Scope 3 emissions can represent over 90% of a company’s carbon footprint. Regulators are zoning in on them, particularly in high-emitting industrial and commodity supply chains — and this will impact many companies’ business models.
With organizations increasingly disclosing their full carbon footprint on the road to net zero, find out more about the importance of Scope 3 emissions, why this data enables companies to better understand their climate impacts, and how to begin this complex reporting process.
Scope 3 emissions are indirect emissions emitted across an organization’s value chain, the result of activities which are not directly controlled or owned by the company. The exception is indirect emissions from the purchase or use of electricity generated elsewhere: those emissions are Scope 2, rather than Scope 3.
Categorizing greenhouse gas (GHG) emissions into ‘Scopes’ was first introduced by the GHG Protocol, a leading provider of standards and tools which help organizations quantify their emissions. Scope 3 emissions are complex to measure, and originate from a wide range of sources, which is why the GHG Protocol identifies 15 categories of Scope 3 emissions — to better guide on measurement, identify where companies’ Scope 3 hotspots are, and make cross-company comparisons easier.
Scope 1 covers emissions from sources which a company owns or directly controls. Scope 2 covers emissions which are indirectly caused by companies through the electricity, heating,cooling or steam they purchase and use.
Scope 3 emissions include sources which are not within a company’s Scope 1 and Scope 2 operational boundaries. Examples include emissions from suppliers' facilities that produce a company's purchased goods, transportation of purchased or sold goods, and how products are used once sold.
While Scope 3 emissions represent the largest share of an organization’s GHG emissions — especially for companies creating and trading physical products — these emissions will represent Scope 1 and 2 emissions for other companies in the original organization’s value chain. In short: one company’s Scope 3 emissions are another company’s Scope 1 or Scope 2 emissions.
If all organizations were equally invested in reducing their carbon emissions, Scope 3 emissions would be easier to monitor and manage.
However, the reality is that economies are highly interconnected and organizations have influence on emissions they do not directly produce. Companies can make decisions about which raw and processed materials they buy and where from, who they work with, who they sell to, and how they design their products — which in turn influences emissions elsewhere in the economy.
One of the GHG Protocol’s original goals was to avoid double counting between companies. This is somewhat inevitable, as one company’s Scope 1 and 2 emissions are another company’s Scope 3 emissions. However, by accounting for companies’ direct and indirect emissions in a value chain, this categorization facilitates organizations working in tandem to reduce emissions.
Manufacturers’ carbon footprints are likely to have a very high share of Scope 3 emissions.
With carbon prices on the rise, commodity traders should keep an eye on the Scope 3 emissions of high-risk products.
Banks looking to reduce their portfolio’s carbon intensity will need to focus on Scope 3 Category 15 emissions — investments — as their primary carbon hotspot.
A comprehensive GHG inventory outlining all three Scopes allows organizations to identify and focus efforts on their largest emissions sources. Disclosing Scope 3 emissions allows stakeholders to more easily compare companies’ carbon footprints.
By disclosing Scope 3 emissions, an organization becomes more accountable for the internal and external environmental capital it expends and therefore more accurately reflects the true cost of the financial value the organization generates.
Companies are increasingly analyzing their value chains to understand the full impact of their business. Classifying and disclosing different types of emissions provides an indication of the control an organization has over GHG emissions and pinpoint emissions reduction opportunities.
Scope 3 emissions could be considered as an organization's GHG ‘externalities’, helping provide a fuller picture of a company’s carbon footprint. Therefore, if an organization does not disclose Scope 3 emissions, it underrepresents its true environmental impact. Limiting disclosures to Scope 1 and Scope 2 could also result in inaccurate carbon pricing, and present an incomplete picture of how physical aspects of climate change will impact an organization.
Disclosing Scope 3 emissions is also an important step towards reaching global climate goals. Measuring and managing Scope 3 emissions at one larger company has the potential to create a chain reaction whereby that company asks its suppliers and customers to do the same (since those form part of the original company’s Scope 3) — thereby accelerating decarbonization worldwide.
Scope 1 and Scope 2 emissions reduction can usually be achieved without significant changes to an organization’s operations, e.g. by sourcing renewable energy.
However, reducing Scope 3 emissions will lead to a more fundamental business model transformation — radical changes will likely be required in how a company’s suppliers and customers operate, as well as changes to a company’s products.
The earlier a company can measure and disclose all Scopes, the easier it will be to adapt to a lower-carbon world.
With regulations requiring companies to disclose Scope 3 emissions ramping up worldwide, it is also important for companies to get ahead of any policy developments which may dramatically impact the way they do business. For example, the EU’s Corporate Sustainability Reporting Directive (EU CSRD), the US Securities and Exchange Commission (SEC) climate disclosure rules and the UK’s Streamlined Energy and Carbon Reporting (SECR) legislation.
Disclosing Scope 3 emissions requires time and effort, which is why it is important to create a dedicated strategy to track progress. Considering the complexity of many companies’ supply chains — particularly in metals, energy and manufacturing — it can be difficult to pinpoint where effort should be focused in quantifying Scope 3 emissions.
One way to prioritize Scope 3 calculations is to complete a screening of Scope 3 sources. A review of a company’s procurement spend — analyzing spend categories, products or services purchased, and prominent suppliers — is a good place to start.
Once an organization has a procurement spend breakdown, it can use spend-based emission factors for an initial assessment of 'emissions hotspots’ within its value chain.
Using this initial information, companies can then move towards better quality data and prioritize:
Organizations can also prioritize different focus areas depending on activities the company has influence over, activities which most impact its critical functions, which stakeholders are deemed most important and which areas identified are most sectorally significant.
Once a reporting period is established, activity data (data from activities which generate GHG emissions) and emissions data should be collected across all emission sources. Over time, it is important to improve data quality to avoid relying on estimates.
Screening Scope 3 sources can help companies decide how to prioritize suppliers’ data. There is a ‘best practice’ data collection hierarchy we recommend following:
💡On CarbonChain’s platform, companies can automatically calculate their Scope 3 emissions with granular accuracy.
There are two main approaches an organization can take to measure its Scope 3 emissions:
GHG emissions are quantified using direct monitoring, mass balance or stoichiometry, such as a flue gas meter.
The most common method used by companies, this approach quantifies GHG emissions by multiplying activity data by an emission factor (the rate at which a given activity releases GHG emissions into the atmosphere).
Different calculation approaches include:
Uses a combination of supplier-specific data (where available) and secondary data to fill in the gaps, by:
There are several different types of emission factors (EFs) which can be used to calculate Scope 3 emissions:
Leading manufacturers and commodity traders use CarbonChain’s products to access accurate and efficiently-calculated data when analyzing their carbon footprint.
We use a validated methodology to provide corporate footprint information broken down into Scope 3 emissions — across all 15 categories — alongside Scope 1 and Scope 2 emissions. This data can be easily imported into key sustainability reporting frameworks.
CarbonChain also helps organizations define their reporting boundaries, e.g. identifying the companies and relevant emissions sources, outlining justifications for exclusion, helping them report accurately and transparently.
A company’s full carbon footprint is considered when creating a net zero target, so Scope 3 emissions are included in net zero targets.
For companies to reach net zero, every aspect of the business must be compatible with climate stability. Collaboration with stakeholders — and supporting companies within an organization’s value chain to decarbonize — is crucial.
Scope 3 emissions are all other indirect emissions that do not fall under Scope 1 and 2 emission sources. They are sometimes referred to as value chain emissions, and supply chain emissions will likely make up the majority of an organization’s Scope 3 emissions.
However, while supply chain emissions are typically generated by suppliers which companies purchase goods or services from — as well as from customers which a company sells goods or services to — Scope 3 emissions also include things like business travel, employee commuting and operational waste generation, which are not classified as ‘supply chain’ activities.
In the context of sustainability-related disclosures such as GHG emissions, an organization must share information which may affect its prospects.
‘Materiality’ in Scope 3 emissions refers to identifying which indirect emissions are significant enough to impact a company’s financial or environmental reporting. Information is material if omitting, misstating or obscuring it could influence decisions that investors and other stakeholders make on the basis of those reports.
Determining materiality involves both quantitative and qualitative analysis and considers the broader implications of Scope 3 emissions, such as risks and opportunities.
Consider a clothing company. If a significant portion of its carbon footprint comes from the production of the fabrics used in its clothes — often the case in the textile industry — this is material. It's not just about the numbers, as these emissions can affect the company's reputation, compliance risks, and customer preferences.
Under the GHG Protocol Corporate Standard, the concept of materiality is also used to decide how important a discrepancy or error is. As a rule of thumb, an error is considered to be materially misleading if its value exceeds 5% of the total inventory for the part of the organization being verified.
Policymakers worldwide are increasingly requiring companies to disclose their full carbon footprint, and Scope 3 emissions represent their largest share. If companies cannot meet new regulatory requirements, it is clear their bottom line — as well as their reputation — could be damaged.
There are many other benefits to disclosing Scope 3 emissions. Measuring and reporting on Scope 3 allows organizations to better understand their environmental impact, analyze the risks and opportunities present in a low-carbon world, better inform stakeholders about their environmental impact, create a more sustainable and efficient supply chain, encourage innovation, and contribute towards global climate goals.
💡 Read our guide to the frameworks and standards that include reporting Scope 3 emissions.