ESG Reporting

How to solve your company’s Scope 3 reporting challenges

Mar. 6, 2024

What do Nike, Ikea, and Mercedes Benz have in common?

They all have admitted that their Scope 3 emissions are more than 90% – a high portion but standard in many industries.

CDP confirms that most corporate emissions come from Scope 3 sources. These emissions typically constitute around 80% of a company's total greenhouse gas emissions, with specific industries such as financial services, capital goods, and transport OEMs reaching up to 100%. Especially in sectors reliant on raw materials like real estate, construction, metals and mining, or agriculture commodities, Scope 3 emissions encompass a significant portion, ranging from 90% to 95% of a company's entire value chain emissions.

Scope 1, 2, and 3 emissions by sector
Own illustration based on CSP 2022

What are Scope 3 emissions?

According to the Greenhouse Gas (GHG) Protocol, a company's greenhouse gas emissions are divided into three scopes: Scope 1, Scope 2, and Scope 3.

Managing all your emissions, including Scope 1, 2, and 3, is a comprehensive process – from defining your scope boundary settings, assessing your company's emissions, setting emissions targets, and disclosing your emissions. Get help with our four-step guide on emission management.

Scope 3 emissions are all indirect emissions (excluding those in Scope 2) that arise throughout a company's value chain through both upstream and downstream activities.

Upstream emissions-producing activities (everything to produce a product/service)

  • Purchase of goods and services

  • Capital goods (buildings, machinery, etc.)

  • Fuel and energy-related activities

  • Transportation and distribution (of materials to manufacturing facilities)

  • Waste generated in daily operations

  • Business travel

  • Employee commutes

  • Leased assets

Downstream emissions-producing activities (everything to consume a product/service)

  • Transportation and distribution of products to customers

  • Processing of sold products

  • Use of sold products

  • End-of-life treatment (disposal or recycling) of sold products

  • Leased assets

  • Franchises

  • Investments

The challenge of Scope 3 emissions

When it comes to reducing a company's Scope 3 greenhouse gas emissions, businesses face a daunting task. Not to mention that many companies are not yet addressing the reduction issue but are just beginning the complicated task of tracking their Scope 3 footprints.

Scope 3 emissions are large and indirect and, therefore, outside a company’s direct control; estimating and tracking them, let alone reporting them, seem devilishly complicated. This is particularly true for large, internationally operating companies.

We from Envoria can give the following example:

We are working with a global company in the lubricants industry with around 60 locations worldwide, which is aiming for a "net zero target" by 2040. This means that compared to 2021, Scope 3 emissions must be reduced by at least 25% by 2030, and all emissions together must be reduced by at least 90% by 2040. However, more than 90% of the emissions attributable to the company have already been generated when the raw materials arrive at the company premises. A major challenge. In order to track its Scope 3 emissions and ensure the necessary development of a (primary) database, the company has been requesting data on the product carbon footprint (PCF) of all raw materials purchased from its suppliers since 2022. To this end, the company has created a methodology document for the PCF calculation in order to ensure the comparability of raw material data. If no data is available, average values are researched in third-party databases. The company now relies on Envoria to drive forward the standardized, automated and digital recording, documentation, calculation and reporting of its emissions. The software enables simple comparison of internal data and easier access to external emission factors.

Dealing with reporting on Scope 3 emissions

Assessing an organization's greenhouse gas footprint poses significant challenges, primarily due to a lack of data, resources, and standardized methodologies. To accurately determine an organization's exact greenhouse gas footprint, a comprehensive lifecycle assessment would need to be completed for every good or service provided – a costly and time-intensive process.

The challenge of lacking data

When assessing companies’ upstream emissions from purchased goods and services, the accuracy and specificity of data can vary. In an ideal scenario where all companies report their Scope 1 and Scope 2 emissions alongside product lifecycle emissions, companies could depend on supplier-specific and item-specific data to calculate their upstream value chain emissions.

In reality, companies often face challenges in obtaining relevant and sufficiently detailed primary data from their suppliers.

How to

In many cases, a step-by-step approach to data collection can reduce the burden. Only a few suppliers are often responsible for most emissions in a company's supply chain. Around 20% of suppliers typically account for 80% of the impact.

If companies focus on their suppliers, activities, and processes that contribute the most to emissions, high emission reductions can be achieved quickly in the first step. This is what most pioneers in emission reporting do — whether HP or Ford.

In addition, specific questionnaires or discussions with suppliers can help. When direct information from suppliers is unavailable, the GHG Protocol allows companies to utilize industry averages, estimations, and other sources to compute their Scope 3 emissions. Emission factors can be sourced from various databases, including open-source, commercial, or industry-specific and government agency databases. The GHG Protocol itself provides a comprehensive list of secondary data sources.

Glühlampe mit einfarbiger Füllung

Did you know? The Emission Management module of Envoria’s ESG reporting software allows companies to access more than 60,000 emission factors, helping them calculate their emissions without the exhausting search of external databases.

The challenge of missing resources

The lack of resources in emissions reporting presents a significant barrier, particularly for small and medium enterprises (SMEs) striving to measure their carbon footprint. Many find it challenging to process the high volume of data, which is often done manually.

Calculating emissions requires personnel with technical expertise, formal data management plans, and established data quality processes, which can be resource-intensive and financially burdensome. Even when resources are available, they must be balanced effectively, to improve both reporting and reduction of emissions.

The longer and broader the supply chain, the more mammoth the task.

How to

Integrating data collection technology into emissions reporting offers businesses a powerful tool to enhance their processes. By automating data collection, calculation, and management, companies can significantly improve the accuracy and reliability of their Scope 3 emissions data. Advanced emissions measurement software not only facilitates access to consistent and reliable data for suppliers but also optimizes resource utilization and streamlines reporting efforts.

The challenge of calculation methodologies

The GHG Protocol offers a comprehensive framework for calculating emissions, with clear methodologies outlined for Scope 1 and 2 emissions. However, the complexity arises when addressing Scope 3 emissions due to the multitude of calculation methods available. Unlike the limited options for Scope 1 and 2, there are various approaches for each of the 15 Scope 3 categories, such as supplier-specific, hybrid, average, and spend-based methodologies.

Scope 3 emissions calculation methods

Own illustration

Drawing conclusions from a limited sample of suppliers is a commonly used (and beneficial) method of approximating Scope 3 emissions. However, without the necessary statistical proficiency, this approach leads to unreliable data. Conversely, spend-based modeling, for example, relies on industry-standard emissions factors and cannot accurately represent a company's specific emissions footprint.

How to

According to the GHG Protocol, companies should select calculation methods for each Scope 3 activity within a category based on the following criteria:

  • The relative size of the emissions from the Scope 3 activity

  • The company’s business goals

  • Data availability

  • Data quality

  • The cost and effort required to apply each method

  • Other criteria identified by the company

The GHG Protocol provides even more guidance on Scope 3 but leaves practical questions unanswered, leading to uncertainties in data and assumptions.

Consequently, companies must transparently disclose their chosen calculation approaches to stakeholders, particularly when it leads to variations in emissions estimates across organizations and over time.

The challenge of playing a dual role

Besides having their own supply chain, many companies are key players in the supply chain of others. On one hand, they must collect emissions data from their own suppliers to fulfill reporting requirements. On the other hand, they must report their own emissions to other companies further up the supply chain. This includes some of the largest companies in the world, which can impact the climate goals of an entire ecosystem of companies.

At this point at the latest, it is no longer just about collecting, calculating, and reporting Scope 3 emissions but also about reducing them. With it, companies will face new challenges, such as risk management, biased reporting, supplier collaboration, etc.

Without meeting the requirements of companies higher up in the supply chain, companies’ own supplier positions will falter more quickly than they would like. As suppliers, companies have to make sure to comply.

How to

To reduce companies’ footprints, stressing responsible sourcing, human rights, and sustainability regarding supplier selection is the way to go. A data-based approach, in combination with strong supplier partnerships, could be the solution. This is best achieved with the help of software, joining upstream value chain initiatives, as well as close training support for suppliers.

Getting help for faster success

Effectively identifying and measuring Scope 3 emissions is essential for companies committed to addressing their environmental impact comprehensively but challenging. By implementing the solution approaches and strategies outlined in this article, businesses can tackle the challenges of Scope 3 reporting. To support companies with this task, Envoria and its partners offer support with their ESG software and consultancy services for Scope 3 calculations.

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