‘Scope 3 emissions’: what they are and why companies must start reporting them

A carbon inventory (also known as a corporate carbon footprint) is a measurement of an organization’s greenhouse gas (generally referred to as “carbon”) emissions that contribute to climate change. A carbon inventory accounts for “direct” emissions from owned physical assets—buildings, vehicles, trucking fleets, private jets—and “indirect” emissions that occur from day-to-day operational activities such as electrifying warehouses, heating and cooling office spaces, energy needed to operate plant machinery, and fuel used to transport finished products to market.

In the arcane world of carbon accounting, a company’s direct emissions are called Scope 1 emissions. Indirect emissions fall into two buckets: Scope 2 (electricity use) and Scope 3 (value chain emissions). Scope 2 electricity emissions are straight-forward to calculate and easy to identify. A company just needs to look at its utility bills for a calendar year. Scope 3 emissions include 15 “categories” or types of activities that may occur within a company’s supply chain, both up (e.g., sourcing and shipping materials and equipment) and down (e.g., getting products and services to market, and disposal of products) an organizational value chain.

The value of completing a carbon inventory is two-fold. First, it calculates how much total carbon a company is responsible for emitting into the atmosphere. Second, it allows companies to see where within their operations there is “carbon intensity” or which activities within their operations require the most fossil fuel energy use. The first data point allows a company to set a baseline on its carbon emissions that grounds a trendline, in order to set carbon reduction goals to mitigate organizational contributions to climate change over time.

The second value set provides strategic guidance on how to reduce and transition away from fossil fuel energy use at precise points in a company’s supply chain. For a carbon inventory to be useful, meaningful, and impactful, a company needs to conduct a comprehensive carbon accounting and calculate its Scope 1, 2 and all relevant Scope 3 category emissions.

Currently in the U.S., this commitment remains less than adequate. Morgan Stanley Corporate International (MSCI) acknowledges that public companies’ reporting of Scope 3 emissions is sparse and incomplete. Only 18% of MSCI’s constituents even report their Scope 3 emissions and those that do, typically report on two main categories: business travel and purchased goods and services. The software provider Greenstone Plus surveyed some 300 companies this year about Scope 3 emissions and found that 38% of companies report limited Scope 3 emissions (e.g., business travel only), and nearly 24% stated they do not currently report any Scope 3 emissions but are “considering reporting in this area in the future”.

Most companies that engage in carbon inventories annually focus on calculating and reporting Scope 1 and 2 emissions. When you see companies declaring carbon neutrality goals and achieving them, the fine print is that those goals were realized by sourcing 100% renewable energy and purchasing carbon offsets for their Scope 1 and 2 emissions only. These efforts are admirable but not sufficient. Eighty-five to 90% of most companies’ emissions fall into Scope 3. This is true if you are a product manufacturer, a service-based company, or one of the many ubiquitous and proliferating digital marketplaces. Scope 3 is where organizational footprints remain heavy with emissions and where digging into the details of a company’s business model can uncover opportunities to significantly reduce environmental impact.

Here are four steps to follow to conduct a worthy corporate carbon inventory:

MEASURE

Don’t deny your Scope 3 carbon emissions.

If you lease office, plant, or warehouse space, carbon emissions associated with energy, heating and cooling of those spaces fall into Scope 3. Service companies have been almost universally work-from-home during the pandemic. Energy usage from personal electronics, home offices and distributed wifi networks fall into Scope 3. Digital marketplaces and their growth during the pandemic are effectively Scope 3 entities. They lease warehouse space, often have duplicate upstream and downstream transportation and distribution footprints, are cloud-based requiring servers to be rented, and need millions if not billions of customer and transaction data to be securely stored. Many digital marketplaces are dabbling in custodial e-commerce models for their buyers and sellers; authenticating digital transactions and securing ownership with non-fungible tokens. NFTs rely on blockchain technologies that by their very nature are inefficient and energy intensive. These aspects of digital entities and the marketplace “products” they offer are all Scope 3 emissions.

MITIGATE

Companies should first pursue carbon reduction strategies within their value chain. Use the mnemonic Obvious to remember three types of mitigation strategies:

Optimize: energy efficiencies, buildings in use, servers processing, amount of business travel conducted, transportation systems, and engagement with value chain partners and suppliers.
Invest: in high efficiency equipment, streamlined logistics, and renewable energy systems.
Substitute: materials, processes and behaviors that support environmental impact reductions such as sourcing products that include recycled content and that are highly recyclable, incentivizing electric vehicle and public transportation use, and eliminating and reducing number of chemicals used in manufacturing.

COMPENSATE