Navigating the Complexities of Scope 3 Reporting

Climate reporting is rapidly evolving, with new disclosures and standards emerging. To assess an organisation's impact on climate, stakeholders are increasingly focused on greenhouse gas (GHG) emissions as a measurable and comparable metric. While direct emissions are important, the majority of emissions in several industries come from scope 3 emissions, which refer to the indirect emissions associated with a company's entire value chain. Understanding and accurately reporting scope 3 emissions are crucial for achieving climate targets and meeting disclosure requirements. In this article, we will explore the challenges faced in scope 3 reporting and offer solutions.

What are Scope 3 Emissions?

Scope 3 emissions refer to greenhouse gas (GHG) emissions that occur indirectly as a result of an organisation's activities, but are not directly owned or controlled by the organisation. These emissions are generated throughout the entire value chain, including both upstream and downstream activities. Scope 3 emissions account for the largest share of total emissions for many organisations.

Scope 3 emissions often encompass a wide range of activities, making their measurement and control more complex. Examples of scope 3 emissions can include emissions from the extraction of raw materials for product manufacturing, emissions from the transportation of goods by third-party logistics providers, or emissions resulting from the use of products by end-users.

Why are Scope 3 Emissions Important?

Scope 3 emissions are often the largest contributor to a company's overall carbon footprint—and are therefore becoming increasingly important to measure and manage as part of a comprehensive climate strategy. 

Several factors emphasize the importance of scope 3 emissions:

• Contribution to Climate Change: Neglecting scope 3 emissions disregards a significant portion of a company's environmental impact, contributing to climate change.
• Regulatory Pressure and Risk Management: Investors and other market participants concerned about climate-related risks have placed a major focus on greenhouse gas emissions. Regulatory bodies are introducing new regulations and policies, such as the SEC Climate Proposal and CSRD, that require certain companies to measure, report, and mitigate their scope 3 emissions. Non-compliant companies may be subject to fines or other negative consequences.
• Climate goals and targets: Many organisations set targets for reducing their greenhouse gas emissions as part of their climate action plans. To achieve ambitious climate goals, organisations must go beyond their direct emissions and address scope 3 emissions. Scope 3 emissions often make up the majority of a company's carbon footprint, and reducing these emissions is crucial for meaningful progress toward climate mitigation.
• Business Opportunities: Addressing scope 3 emissions can open up new business opportunities and contribute to value creation through sustainable supply chains, improved resource efficiency, and reduced operational costs.

Companies that prioritize addressing scope 3 emissions are better equipped to mitigate their environmental impact, meet stakeholder expectations, comply with regulations, and capitalize on new business opportunities.

Challenges of Measuring and Reporting Scope 3 Emissions

Scope 3 emissions pose unique challenges as they are indirectly emitted and not under a company's direct control. The following are common challenges encountered when measuring and reporting scope 3 emissions:

• Data Availability: Collecting data on scope 3 emissions can be challenging due to limited data transparency and traceability across the value chain, as well as a lack of automated and scalable tools for data extraction.
• Complex Value Chains: Companies often have complex value chains with many suppliers and customers, making it challenging to accurately account for all scope 3 emissions. It may also be difficult to determine which emissions are attributable to the company and which are the responsibility of other stakeholders.
• Calculation Methodologies: When it comes to calculating emissions, the GHG protocol provides a variety of calculation methods based on the source of emissions and the type of data available. Calculating scope 1 and 2 emissions is relatively simple, as the data required is often housed within the reporting organisation and uses only a small number of straightforward calculation methods. Scope 3 is where it gets more complex. Whereas scope 2 emissions are calculated by one of only two methods that cover both categories, each of the 15 scope 3 categories can be calculated by multiple different methods (spend-based, average data, supplier-specific, etc), with data varying in granularity and accessibility. 
• Limited Control: Unlike scope 1 and 2 emissions, which are directly under a company's control, scope 3 emissions are largely outside of a company's direct control. This can make it challenging to set targets and implement strategies to reduce these emissions.
• Ever-Changing Regulatory Landscape: As regulations related to scope 3 emissions evolve, organisations need to stay updated and ensure compliance with new reporting requirements. The evolving landscape may introduce additional reporting obligations, measurement methodologies, or disclosure standards that companies must adhere to.
• Cost: Measuring scope 3 emissions can be costly, particularly for smaller companies with limited resources. Calculating emissions along the value chain often requires personnel with technical expertise in carbon measurement, as well as established organisational structures, processes, data management plans, and data quality processes.

Despite these challenges, measuring scope 3 emissions is crucial for understanding a company's environmental impact, meeting stakeholder expectations, complying with regulations, and identifying emission reduction opportunities throughout the value chain. Investing in data collection systems, collaborating with stakeholders, and adopting standardised calculation methodologies help overcome these challenges.

What about Double Counting, and Scope 3?

The Greenhouse Gas (GHG) Protocol defines three scopes of emissions for companies to report: scope 1, scope 2, and scope 3. These scopes are mutually exclusive for the reporting company, meaning there should be no double counting of emissions between scopes within the same company's inventory. For instance, let's say you included your spend on commercial air travel as a purchased good and service AND as a business travel emission - that would be considered a problematic form of double counting.

Double counting in the context of scope 3 emissions is different—and an expected type of double counting. It refers to the unintentional inclusion of the same emissions in the calculation of GHG emissions from two parties within the same value chain. Scope 3 emissions, being indirectly emitted and owned or controlled by external parties within the value chain, require calculation by the reporting company as well as by the direct supplier and any other reporting companies utilizing that supplier.

For instance, when a company calculates its scope 3 emissions by considering the emissions associated with the transportation of its products by a third-party logistics provider, it is highly likely for the logistics provider to also include the same emissions in their GHG inventory as a scope 1 or scope 2 emission. This kind of double counting is unavoidable.

Source: GHG Protocol

Double counting within scope 3 may be acceptable for reporting scope 3 emissions to stakeholders, monitoring progress towards scope 3 reduction targets, and driving reductions in value chain emissions. However, it becomes problematic when dealing with offset credits or other market instruments that convey distinct claims for GHG reductions or removals. To prevent double crediting, companies must clearly specify exclusive ownership of reductions through contractual agreements to avoid any misinterpretation of data and ensure transparency.

Tackling The Scope 3 Data Challenge

If you're ready to tackle your scope 3 emissions and have already measured your total GHG emissions, breaking down the process into manageable steps is a great starting point. Here are the recommended steps to kick-start your journey:

• Prioritize Your Suppliers. Start by identifying the most significant sources of scope 3 emissions within your value chain. Focus on suppliers, activities, and processes that contribute the most to your overall emissions footprint. Typically, around 20% of suppliers account for 80% of the impact. This prioritization allows you to allocate resources efficiently and focus on areas with the greatest impact.
• Improve Supplier Engagement. Foster closer engagement with suppliers to reduce scope 3 emissions. Consider the following approaches:
  - Screen suppliers early on and collaborate with those willing to share primary emissions data. This can be integrated into contractual agreements.
  - Share sustainability initiatives with suppliers or partner with those who demonstrate higher standards compared to their competitors. Noteworthy  Companies like PepsiCo and Walmart prioritize suppliers that align with their public sustainability standards.

• Reduce Downstream Impacts. Collaborate with customers and retailers to invest in research and development aimed at reducing emissions associated with product usage and disposal.
• Leverage Technology. Technology plays a crucial role in supplier engagement. It enables the collection and monitoring of GHG emissions data at scale, providing valuable insights to understand and evaluate progress. Utilizing carbon accounting technology, such as Persefoni's Scope 3 Data Exchange module, can help gather reliable data in a streamlined manner, filling any data gaps. Moreover, it enhances transparency, auditability, and traceability for GHG reporting, in contrast to manual approaches relying on Excel spreadsheets.
• Monitor Progress and Set Targets: Regularly monitor and evaluate your scope 3 emissions data to track progress and identify areas for improvement. Set ambitious yet achievable reduction targets to drive continuous emission reductions throughout your value chain. By measuring performance against these targets, you can assess the effectiveness of your strategies and make necessary adjustments.
• Continuous Improvement: Embrace a culture of continuous improvement by regularly reviewing and refining your scope 3 emissions management approach. Stay informed about emerging trends, industry benchmarks, and evolving regulatory requirements. Seek opportunities to innovate and explore new technologies and practices that can further enhance the accuracy and effectiveness of your scope 3 emissions management efforts.

By following these steps and leveraging the right tools and technology, companies can effectively address the challenges associated with scope 3 emissions data. Taking proactive measures not only helps in reducing emissions but also positions businesses for long-term success in a rapidly changing landscape.

Unlocking Business Value With Scope 3 Emissions Reporting

Accurately accounting for and reporting scope 3 emissions can unlock numerous benefits for your business, driving climate resilience across your company and suppliers. It not only helps mitigate future climate-related risks but also enhances the stability of your business. By collaborating with suppliers who share aligned sustainability goals throughout your value chain, you can simultaneously reduce costs and lower emissions, ensuring long-term viability. As regulatory and investor pressures continue to amplify the need for addressing and disclosing climate-related risks and opportunities, gaining a comprehensive understanding of your entire value chain and implementing emission reduction strategies positions your company favorably. This proactive approach prevents missed financial opportunities and ensures compliance with policy requirements.

With the right tools and strategies in place, measuring, reporting, and reducing your scope 3 emissions is achievable and makes good business sense—whether your company is publicly listed or privately held. Schedule a demo to learn how Persefoni can support your scope 3 emissions measurement and reporting.