Many companies have made progress in managing their direct emissions (Scope 1) and energy use (Scope 2). However, Scope 3 emissions, which include all the indirect carbon emissions that come from a company’s supply chain and activities, are often overlooked. Ignoring Scope 3 emissions can lead to serious risks, but addressing them also opens up valuable opportunities for companies committed to sustainability. In this blog post, we’ll explain what Scope 3 emissions are, the risks of not dealing with them, the opportunities they bring, and how businesses can start managing them effectively.
What are Scope 3 indirect emissions?
Scope 3 emissions are the indirect emissions that come from a company’s value chain, both upstream and downstream. Unlike Scope 1 and Scope 2 emissions, which are directly related to a company’s own activities or its purchased energy, Scope 3 includes emissions that are not directly owned or controlled by the company.
According to the Greenhouse Gas Protocol, Scope 3 emissions are divided into the following 15 categories:
Upstream emissions:
- Purchased goods and services: Emissions from the production of goods and services a company purchases.
- Capital goods: Emissions from the production of long-term assets such as buildings, machinery, and vehicles.
- Fuel- and energy-related activities (not included in Scope 1 or 2): Emissions from the production and transportation of fuels and energy consumed by the reporting company.
- Upstream transportation and distribution: Emissions from the transportation and distribution of goods purchased by the company, before they are used.
- Waste generated in operations: Emissions from the treatment and disposal of waste produced by a company’s operations.
- Business travel: Emissions from employee travel for work purposes, such as flights and car rentals.
- Employee commuting: Emissions from employees traveling to and from work.
- Upstream leased assets: Emissions from assets leased by the reporting company (but not included in Scope 1 or 2), such as leased buildings or vehicles.
Downstream emissions:
- Downstream transportation and distribution: Emissions from transporting and distributing products sold by the company after they leave the company’s control.
- Processing of sold products: Emissions from the processing of products sold by the company by third parties.
- Use of sold products: Emissions from the use of products sold by the company (e.g., fuel, appliances, vehicles).
- End-of-life treatment of sold products: Emissions from the disposal and treatment of products sold by the company after consumer use.
- Downstream leased assets: Emissions from assets owned by the company but leased to others (not included in Scope 1 or 2).
- Franchises: Emissions from the operation of franchises.
- Investments: Emissions from investments the company makes, such as equity or debt investments.
These categories provide a comprehensive framework for measuring emissions across the entire value chain.
Because Scope 3 emissions cover such a wide range of activities, they are often the largest portion of a company’s total carbon footprint. Measuring and managing these emissions can be complex because they involve engaging suppliers and tracking emissions throughout the entire supply chain. However, for companies serious about reducing their overall environmental impact, addressing Scope 3 emissions is essential. It provides a clearer picture of their true carbon footprint and helps drive meaningful change across the whole business ecosystem.
What are the common challenges of measuring Scope 3 emissions?
Measuring Scope 3 emissions is a complex task for many businesses due to several factors:
Data availability and accuracy
One of the biggest challenges in measuring Scope 3 emissions is gathering accurate and comprehensive data. Since these emissions span across a company’s entire value chain, it can be difficult to obtain precise data from suppliers, distributors, and customers. Many businesses rely on estimates or industry averages, which can lead to inaccuracies. Collecting detailed data requires a lot of coordination, and suppliers may not always have the capacity or willingness to provide the necessary information, making this process time-consuming.
Lack of visibility and control
Another key challenge is the limited visibility and control businesses have over indirect emissions. Because Scope 3 emissions are generated outside of a company’s direct operations, and not from owned or controlled sources, companies often have little influence over how these emissions are produced. Engaging suppliers to provide accurate data and adopt sustainable practices can be difficult. Multiple tiers of suppliers add another layer of complexity, as businesses must gather data from not just direct suppliers, but also from the suppliers of those suppliers.
Complexity in scope and scale
The wide scope and scale of Scope 3 emissions add another layer of complexity. These emissions cover a broad range of activities, from raw material extraction to the disposal of products. As a result, companies often struggle to identify where to start or which areas to prioritize. Without a clear focus, they may end up with incomplete assessments that don’t fully capture the total impact of their indirect emissions. This complexity makes it challenging for business leaders to develop a coherent strategy for measuring and reducing Scope 3 emissions.
What are the risks of not addressing your Scope 3 emissions?
Failing to address Scope 3 emissions can expose companies to multiple risks:
Regulatory risk
One of the most immediate risks is non-compliance with increasingly stringent regulations. Governments worldwide are implementing tougher climate regulations, including the CSRD, SFDR and SEC – and are often requiring companies to disclose and reduce GHG emissions across all scopes, including Scope 3. Failure to report and manage these emissions could result in fines, sanctions, or penalties. As regulations evolve, companies that are unprepared may also face higher operational costs or restrictions that can impact their bottom line.
Reputational risk
Consumers and investors are becoming more environmentally conscious, and transparency around sustainability practices is increasingly expected. If a company fails to address its Scope 3 emissions, it risks damaging its reputation among eco-conscious customers and investors. This can erode trust, reduce customer loyalty, and make the business less competitive in the marketplace, especially if competitors are more transparent about their sustainability efforts.
Investor risk
Investors are increasingly factoring environmental, social, and governance (ESG) considerations into their decision-making processes. Companies that fail to engage with their Scope 3 emissions may see a decline in interest from sustainable investment funds. Without a credible plan to reduce these emissions, businesses may be seen as financially risky, which could limit access to capital and investment opportunities.
Value chain risk
Ignoring Scope 3 emissions can also expose businesses to supply chain risks. If suppliers fail to reduce their emissions, they may face higher costs, regulatory fines, or market barriers, which could disrupt the supply chain. Moreover, these suppliers may be forced to pass on the costs of compliance or carbon taxes, increasing operational costs for companies that rely on them.
What are the opportunities associated with Scope 3 emissions measurement?
While the risks are significant, addressing Scope 3 emissions also presents various opportunities. By engaging suppliers to help reduce emissions, carbon reduction efforts can be effectively implemented. Below are the primary benefits of tackling these emissions.
Cost savings and efficiency improvements
One of the key opportunities lies in identifying inefficiencies across the value chain. By engaging suppliers to help reduce emissions, businesses can streamline operations and potentially reduce costs. Improving energy efficiency in production and logistics, for instance, can lead to lower energy bills, reduced resource consumption, and a more efficient supply chain. These cost savings can improve profitability while simultaneously reducing the company’s environmental footprint.
Strengthening brand reputation
Businesses that actively work to measure and reduce their indirect emissions can enhance their brand reputation. Customers, particularly eco-conscious ones, are drawn to companies that demonstrate a genuine commitment to sustainability. By addressing Scope 3 emissions, businesses can attract a loyal customer base that values transparency and environmental responsibility. Additionally, companies that lead on sustainability often gain a competitive edge in markets where ESG performance is a differentiator.
Access to sustainable investment
Businesses that address Scope 3 emissions are more likely to attract investors who prioritize ESG metrics. With ESG investment funds on the rise, companies that provide accurate data on their emissions and have a clear strategy for reducing them are better positioned to access green financing or other sustainability-linked financial products. This opens the door to new funding sources and can improve financial stability.
Supplier collaboration and innovation
Engaging with suppliers to reduce emissions fosters collaboration and can lead to innovation across the value chain. By encouraging suppliers to adopt greener practices or more efficient technologies, businesses can drive the development of sustainable materials, processes, and products. Strong supplier partnerships built on shared sustainability goals also make the supply chain more resilient and adaptable to future challenges.
How do you get started with measuring your Scope 3 emissions?
Getting started with managing Scope 3 emissions may seem daunting, but following these steps can help set your business on the right path:
Conduct a baseline measurement: Use the greenhouse gas protocol to understand where your emissions come from across the value chain. This involves mapping both upstream and downstream activities, from supplier emissions to waste generated by customers.
Engage suppliers early: Collaboration with suppliers is essential for tackling indirect emissions. By engaging your suppliers, you can gather accurate data and encourage them to adopt more sustainable practices.
Set clear reduction targets: Once your baseline is established, set ambitious yet achievable reduction targets that are aligned with broader corporate sustainability goals. These targets should focus on reducing emissions across the full scope of your value chain.
Monitor progress regularly: Emissions reduction strategies must be dynamic. Regularly review your data and progress to ensure you’re on track to meet your goals. Adjust your approach if needed based on performance and new insights.
Positively engage customers and stakeholders: Educate customers about your sustainability efforts and encourage them to adopt behaviors that contribute to emissions reduction. This can foster customer loyalty and further reduce emissions throughout the product lifecycle.
Use carbon accounting software: Consider using carbon accounting software to streamline the process of tracking and managing emissions. These platforms can automate data collection, provide real-time insights, and help you monitor progress toward reduction targets. Carbon accounting tools often integrate with supplier management systems, making it easier to collect accurate data from across the value chain. Many also offer analytics to identify areas for further emissions reductions, helping you make informed decisions on your sustainability strategy.
Turning Scope 3 emissions into a strategic advantage
Addressing Scope 3 emissions is a critical challenge, but it’s also a strategic opportunity for businesses looking to lead in sustainability. While the risks of non-compliance, reputational damage, and supply chain disruption are real, companies that proactively manage their indirect emissions can unlock significant cost savings, enhance their brand reputation, and build stronger relationships with both suppliers and customers. With the right tools, including carbon accounting software, business leaders can develop a robust strategy for addressing Scope 3 emissions, driving both environmental and financial benefits in the process.
