As the world is becoming increasingly aware of the impact of climate change, it’s more important than ever for organizations to understand their carbon footprint and work towards reducing their emissions. Most organizations currently focus on direct emissions (Scope 1) and indirect emissions from energy usage (Scope 2).
However, it is even more critical to understand and manage indirect emissions that originate along a company’s value chain (Scope 3), as the CDP estimates that these are the source of 75% of total emissions on average across industries.
In this article, we’ll aim to answer the following questions:
- What are Scope 3 emissions?
- Why is it important to reduce them?
- How are regulations driving change within organizations?
What Are Scope 3 Emissions?
Scope 3 emissions are the indirect emissions an organization generates outside its operations. These emissions result from an organization’s value chain, including producing goods and services, employee commuting, and waste disposal. Essentially, Scope 3 emissions are the emissions that result from the entire life cycle of a product, from the production of raw materials to the removal of the final product.
- Scope 1: Direct Emissions – These are emissions directly released from company-owned or controlled assets, such as burning fossil fuels for heat or power, industrial processes, and leaks from HVAC and refrigeration systems.
- Scope 2: Indirect Emissions – These emissions are associated with the energy purchased from utility companies to power an organization’s operations.
- Scope 3: Supply Chain Emissions – These are all other indirect emissions that occur in an organization’s value chain, both upstream (performed by suppliers) and downstream (performed by customers).
Upstream vs. Downstream Operations
- Upstream operations occur before an organization’s operations in the value chain.
- Downstream processes occur after an organization in the value chain, usually by customers.
Categories of Scope 3 Emissions
- Business Travel: Emissions from business travel by air, rail, taxis, buses, and other business-related private vehicle use.
- Employee Commuting: Emissions from employees commuting to and from work.
- Waste Generation: Emissions from waste disposal in landfills and wastewater treatments.
- Purchased Goods and Services: Emissions from producing goods and services purchased by an organization (cradle to gate).
- Transportation and Distribution: Emissions from the vehicle and distribution of goods by suppliers and customers.
- Fuel and Energy-Related Activities: Energy-related emissions from fuel production and energy consumption by the reporting organization are not accounted for in scopes 1 and 2.
- Capital Goods: Emissions from the production of capital goods used to manufacture a product, provide a service, store, sell, and deliver merchandise.
- Upstream Leased Assets: Emissions from the operation of assets leased by the reporting company are not included in scopes 1 and 2.
- Transportation and Distribution: Emissions from the transportation and distribution of sold products in vehicles and facilities not owned or controlled by the reporting company.
- End-of-Life Treatment of Sold Products: Emissions from the disposal of sold products encourage companies to design recyclable products to reduce landfill waste.
- Use of Sold Products: Emissions resulting from the usage of products sold to consumers.
- Investments: Emissions associated with investments in equity, debt, project finance, managed the acquisition, and client services relevant to larger financial institutions.
- Franchises: Emissions associated with franchise operations (scope 1 and 2 emissions of the franchisor).
- Downstream Leased Assets: Emissions from the operation of assets leased by the reporting company not included in scopes 1 and 2, involved in upstream activities.
- Processing of Sold Products: Emissions from processing intermediate sold products by third parties.
Why is it Essential to Reduce Scope 3 Emissions?
Scope 3 emissions often account for most of an organization’s total emissions, which makes managing and reducing them essential. Reducing emissions helps mitigate the impact of climate change and has business benefits, such as increased competitiveness, improved brand reputation, and reduced regulatory risk. Additionally, reducing supply chain emissions can improve resource efficiency, reduce costs, and increase sustainability.
How is Regulation Driving Change?
Governments and organizations around the world are taking action to reduce emissions, and this is having a significant impact on how organizations manage their carbon footprint. The Paris Agreement, for example, sets an international goal to limit global temperature rise to well below 2°C and pursue efforts to limit it to 1.5°C. This agreement is driving organizations to act and reduce their emissions, including Scope 3 emissions, from their supply chain.
In addition to the Paris Agreement, there are several other regulations that organizations need to be aware of, including:
- The EU’s Emissions Trading System (ETS) is a cap-and-trade system that limits the total amount of greenhouse gas emissions emitted by power plants, factories, and airlines operating in the European Union.
- The EU’s Sustainable Finance Disclosure Regulation (SFDR) went into effect in 2021, providing more transparency for investors and requiring specific disclosures from asset managers and investment advisers on sustainability risks and principal adverse impacts.
- In 2024, 49,000 EU firms will be required to report environmental and social impacts under the CSRD & ESRS, part of a series of regulatory measures for incorporating sustainability information in corporate disclosures.
- The Task Force on Climate-related Financial Disclosures (TCFD) is a global effort to improve the quality and consistency of climate-related information in financial disclosures.
- SBTI, or Science Based Targets initiative, is a global collaboration between companies, investors, NGOs, and cities that aims to encourage organizations to set science-based targets to reduce their greenhouse gas emissions and help prevent the worst impacts of climate change.
- Organizations that are proactive in reducing their emissions and demonstrating their commitment to sustainability are likely to be better prepared for the regulatory requirements and market changes that are expected in the future.
How Will This Affect Organizations Moving Forward?
Organizations that do not take action to reduce their emissions will face increasing pressure from consumers, investors, and regulators. This pressure will likely result in increased regulatory requirements, decreased market access, and damage to organization. In contrast, organizations that take action to reduce their emissions will probably see benefits, including increased competitiveness, improved brand reputation, and reduced regulatory risk.
Organizations need to understand the importance of reducing their Scope 3 emissions and develop strategies for managing and reducing them. This can include measures such as reducing emissions in the production of goods and services, improving the efficiency of their supply chain, and engaging with suppliers to reduce emissions.
Reducing Scope 3 emissions is a critical step for companies to take in their journey toward sustainability. The regulatory landscape is changing, and companies must adapt to new regulations and take action to reduce their carbon footprint. By addressing their Scope 3 emissions, companies can help mitigate the effects of climate change and create new business opportunities and improve their reputation.