Scope 3 Emissions

Scope 3 Emissions: Definitions and Sources

Scope 3 greenhouse gas (GHG) emissions result from activities in a company’s value chain that are not caused by assets directly owned or controlled by the company. As a review, Scope 1 emissions are direct GHG emissions from assets owned or controlled by the company, and Scope 2 emissions are indirect emissions from the generation of acquired electricity, heating, or cooling consumed by the company.  

Scope 3 emissions include all other indirect emissions in the company’s value chain that are not included in Scope 2. This includes both upstream and downstream emissions. Upstream activities include material acquisition and pre-processing. These events happen before the company controls assets. This could be anything from the transportation of goods purchased from vendors to employees for 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 the 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 Emission Measurement and Calculation  

Scope 3 emission measurement can be a complex and work-intensive process. To utilize their resources effectively, it is recommended to first identify the most significant category of emissions for measurement. Determining the significance of a category can be done through analyzing the largest category or the one that aligns closest with the goals of the company. Other factors to consider include data availability, data quality, cost required, and other criteria identified by the company.  

The Greenhouse GasProtocol (GHGP) has outlined techniques for measurement across each of the categories in Scope 3 emissions.² For each category, calculation methods range from precise to broad, or data-intensive to estimation-based approaches. The election of methods is based upon principles discussed above.  

Regardless of the category, Scope 3 emissions are calculated using both primary and secondary data. Primary data comes from supplier data and other data specific to the product. These can be found in supplier contracts, utility bills, meter records, engineering models, and other sources. Secondary data is gathered from averages in the industry, government statistics, and financial data. Most calculations incorporate both data types; however, primary data is better suited for goals to reduce emissions, and secondary data is optimal for identifying emission hotspots.  

For example, a company decides category 1 is the most prevalent emission in their composition of Scope 3. The Greenhouse GasProtocol provides a set of established steps for calculating total emissions, which the company would then apply. This process is illustrated below.³

Step 1: Identify Emissions

As aforementioned, Scope 3 emissions are indirect emissions resulting from activities in a company’s value chain. Careful evaluation of a company’s emissions will determine the category of Scope 3 they fall into.  

Step 2: Select a Calculation Approach  

In Category 1, there are four calculation methods available to utilize: Supplier-specific,Hybrid, Average-data, and Spend-based. Supplier-specific and Hybrid require primary data from the supplier, such as the physical quantity of purchased goods and services or product-level cradle-to-gate GHG data. If the supplier does not have this data but can provide allocated information on their Scope 1 or 2 emissions in relation to the product or service, Hybrid is the best option. If none of this information can be gathered, then Average-data or Spend-based would be the best method to use.

Step 3: Collect Data and Choose an Emission Factor

Data collected should be reliable and accurate for all methods employed. Supplier specific data includes emission information directly from the supplier on quantity of goods and services purchased, including its unique cradle-to-gate emission factor. The hybrid method incorporates this primary data with secondary data from Scope 1 and Scope 2 emissions. These allow the company to identify the upstream emissions generated from the product or service purchased and their respective emission factors. The Spend-based and Average-data methods utilize industry data for emission factors. The difference between the two being that Average-data method determines emissions from the mass of the product or service, while the Spend-based method calculates emissions from the economic value of the product or service.

Step 4: Apply Calculation Tools

The next step is to multiply the value of goods or services purchased by their corresponding emission factor determined in Step 3. Below is an example of calculating the total emissions using the Spend-Based method.

Calculated emissions from the illustrated data are equal to 4,150 kg CO2e.

Step 5: Roll-up Data to Corporate Level

In this step, the calculated emissions are compiled and reported to the relevant leaders within the organization. Aggregating these totals and presenting results from the above steps to corporate leaders is essential for developing sustainability goals and evaluating the company’s overall carbon footprint. Data can also provide insight into how well the company is meeting or failing to meet its goals.  

Challenges in Reporting Scope 3 Emissions

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. Leveraging procurement means including carbon reporting and reduction requirements in contracts. Along with this, penalties and terminations for failure to comply with the company’s standard regarding GHG emissions should also be included. Furthermore, building capacity strives to train supplier employees on best practices for carbon reductions and offers resources to promote this goal. Rewarding progress is simply financial incentives for meeting reduction of targets. Lastly, enforcing performance results in a shift of carbon reduction responsibility to suppliers and applies direct financial penalties for failure to meet goals. Implementing these strategies will enhance a company’s collaboration with its suppliers.

Other challenges in reporting Scope 3 emissions are similar to Scope 1 and Scope 2, a discussion of which can be found here.  

Current Reporting  

In 2022, the SEC proposed new rules for climate-related disclosures by companies, which ultimately were not passed. Thus, there are still no current regulations or guidelines under the SEC in the United States mandating the reporting of Scope 3 emissions. However, there are requirements for reporting in foreign countries and select states. A discussion of these can be found here (note: the SEC proposed standards in the article are no longer relevant).  

Despite this, companies have continued to disclose voluntary information in their 10-Ks as they see necessary and further ESG data on their company's websites. Notable reports that include Scope 3 emission data come from Walmart, Tesla, Toyota, and Apple.

An example of Walmart is shown and discussed below.

Conclusion

Scope 3 emissions represent the most complex variable in a company’s GHG inventory. As outlined in the GHGP, it encompasses indirect emissions that occur throughout the value chain in both upstream and downstream activities. The tracking of Scope 3 emissions is both time and work-intensive, making it difficult to maintain an accurate and comprehensive assessment of Scope 3 emissions. As illustrated by larger companies, such as Walmart, Scope 3 emission reduction can be targeted through stronger relationships with suppliers and value chain management. Despite recent setbacks in Scope 3 emissions disclosure, these emissions continue to be a focus for companies striving to enhance transparency, accountability, and long-term environmental performance.

Sources Consulted

1. GHGP Technical Guidance

2. KPMG GHG Emissions Reporting

3. KPMG GHG Emissions Reporting

4. Walmart 10K

Other Sources Consulted

PWC What You Really Need to Know About Scope 3 Emissions and Your Business

PWC How Companies Can Effectively Measure and Manage Scope 3 Emissions

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