Scope 3 emissions fall into 15 categories that are divided into two groups: one, referred to as ‘upstream’, focuses on the goods and services a company and its employees consume while doing business; and the other involves the ‘downstream’ GHG emissions of the goods and services that a business produces.

Common Scope 3 emissions are the goods and services a company purchases, the distribution and use of its own products by customers, the disposal of its discharges and waste, and employee commuting or business travel.

Why are Scope 3 emissions more difficult to track than Scope 1 or 2?

Despite engaging in similar activities, companies with different corporate structures can have

different emissions profiles. For example, one retailer might own its own trucking fleet, creating Scope 1 emissions, while another outsources transportation options, creating Scope 3 emissions. Such differences pose a challenge when trying to compare the emissions profiles for companies within the same industry. 

While these difficulties exist in Scope 1 & 2 reporting, they are magnified for Scope 3 because of a variety of factors, including the lack of reliable data and lack of validation of that data, the greater variation in methodologies and the fact Scope 3 emissions often dominate a company’s total footprint. For example, Scope 3 emissions may be responsible for as much as 88 percent of the overall emissions from the oil and gas industry, due largely to distributing the end product, the emissions created in their use and disposing the waste. Determining precise figures is difficult as double counting may occur, with some Scope 3 emissions possibly captured as Scope 1 or 2 elsewhere in the corporate spectrum. It’s also important to note that companies generally have limited visibility into and control of their suppliers, and are frequently challenged to know how customers use their products.

The two commonly-used approaches for calculating emissions in the ‘Purchased Goods and Services’ category further complicate Scope 3 tracking. One is to approach suppliers and ask them to disclose the emissions associated with the goods and services they provide. Another is to use an economic input-output model, which estimates emissions from the production and upstream supply chain activities of different sectors and products in an economy.

Given the difficulties, why calculate Scope 3 emissions?

The Securities and Exchange Commission in March 2022 released a proposal requiring public companies to report their emissions, including in many instances their Scope 3 emissions. The proposal received more than 15,000 public comments, “more than we’ve gotten on any other rule in the history of our commission,” according to SEC Chair Gary Gensler, who in March 2023 indicated the agency was considering scaling back its emissions disclosure rule because he didn’t want to “get ahead of the process” and acknowledged that fewer companies accounted for Scope 3 emissions than Scopes 1 and 2 as those calculations weren’t as “well developed.”

EU officials, who met with Mr. Gensler and industry representatives in Washington during April 2023, said the bloc would be unlikely to treat the U.S. disclosure rule as comparable to their own if Scope 3 requirements aren’t included in the SEC’s final rule. Regardless of the requirements in the version likely to be finalized sometime in 2023, companies have been preparing to address possible Scope 3 requirements.

The European Union under the Sustainable Finance Disclosure Regulation requires any fund manager holding “sustainable” investments to provide more information about companies in their portfolios, as financial entities needed to start measuring companies’ Scope 3 emissions as of Jan. 1, 2023. Additionally, the EU Corporate Sustainability Reporting Directive that will require companies to report Scope 3 emissions data will gradually roll out from 2024 to 2028 according to company size, with approximately 50,000 companies being required to comply starting in 2024 according to some estimates. 

Additionally, increasing numbers of companies are making public pledges to reduce their emissions to “net zero,” or a situation in which emissions are fully outweighed by emissions reductions. Given Scope 3 emissions are such a significant part of overall emissions, delivering on these pledges requires accounting for and controlling Scope 3 emissions.

Examples of companies that are tracking and reporting Scope 3 emissions include the founding partners of the Transform to Net Zero initiative, which includes AG , Corp. and Inc. among the 10 original companies. While Scope 3 targets in Net Zero pledges are often vague because it’s not clear how the companies should incorporate them, the Transform to Net Zero companies acknowledge this by noting the standards are evolving. Meanwhile, Co. , which is not a member of the Transform to Net Zero initiative, uses a proprietary method of calculating the total emissions generated by its facilities, suppliers and customers involved with the production and consumption of its products.

Getting Started

While organizations of different sizes and industries may have different needs, the following steps can serve as a roadmap for businesses starting a Scope 3 measurement program:

• Understand which Scope 1, 2 and 3 categories your organization is currently tracking and where the gaps are.

• Accounting for Scope 3 emissions is a long-term commitment. Review and decide which framework or combination of frameworks are most relevant. Examples include:
  • EPA: Scope 3 Inventory Guidance 
  • GHG Protocol: Corporate Value Chain (Scope 3) Standard
  • GHG Protocol: Technical Guidance for Calculating Scope 3 Emissions
  • SBTi: Best Practices in Scope 3 Management

• Assess and prioritize which of the 15 GHG Scope 3 categories are relevant to your business and should be tracked.

• Plan the data collection methods and calculation approaches your business will use. Estimates may be fine for an initial emissions assessment, but will not help with knowing whether a reduction in emissions is happening over the longer term.

• After the data has been collected and analyzed, you have a benchmark to identify where improvements can be made and targets set.

By gaining a better understanding of the impact of their business throughout their value chain and developing more effective GHG reduction strategies, companies can benefit not only themselves, but also their suppliers, customers and other partners, while possibly increasing their attractiveness for potential investors.

Scope 3 Strategies for Success

Renee Morin, the chief sustainability officer at e-commerce company Inc., and Pankaj Bhatia, deputy director of climate and global director of GHG protocol at the World Resources Institute, provided their insights on Scope 3 Emissions in an interview with WSJ Pro Research. Here are the key points and tips they shared.

• Structuring for Success: Having a robust corporate structure and support from the executive leadership and board sets firm foundations for any sustainability program, especially one that aims to cut emissions throughout the value chain.
• Getting the Board Onboard: The board needs to not only understand how and why the company is intending to measure Scope 3 emissions, but it should also buy into that work. Ms. Morin said she briefs the board regularly on eBay’s progress and to remind them that investors are looking for this information.
• Executive-Level Engagement: The sustainability leader must engage stakeholders across the organization, including the leaders of finance, procurement, communications and the chief executive.
• Resourcing the Effort: The resources needed to run a Scope 3 project can be influenced by a company’s ambitions and its industry or sector. Mr. Bhatia suggests one employee may be necessary for each GHG category the business intends to track, with expert consultancy support for any complex value chains and where a lot of follow-ups may be needed with suppliers.

Maturing the Program

Accounting for Scope 3 is a journey and not everything will fall into place during the first go around. After a program is established, additional steps will be required to fine tune its strategic priorities and start to achieve the business’s emissions-reduction objectives.

• Assess Relevance: Companies should strive to get a handle on how the 15 Scope 3 categories are relevant to their business. Ms. Morin said this will help them determine which ones are not sufficiently material to track, while enabling them to focus on those that are important.
• Collaborate with Third Parties: Making a business case to suppliers can help gain their cooperation, according to Mr. Bhatia. For example, a company could explain to its suppliers that tracking Scope 3 emissions is an opportunity for them to reduce energy usage. Additionally, showing progress with Scope 3 numbers and having a demonstrated track record of collaboration could make suppliers more attractive to potential business partners.
• Learn from Others: Keep track of peer companies and apply relevant best practices from industry leaders. Both experts cited Citibank, Hewlett Packard Enterprise Co., IKEA, Kraft Heinz Co., Levi Strauss & Co. and Mars Inc. for being role models in areas such as the use of sold products, project finance, collecting data and the allocation of emissions.

Case studies of company best practices can be found in the World Resources Institute’s Greenhouse Gas Protocol Corporate Value Chain (Scope 3) Accounting and Reporting Standard.

Watch the ‘Getting to Grips with Scope 3 Emissions’ workshop:

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