Disparities between Scope 3 relevance and corporates’ efforts

Broader value chain emissions (Scope 3) are a material impact for most organizations as they usually account for more than 70% of an organization’s carbon footprint. Supply chain emissions, also referred as the upstream emissions of Scope 3, on average, above 11 times greater than operational emissions according to CDP. Yet many still do not measure it. While 72% of CDP-responding companies reported operational emissions (Scope 1 and/or 2) in 2022, only 41% reported emissions for at least one Scope 3 category.

The primary cause of this disparity is the challenges in measuring and disclosing Scope 3 emissions, such as limited data availability and traceability across the value chain, low quality and/or granularity of data, lack of automated and scalable tools for data extraction, and limited influence over most Scope 3 categories.

Organizations that have not yet developed a full understanding and reporting of their Scope 3 GHG emissions will shortly need to do so in order to keep up with the changes occurring in the regulatory environment and align their climate ambitions with the Paris Agreement.

Evolutions in the reporting landscapes on Scope 3 GHG emissions

The European Sustainability Reporting Standards, an important piece of the Corporate Sustainability Reporting Directive (CSRD), will require some European and non-European companies to have footprinted their whole value chain (Scope 1, 2 and 3) and have set (science-based) targets.

While not mandatory, the Task Force for Climate-related Financial Disclosures (TCFD) encourages businesses to disclose Scope 3 emissions. TCFD-aligned reporting is already compulsory across the UK. Drawing from the TCFD framework, the Securities and Exchange Commission have proposed a new climate-related risk disclosure rule. As part of this, any business with a material value chain or with a Scope 3 target may have to disclose their emissions from upstream and downstream activities.

Scope 3 GHG accounting to understand emissions hotspots and enable significant climate impact

One of the main and many benefits of estimating Scope 3 GHG emissions is the identification of emissions hotspots in an organization’s value chain, or in other words, the biggest emission sources, that will then help you to scale up your emissions reduction strategies and climate goals.

For example, in 2021, HP committed to diverse climate action targets, including a commitment to reach net zero by 2040. By identifying their supply chain as an emission hotspot as it represented over two-thirds of the organization’s emissions, HP decided to engage with their 30 largest partners, responsible for nearly 80% of Scope 3 emissions from directly-contracted-suppliers operations. Engagement took several shapes such as stricter supplier selection, footprint disclosure requests, and support in identifying and adopting environmentally conscious approaches.

Another example is Ford. As the use of Ford vehicles and the company’s supply chain represent 75% and 17% of their Scope 3 emissions, respectively, and around 96% of their total carbon footprint, immediate focus was put on taking concrete steps to address emissions from these sources. With these concrete steps (e.g., shifting product portfolio to clean energy, considering carbon capture and sequestration, engaging with suppliers), Ford is aiming to remain aligned with the Paris Agreement and reach carbon neutrality by 2050.

Corporate approach and resources needed to develop a Scope 3 inventory

In light of the increasing regulatory requirements and significant potential emissions reduction opportunities, it is essential for companies to start accounting and strive to improve the accuracy of their Scope 3 inventory over time. Below are a few key practical tips that are helpful for your organization to overcome challenges posed by Scope 3 GHG accounting. More guidance is available in the download at the top of this page.

- Setting up an internal team with a good understanding of GHG accounting: the team in charge of overseeing the process should build on its GHG accounting knowledge to draw up a plan, including the selection of methodologies, stakeholder engagement approaches, and resources needed, and also be an accessible point of contact for internal and external stakeholders regarding data requests.

- Developing a thorough understanding of the upstream and downstream activities in which the organization is involved: an exercise whereby the main interactions of the organization with external value chain partners are mapped out in relation to the 15 Scope 3 categories can add significant value when starting to conduct a Scope 3 inventory and determining the relevance of each Scope 3 category.

- Completing an initial screening of the 15 Scope 3 categories: performing this initial screening using a quantitative approach and readily available data (e.g., using industry-average data, environmentally extended input output data, proxy data) will give you the most accurate understanding of the relative magnitudes of various Scope 3 activities and how to prioritize further data collection.

Finch & Beak can help you to strengthen your climate journey

Our purpose is to accelerate sustainability within the business of our clients. Together with our fellow colleagues from SLR Consulting, we offer a wide range of Climate Resilience & Net Zero support services:

• Footprint Calculations
• Climate and Net-Zero Strategy Development
• TCFD and CSRD Readiness Assessments
• Full TCFD Support

If your organization requires support in conducting a GHG emissions inventory or strengthening your climate strategy, contact Johana Schlotter at johana@finchandbeak.com or +31 6 28 02 18 80 to discuss how we can assist you.