Scope 3 emissions: what’s in scope in your value chain?

What are the different types of emissions?

According to the Greenhouse Gas (GHG) protocol, which is the predominant accounting tool used internationally, Greenhouse Gas emissions fall into three categories:

·         Scope 1 covers direct emissions from owned or controlled sources

·         Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling that is consumed by the reporting company

·         Scope 3 includes all other indirect emissions that occur in an organisation’s value chain, both upstream and downstream

It is Scope 3 that we’re interested in here. For most organisations, the majority of their GHG emissions will be Scope 3 and therefore outside of their own area of operations. This stands to reason, given the many links in companies’ supply and value chain carbon footprints. Carbon Trust suggests that by measuring Scope 3 emissions, companies can access the following benefits:

• Assess where the emission hotspots are in their supply chain

• Identify resource and energy risks in their supply chain

• Identify which suppliers are leaders and which are laggards in terms of their sustainability performance

• Identify energy efficiency and cost reduction opportunities in their supply chain

• Engage suppliers and assist them to implement sustainability initiatives

• Improve the energy efficiency of their products

• Positively engage with employees to reduce emissions from business travel and employee commuting

While it’s the case that some organisations have begun to address their Scope 3 emissions, there’s still much work to be done, and action remains limited.

The CDP, the not-for-profit charity that runs the global disclosure system for investors, companies, cities, states and regions to manage their environmental impact, states that a company’s supply chain emissions are on average 5.5 times larger than its Scope 1 and 2 emissions, it is therefore very important that businesses tackle Scope 3 emissions to help meet the aims of the Paris Agreement.

Carbon footprint. Photo: Gerd Altmann on Pixabay

As well as the overarching goal of fighting climate change, there is also the matter of reputational risk in ESG terms. The GHG Protocol has this to say:

“By undertaking a scope 3 inventory and understanding where their emissions are, companies can credibly communicate to their stakeholders the potential impacts of these emissions and the actions planned or taken to reduce the associated risks.”

How far should the sector go?

According to a report by the United Nations Environment Programme, construction accounted for 38% of total global energy-related CO2 emissions in 2019, the most recent year for which we have data. In order to reach net zero, it is estimated that emissions will need to halve by 2030. Of course, Scope 3 emissions will only form part of that aggregate but given the difference in size from Scope 1 & 2, it seems clear that it will be the larger part.

With this in mind, UKGBC produced a consultation paper in 2019 for real estate companies that addresses what it thinks the sector needs to do. This is a key section from the document:

“There is currently a lack of understanding on the scale of scope 3 emissions – up to 87% of total carbon impacts for some real estate companies – in the industry, as determined by UKGBC through industry workshops and surveys. This is due in large part to a lack of sector-specific guidance for reporting scope 3 emissions using the Greenhouse Gas Protocol’s Corporate Value Chain (Scope 3) Accounting and Reporting Standard”.

This is effectively a reporting barrier; one amplified by a lack of consistency in the reporting and a tendency to under-report. The GHG Protocol, as you may expect, suggests that sectors should develop their own guidance through a multi-stakeholder approach in order to ensure the widest take up and consistency of reporting.

This is a bit of a hot topic at present, as once we consider indirect emissions resulting from other actors in our value chain, the question of liability and where this should stop comes into play. This has been considered within the GHG Protocol, which includes a chapter entitled, “Setting the Scope 3 Boundary”. As this quote outlines, there is flexibility:

“The GHG Protocol Corporate Standard allows companies flexibility in choosing which, if any, scope 3 activities to include in the GHG inventory when the company defines its operational boundaries. The GHG Protocol Scope 3 Standard is designed to create additional completeness and consistency in scope 3 accounting and reporting by defining scope 3 boundary requirements.”

Working out how much flexibility to allow should be facilitated in the first instance by what the Protocol calls “mapping the value chain”. Of course, such chains are dynamic, mutable and not fixed. Therefore, this will need to be done annually. Decisions about what to include are predicated upon a selection of criteria laid out in Table 5.4 of the GHG Protocol. Emissions from optional categories can, by definition, be omitted. There is also room for situations where a company has Scope 3 activities, but data is not available. This paragraph provides a useful summary of the approach:

“Companies should follow the principles of relevance, completeness, accuracy, consistency, and transparency when deciding whether to exclude any activities from the scope 3 inventory. Companies should not exclude any activity that would compromise the relevance of the reported inventory.”

This seems clear enough; like any quality assurance activity, reporting must speak to a particular requirement. The requirement will be universal, but the reporting will respond to in a variety of ways. Furthermore, it is up to an individual company to decide what its business goals are and account based on that. Once an inventory is established, then it becomes significantly easier to know what areas to address. Of course, there are opportunities here to establish new markets; it’s not simply a compliance exercise. It should be considered as an important part of a holistic ESG strategy that provides a greater level of transparency to all your stakeholders.

Mainer Associates is working with contractors and clients to streamline the reporting of Scope 3 emissions.