products.
Scopes 1 and 2 are the most controllable scopes for GHG accounting and reduction, and the focal point of any decarbonization journey. But for leading organizations under investor pressure and looking to expand their impact, Scope 3 emissions provide the opportunity to reach other emitters in their value chain – such as suppliers and customers – and influence them to reduce their emissions, too.
Scope 3 and Supply Chain Emissions
Much of the discussion on Scope 3 focuses on the supply chain, and is sometimes referred to as ‘supply chain emissions’. This is because, according to a 2020 World Economic Forum and BCG report, just eight supply chains (food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight) account for over 50% of global emissions – with a significant share indirectly controlled by only a few companies.
Furthermore, supply chain emissions account for 5.5 times more emissions on average than a company’s direct emissions. This figure is even higher in retail, hospitality, manufacturing, and food, beverage and agriculture.
This statistic is a reminder that organizations must consider climate impacts beyond the sphere of their own direct operations if they wish to make a difference.
This graphic shows how supply chain emissions from Scope 3 compare with direct emission by industry.
For reporting purposes, under the guidance of the GHG Protocol, Scope 3 emissions consist of 15 categories and fall into either ‘upstream’ or ‘downstream’ emissions types as shown below.
Scope 3 categories:
Upstream Scope 3 emissions
1. Purchased goods and services
2. Capital goods
3. Activities related to fuel and energy
(not included in Scope 1 or Scope 2)
4. Upstream transportation and distribution
5. Waste generated in operations
6. Business travel
7. Employee commuting
8. Upstream leased assets
Downstream Scope 3 emissions
9. Downstream transportation
10. Processing of sold products
11. Use of sold products
12. End-of-life treatment of sold products
13. Downstream leased assets
Source: Corporate Value Chain (Scope 3) Standard, GHG Protocol.
Vehicle manufacturers who produce fossil-fuel-powered cars would expect a significant portion of Scope 3 emissions to come from downstream category 11, “use of sold products”, whereas in food and beverage / FMCG manufacturing, a significant portion of emissions would come upstream from category 1, “purchased goods and services”. Within the commercial real estate sector, a real estate firm that develops buildings will have a very different Scope 3 category mix than a real estate investment trust that only invests in existing buildings.
Scope 3 reporting: the challenge and opportunity
Scope 3 emissions present a significant opportunity for organizations to engage their suppliers to accelerate decarbonization globally. Supply-chain measures put in place by relatively few end-consumer companies can yield a significant flow on affect by reducing emissions for numerous organizations in the supply chain.
But not without hard work. There are significant barriers that exist to report and reduce scope 3 emissions. The following challenges are most commonly cited:
- Difficulty establishing boundaries between scopes
- Difficulty capturing reliable data in a systematic and auditable way across numerous suppliers and locations
- Difficulty selecting emission factors to derive accurate calculations
- Challenges engaging with suppliers to both report and reduce emissions
Though robust and detailed processes for Scope 3 reporting are not standard practice among organizations today, we expect Scope 3 accounting to become more mature and widely adopted, following the same steep trajectory we’ve seen with Scope 1 and 2.
While significant in emissions impact, especially for organizations that report to CDP or have committed to a Science Based Target, the process of sourcing and accurately capturing data for Scope 3 can be a challenge. The breadth of the data types can be large, and the size and complexity should not be underestimated. There’s no escaping Scope 3 emissions – but getting a technology partner in place early in the process can simplify and streamline the process.
Addressing upstream emissions is hard, with several barriers
Lack of transparency
- Lack of high-quality data sharing with suppliers
- Scope 3 estimates rely on averages
- Hard to set targets (SBTi) where pathways are not agreed upon
- Lack of clarity on Scope 3 boundaries
- Challenges sourcing and selecting emissions factors
Challenge to execute
- Knowledge gap among suppliers
- Hard to monitor fragmented suppliers
- Low trust in supplier certifications
- Hard to change in-series production
- Performance and cost concerns vs low-carbon design
- Procurement incentives not aligned to climate
- Securing engagement across the supply chain
- Overwhelming breadth and depth of data required
- Lack of government action/ investment
- Too high costs for individual value chains
- Concern over customers’ willingness to pay
Source: Net-Zero Challenge: the supply chain opportunity, World Economic Forum, January 2021.
Four steps to calculate and report on Scope 3 emissions
ESG reporting software like Envizi can prepare organizations to meet this challenge, and simplify what may seem like a daunting task to calculate and report Scope 3 emissions. With over a decade of experience supporting sustainability leaders to streamline ESG reporting against all scopes, we recommend a systematic approach that’s been tried and tested by our clients.
Step 1. Determine which Scope 3 emissions categories and data types are most material (and open to influence) to your organization’s footprint.
One of the biggest challenges is establishing the boundaries for your Scope 3 data; determining which emissions categories, and which suppliers / data types within each you will report. 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 your scope 3 reporting.
Step 2. Establish a strategy for capturing the best information in the most efficient way.
After you’ve determined the boundaries of your Scope 3 reporting, the next step is to determine where you can source the data. A consultant can help you assess if 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. Envizi’s ESG reporting software supports this process by automating data collection from existing systems where available – helping to reduce manual errors, version confusion, or productivity loss.
Envizi provides a flexible data structure to enable large organizations to easily set and change reporting boundaries, ensuring your GHG emissions calculations stay up to date as your organization changes. Additionally, we provide traceability to the source of data and an audit trail noting when changes were made to the dataset, and by whom. This helps reduce the risk of manual errors.
Step 3. Calculate emissions for each category using the most appropriate emission factor(s) and/or method(s).
After you’ve set your scope 3 boundaries and where you will source your data, you can determine which emission factor and calculation is most appropriate. Each category of Scope 3 emissions demand different emission factors and/or calculation methods, depending upon what information is available. 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 emission factor to the dollar value to derive your emission calculation for that supplier.
In other cases where you have a cradle-to-grave emission factor from the supplier, you can apply the supplier method. Envizi can capture and store publicly available emission factors from lifecycle data tables, as well as from US EPA (Climate Leaders), IEA National Electricity Factors, IPCC, as well as custom emission factors. We then apply our emissions engine and hierarchy management tools to derive GHG emissions calculations at any level of the organization – whole of enterprise, reporting group, location or sites.
Category 1: Purchased goods and services
Step 4. Disclose progress and drive performance.
Envizi organizes your GHG emissions data into a single source of truth and streamlines submissions to common sustainability guidance and reporting frameworks like CDP, GRI, ENERGY STAR and GRESB with pre-built templates aligned to their requirements.
In addition, Envizi provides insight to drive performance improvement – internal reports that highlight emission 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.
How to reduce Scope 3 emissions
Organizations that report and reduce Scope 3 emissions, especially within the top eight emitting supply chains (food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight), can use their buying power to encourage and support the suppliers in their value chain to adopt more sustainable business practices.
While each business unit plays a critical role in business decarbonization efforts, a recent Accenture piece, Getting to “Net Zero” is a big gain for CPOs, highlights the opportunity for Chief Procurement Officers to reduce emissions through the supply chain. The Accenture survey found that 62% of customers want companies to take a strong stand on issues like sustainability and, the World Economic Forum suggested that a Net Zero Supply Chain would only increase end consumer’s costs by 1-4%. While customers may drive business, investors and regulators can incentivize more progressive organizational commitments. In fact, the Accenture report shows that 75% of investors now integrate ESG (Environmental, Social and Governance) principles into their decision-making and that governments – even at the highest level – are creating binding targets to achieve carbon neutrality.
As a company accelerates its net-zero journey, it will become increasingly clear that solutions to reduce emissions within the supply chain will be the most challenging, yet most impactful. The procurement team, supply chain experts and Chief Procurement Officers, can lead this charge to become the unexpected heroes of your organization’s decarbonization efforts.
A recent report by the World Economic Forum and Boston Consulting Group outlines key strategies organizations can use to engage and support their supply chains:
Simplify Scope 3 emissions reporting with ESG and sustainability software
Scope 3 accounting is complex, which makes the benefits software can offer compelling. Over the past 10 years, Envizi has supported our clients to account for Scope 3 emissions across all 15 categories and drive leading performance, completely out of the box, saving you the cost and complexity of developing bespoke solutions. We continually update our software in line with customer needs to ensure they stay ahead. The following sustainability software features can simplify and strengthen your Scope 3 emissions accounting process.
Data capture and automation
Sustainability software supports data capture against all Scope 3 categories completely out of the box. We can automate files directly from the source, helping to reduce risk and productivity loss.
Project management tools
In order to make meaningful comparisons of emissions over time, a GHG inventory boundary must be established between data sets. Sustainability software can apply in built tools that help set and manage boundaries over time.
Support for emission factors and carbon accounting methodologies
Sustainability software can capture emission factors for lifecycle databases and nationally-recognized data tables such as US EPA (Climate Leaders), e-GRID USA, IEA National Electricity Factors, NZ Ministry for the Environment, and IPCC. In addition, ESG and sustainability software can allow system administrators to define custom time-varying factors.
Audit trails and data health checks
Sustainability software can ensure that all data captured is traceable to the source, including time stamps and audit trail for any changes subsequently made to that data.
Sustainability software supports multi-country, multi-currency, and multi-metric reporting, and allows for data capture in local units of measure and currencies with the ability to convert to standard units.
Custom reports to measure and disclose progress
Baseline emissions need to be recalculated when structural changes occur in the organization that change the inventory boundary (such as acquisitions or divestments). Sustainability software can simplify the process for recalculating baselines.
ESG and sustainability reporting software benefits
With ESG and sustainability reporting software, you can automate collection of the data you need to report on your organization’s performance and consolidate it into a single system of record, allowing you to generate important insights and deliver results.
Sustainability reporting software can help your organization to:
Drive enterprise-wide engagement
With access to a shared, trusted source of information, you can make sustainability relevant across diverse stakeholder groups by providing targeted insights, and empowering people to deliver sustainability results in their business area.
Simplify audit and assurance
Sustainability software can enable you to easily share your organization’s data with auditors via a single system that contains all supporting data, documentation and audit trails in one place.
Report with confidence
Sustainability reporting software can help you produce financial grade reports by ensuring confidence in the data and auditability at every step in the process, from collection at the source data through to the production of reports.
Focus on strategy
With sustainability software you can access a library of compliance and management reporting templates, freeing up time so you can focus your efforts on delivering strategic outcomes.