Greenhouse Gas Reporting

Scope 3 Emissions

Learn how to accurately report indirect GHG emissions from both upstream and downsteam activities across a company’s value chain.

May 1, 2023
September 11, 2023


This article explains how the SEC’s proposed rule for climate-related disclosures applies to Scope 3 emissions. As companies prepare to comply with this framework, separating greenhouse gas (“GHG”) emissions into three different scopes is an essential task. Gathering disclosure data for Scope 3 emissions is difficult and will require a strong understanding of ESG-related activities to be done effectively.

What Are Scope 3 Emissions?

Each scope of GHG emissions can be identified as either direct or indirect. Scope 3 GHG emissions result from activities in a company’s value chain that are not caused by assets directly owned or controlled by the company. Consequently, Scope 1 and 2 emissions result from the company’s own actions.

Scope 1 emissions are direct GHG emissions from assets owned or controlled by the company. Some examples include emissions from company-owned or controlled vehicles, manufacturing plants, or other equipment. Scope 2 emissions are indirect emissions from the generation of acquired electricity as well as heating or cooling consumed by the company. The company may not own the plant producing the electricity, but it owns the facilities utilizing the electricity.

Scope 3 emissions include all other indirect emissions that occur in the value chain of the company not included in Scope 2. This includes both upstream and downstream emissions. Upstream activities are activities such as material acquisition and pre-processing. These events happen before assets are controlled by the company. This could be anything from the transportation of goods purchased from vendors to employee business travel and commuting. Downstream activities are events that occur when assets are no longer controlled by the company; these include aspects of the value chain such as distribution & storage, use, and even end-of-life treatment. Some examples would be transportation of goods to the customer, additional third-party processing of sold products, and actual use of sold products. Note that Scope 3 emissions for a company are Scope 1 and 2 emissions of another company or end consumer.

The GHG Protocol divides Scope 3 emissions into 15 distinct categories, which are further divided into upstream and downstream emissions.1 These categories enable companies to organize and evaluate which Scope 3 emissions are relevant to their industry. Upstream Scope 3 emissions fall under categories 1-8, while downstream Scope 3 emissions can be found in categories 9-15. To be fully compliant with the SEC’s disclosure framework, companies must report emission data from all 15 Scope 3 categories. The table below illustrates each category along with its description.

Scope 3 Emissions Categories

Category Description
1: Purchased goods and services Extraction, production, and transportation of goods and services purhcased or acquired by the company in the reporting year.
2: Capital goods Extraction, production, and transportation of capital goods purchased.
3: Fuel- and energy-related activities (not included in Scope 1 or Scope 2) Extraction, production, and transportation of fuels and energy purchased.
4: Upstream transportation and distribution Transportation and distribution of products purchased by the company in the reporting year between a company’s direct suppliers and its own operations.
5: Waste generated in operations Disposal and treatment of waste generated in the company’s operations in the reporting year.
6: Business travel Transportation of employees for business-related activities during the reporting year.
7: Employee commuting Transportation of employees between their homes and their worksites during the reporting year.
8: Upstream leased assets Operation of assets leased by the company (lessee) in the reporting year.
9: Downstream transportation and distribution Transportation and distribution of products sold by the company in the reporting year between the company’s operations and the end consumer.
10: Processing of sold products Processing of intermediate products sold in the reporting year by downstream companies.
11: Use of sold productions End use of goods and services sold by the company in the reporting year.
12: End-of-life treatment of sold products Waste disposal and treatment of products sold by the company.
13: Downstream leased assets Operation of assets owned by the company (lessor) and leased to other entities in the reporting year.
14: Franchises Operation of franchises in the reporting year.
15: Investments Operation of investments (including equity and debt investments and project finance) in the reporting year.

In order to accurately calculate Scope 3 emissions, a company must first identify the categories that are relevant to its operations. Once these categories have been identified, the company must collect individualized data related to each of these categories. The GHG Protocol provides guidance on how to collect and calculate Scope 3 emissions for each category. To illustrate, consider the Category 1: Purchased Goods and Services example below.

Category 1: Purchased Goods and Services

Scope 3 Proposed Disclosure Requirements

The SEC's proposed rule will require a company to disclose its total Scope 3 emissions for the fiscal year separately if it meets one of two requirements: 1) The Scope 3 emissions are material, or 2) the company has set a GHG emissions reduction target that includes Scope 3 emissions. The SEC requires that the disclosed data for each of a company's Scope 1, 2, and 3 emissions be disaggregated by each GHG, including carbon dioxide, methane, nitrous oxide, nitrogen trifluoride, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride. Companies would also report these numbers in the aggregate. The SEC suggests that since the data is already acquired in terms of the individual GHG, this requirement should not create any significant additional burdens.

The SEC is specific with how these emissions should be measured and reflected in accordance with the proposed rule. The company would be required to disclose GHG emissions in terms of carbon dioxide equivalent (“CO2e”). This measurement is commonly used by the GHG Protocol which provides insights on the global warming potential (“GWP”) of the emissions.2 The SEC wants to establish a standardized unit of measurement for all GHG emissions regardless of scope so investors can have comparable data across all companies (page 152).3

There is also an emphasis placed on disclosing Scope 3 emissions in terms of GHG intensity to provide additional context to a company’s emissions compared to the scale of its business. Although larger companies may emit more greenhouse gasses, they may still be more efficient than some smaller companies that emit significantly less because of the nature of differences in scale. GHG intensity is defined as a ratio that expresses the impact of GHG emissions measured in terms of metric tons of CO2e per unit of economic value or per unit of production.

Carbon Intensity: Southwest Airlines
Carbon Intensity: Alphabet Inc.

Scope 3 emissions commonly make up the majority of a company’s total GHG emissions. Therefore, the SEC believes that it would be beneficial for companies to disclose this information to the public in a quantified manner to assess exposure to climate-related risks. The goal of these disclosure requirements is to create consistency, comparability, and reliability in reporting Scope 3 emissions data. With the GHG Protocol’s framework being the globally accepted standard used by many companies, there is already an unofficial foundation for Scope 3 emissions reporting. Although companies may not be able to directly control their Scope 3 emissions, they can still influence their outputs by choosing greener suppliers and more energy-efficient transportation and distribution networks.

How are Companies Currently Disclosing Scope 3 Emissions Data?

Given that there is no current regulation for ESG reporting, one of the most difficult tasks for companies is to determine how to disclose ESG information. For companies in the early stages of ESG reporting, the best available blueprint comes from reports issued by larger companies. Notable reports that include Scope 3 emission data come from Walmart, Tesla, Toyota, and Apple.

As previously mentioned, one of the proposed requirements for Scope 3 emission disclosure is that those emissions are material. Like other financial statement presentation matters, the determination of materiality follows the same logic prescribed by the SEC: “A matter is ‘material’ if there is a substantial likelihood that a reasonable person would consider it important.”4 This may vary by industry, but the idea remains consistent. If a company emits a significant amount of Scope 3 emissions, it should be disclosed, especially if Scope 3 emissions dwarf Scope 1 and 2 emissions. The SEC notes that many companies have adopted a threshold of 40% of total emissions as Scope 3 materiality. In other words, many companies would consider Scope 3 emissions to be material if those emissions account for 40% or more of total emissions.5 While an audit of the ESG report is not currently required, some companies have used auditors to verify that the data they disclose is accurately and fairly represented. Tesla, for instance, used PwC to audit their ESG report. The audit provides additional assurance to corroborate management’s assertions.

Tesla’s disclosures about electric vehicle related emissions is an example of materiality. Electric vehicles have material Scope 3 emissions investors are likely to care about. Tesla generates significant Scope 3 downstream emissions via electric vehicle (“EV”) charging. The production of Tesla’s batteries in its supply chain is another significant source of Scope 3 emissions for Tesla, these being upstream emissions. Tesla’s 2021 Environmental Impact Reports states that “upstream GHG emissions from manufacturing an EV battery – from raw material extraction through refining and transportation of materials – can be meaningful….[These activities] cause up to ~80% of the total emissions of a Model 3 battery pack, with the largest contributors at the chemical processing stage (page 95).”6 These GHG emissions are clearly material to Tesla and would be meaningful information for its investors to know.

Challenges in Scope 3 Emissions Disclosure

One difficulty of reporting Scope 3 emissions is gathering the data itself. Given that Scope 3 emissions occur in a value chain, the company must rely on other companies to produce accurate data. Establishing and maintaining supplier relations is key to maintaining an efficient supply chain. In its guide to leverage this relationship with suppliers, PwC states that the most effective way to work with suppliers is by 1) leveraging procurement, 2) building capability, 3) rewarding progress, and 4) enforcing performance.7 Implementing these strategies will enhance a company’s collaboration with its suppliers.

Another difficulty of Scope 3 emission disclosures lies in the cost/benefit analysis. Even with leveraging supplier relationships to obtain data, additional costs include verifying the accuracy of the data, preparing it for disclosure in the company’s 10-K, and funding more billable hours for an external auditor to verify those figures. While a company’s internal audit function could mitigate some of this cost, it cannot eliminate it entirely because internal audit is also a costly resource.

Finally, the SEC does not present a standard methodology for companies to follow in obtaining and presenting Scope 3 emissions data. Companies are left on their own to navigate this new SEC standard, collect this already challenging data, and prepare it for presentation and disclosure. The GHG Protocol Corporate Accounting and Reporting Standard is a popular reporting framework, but it is technically not sanctioned by the SEC. This means that companies are left to conduct their own research for guidance on how to present Scope 3 emissions data.

Pushback to the SEC Proposal

Many companies have pushed back on the SEC’s proposal to mandate material Scope 3 emissions disclosures. This disclosure means companies must obtain data generated by all suppliers involved in their upstream and downstream emissions. Even if this data is not available from suppliers, estimates of relevant emissions are difficult to calculate. Because of these challenges and others, companies have proposed two alternatives to mitigate these difficulties:

  1. Do Not Require Disclosure of Scope 3 Emissions Data
  2. Restrict the Scope of Companies Required to Disclose Scope 3 Emissions Data

The SEC has considered both perspectives and has addressed these with several proposed provisions discussed below.

Alternative 1: Do not Require Disclosure of Scope 3 Emissions Data

The SEC has not considered eliminating the disclosure requirement entirely because Scope 3 emissions generally account for the majority of a company’s total GHG emissions. Instead, the SEC is attempting to mitigate problems companies encounter when gathering Scope 3 emissions data. The following two proposed provisions are designed to make data collection and presentation easier on companies with fewer resources:

A proposed provision would provide that a registrant may present its estimated Scope 3 emissions in terms of a range as long as it discloses its reasons for using the range and the underlying assumptions (page 201).8
Another proposed provision would require a registrant to disclose, to the extent material and as applicable, any gaps in the data required to calculate its GHG emissions (page 200).8

Presenting emission data in reasonable ranges means companies can assess data at an 80-95% confidence level instead of estimating an exact emissions amount, as long as companies describe the assumptions used and the reasons for using them. For Scope 3 emissions, which are massive in scope and difficult to capture, this provision provides some sense of relief.

The second provision directly addresses data accuracy. The SEC acknowledges that there will be gaps in the data and provides a roadmap on how to address those gaps: "While a registrant's GHG emissions disclosure should provide investors with a reasonably complete understanding of the registrant's GHG emissions in each scope of emissions...we recognize that a registrant may encounter data gaps, particularly when calculating its Scope 3 emissions" (page 200). If the company discloses the fact that gaps exist, whether by using proxy data or other methods requiring significant management assumptions, and addresses those assumptions' effects on the accuracy and completeness of the Scope 3 emissions data, then the company can collect and present its data in that manner.

The SEC also addressed the lack of a central methodology in a separate provision located in the same framework:

As proposed, the description of the registrant’s methodology must include the registrant’s organizational boundaries, operational boundaries, calculation approach, and any calculation tools used to calculate the registrant’s GHG emissions (page 185-186).9 The SEC has not proposed a central methodology for gathering data on Scope 3 emissions because each company, even companies within the same industry, has vastly different types of Scope 3 emissions. While this may seem like an obstacle, this feels more like an olive branch from the SEC in terms of letting each company come up with its own reasonable methodology provided it is defended appropriately.

Alternative 2: Restrict the Scope of Companies Required to Disclose Scope 3 Emissions Data

Another alternative discussed by companies was to limit the scope of Scope 3 emission disclosure requirements. Under this alternative, mandatory emission disclosure would be limited to certain industries, larger companies, or companies whose Scope 3 emissions total more than 40% of their total emissions. This alternative is consistent with the SEC’s prerequisite requirement of Scope 3 emissions being material for disclosure, although it would lead to significantly fewer companies making Scope 3 disclosures than the SEC originally intended. Considering the inherent ambiguity present in the concept of materiality, a specific definition of materiality could be useful in assisting companies to determine their requirements in Scope 3 GHG disclosure criteria.

Case Study: The Automative Industry

Investor Impact

Disclosing GHG emissions into three separate scopes holds the company more accountable for its total emission environmental impact. Higher accountability from companies gives stakeholders confidence that the company is motivated to reduce its carbon footprint. Greater transparency required by the SEC proposed disclosures is likely to lead to more accurate data from companies. In its proposed rule, the SEC describes the benefits of GHG disclosures from an investor point of view:

By requiring the disclosure of GHG emissions both disaggregated by the constituent greenhouse gasses and, in the aggregate, investors could gain decision-useful information regarding the relative risks to the registrant posed by each constituent greenhouse gas in addition to the risks posed by its total GHG emissions by scope (page 151).8

By disclosing GHG emissions in the aggregate as well as disaggregated by each GHG, the company displays an elevated level of transparency to its current and potential investors.


Reporting Scope 3 emissions under the SEC’s proposed rule will be complicated given the lack of experience most companies currently have with ESG disclosures. Learning how to approach these disclosures now can help companies be effective at ESG reporting in the future. The following key details should be considered when reporting Scope 3 emissions:

  • Scope 3 GHG emissions are the result of upstream or downstream activities in a company’s value chain that are not caused by assets directly owned or controlled by the company.
  • Companies that meet at least one of the following two requirements would be required to disclose separately its total Scope 3 emissions for the fiscal year: 1) The Scope 3 emissions are material or 2) the company has set a GHG emissions reduction target that includes Scope 3 emissions.
  • The data for each of a company’s Scopes 1, 2, and 3 emissions is required to be reported both in the aggregate and disaggregated by greenhouse gas.
  • The company would be required to disclose GHG emissions in terms of CO2e, indicating the GWP of each GHG as well as in terms of intensity with regards to total revenues and production for the fiscal year.
  • The goal of the proposed rule is to create consistency, comparability, and reliability in Scope 3 emissions reporting data.