Global Sustainability Agenda #32: Unlocking the Complexities of Scope 3 Reporting

A recent paper from the National Bureau of Economic Research found that global extreme temperature events are associated with national reductions in per-capita GNP, investment and productivity.

The study indicates that each 1-degree Celsius increase in global temperature can be linked to a 12% decline in global gross domestic product (GDP), which is six times larger than prior estimates.

It shows that global temperature shocks correlate more strongly with extreme climatic events than country-level temperature shocks and local temperature shocks have a smaller and less persistent effect on GDP.

The impact of global temperature shocks on GDP varies by region, with warmer countries being more severely affected. High-income and low-income countries experience similar effects, but the impact is more pronounced in middle-income countries.

The study underscores the urgency and cost-effectiveness of decarbonization policies, especially for large economies. Due to their significant economic impact, addressing global temperature changes should be a priority.

Unlocking the complexities of Scope 3 reporting

Climate reporting is evolving, with a growing emphasis on greenhouse gas (GHG) emissions as key metrics. While direct emissions are significant, scope 3 emissions, which include indirect emissions across a company’s entire value chain, are often the largest contributor. Accurately reporting scope 3 emissions is essential for achieving climate targets and compliance with emerging regulations.

What are Scope 3 Emissions?

Scope 3 emissions refer to GHG emissions that occur indirectly due to an organization’s activities but are not directly owned or controlled by the organization. These emissions are generated throughout the entire value chain, including both upstream and downstream activities. Scope 3 emissions account for the largest share of total emissions for many organizations, encompassing a wide range of activities, complicating their measurement and control. Examples include emissions from raw material extraction, transportation of goods by third-party logistics providers, and emissions from end-users product use.

Why are Scope 3 Emissions Important?

Scope 3 emissions are often the largest contributor to a company’s overall carbon footprint, making them critical to measure and manage as part of a comprehensive climate strategy. Several factors emphasize their importance:

• Contribution to Climate Change: Ignoring Scope 3 emissions overlooks a significant portion of a company’s environmental impact.
• Regulatory Pressure and Risk Management: New regulations and policies, such as the SEC Climate Proposal and CSRD, require companies to measure, report, and mitigate their Scope 3 emissions. Non-compliance can lead to fines and other consequences.
• Climate Goals and Targets: Achieving ambitious climate goals requires addressing scope 3 emissions, often comprising most of a company’s carbon footprint.
• Business Opportunities: Managing scope 3 emissions can open up new business opportunities, create sustainable supply chains, improve resource efficiency, and reduce operational costs.

Challenges of Measuring and Reporting Scope 3 Emissions

Scope 3 emissions pose unique challenges due to their indirect nature. Common challenges include:

• Data Availability: Limited transparency and traceability across the value chain and a lack of automated tools for data extraction make data collection difficult.
• Complex Value Chains: Companies often have intricate value chains with many suppliers and customers, complicating the accurate accounting of all scope 3 emissions.
• Calculation Methodologies: Unlike scope 1 and 2 emissions, which are relatively straightforward to calculate, scope 3 emissions involve multiple calculation methods and varying data granularity.
• Limited Control: Scope 3 emissions are primarily outside a company’s direct control, making it challenging to set targets and implement reduction strategies.
• Ever-Changing Regulatory Landscape: Staying updated with evolving regulations and ensuring compliance can be challenging.
• Cost: Measuring scope 3 emissions can be costly, requiring technical expertise and established organizational structures.

Despite these challenges, measuring scope 3 emissions is crucial for understanding a company’s environmental impact, meeting stakeholder expectations, complying with regulations, and identifying reduction opportunities throughout the value chain.

Addressing Double Counting in Scope 3 Emissions

The Greenhouse Gas (GHG) Protocol defines three scopes of emissions, which should be mutually exclusive within the same company’s inventory to avoid double counting. However, double counting in scope 3 emissions is common and often unavoidable due to the inclusion of the same emissions in the calculations of multiple parties within the value chain. While acceptable for reporting and monitoring progress, double counting can be problematic when dealing with offset credits or market instruments. Clear contractual agreements and transparency are essential to prevent double crediting and ensure data integrity.

Tackling the Scope 3 Data Challenge

To address scope 3 emissions effectively, break down the process into manageable steps:

1. Prioritize Your Suppliers: Identify the most significant sources of scope 3 emissions within your value chain and focus on the top contributors.
2. Improve Supplier Engagement: Engage with suppliers to reduce emissions, share sustainability initiatives, and partner with those demonstrating higher standards.
3. Reduce Downstream Impacts: Collaborate with customers and retailers to invest in research and development to reduce emissions associated with product usage and disposal.
4. Leverage Technology: Utilize technology for data collection and monitoring. Carbon accounting tools can help gather reliable data, enhance transparency, and ensure traceability.
5. Monitor Progress and Set Targets: Regularly evaluate scope 3 emissions data, set ambitious yet achievable reduction targets, and assess the effectiveness of strategies.
6. Continuous Improvement: Embrace continuous improvement by staying informed about trends, industry benchmarks, and regulatory requirements and exploring new technologies and practices.

By prioritizing suppliers, enhancing engagement, leveraging technology, and committing to continuous improvement, companies can effectively manage scope 3 emissions, mitigate environmental impact, comply with regulations, and capitalize on new business opportunities.