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What are Greenhouse Gas (GHG) Scope 3 Emissions?

ESG

Unlike Scope 1 and Scope 2 emissions—which are the direct and purchased energy emissions of a corporation, respectively—Scope 3 emissions are indirect emissions generated from activities of assets not owned or controlled by the reporting organization.

Because they make up an average of 75% of companies’ emissions, it’s no wonder that more and more are setting bold Science-based Targets (SBTs) for Scope 3 emission reduction while many of the emerging climate disclosure regulations now include them as well.

As things continue to evolve, we want to help you gain a better understanding. In this blog, we’ll investigate what Scope 3 emissions are, the challenges of measuring and reducing them, the growing regulations demanding their disclosure, and how firms can kickstart devising strategies to handle and reduce them.

What are the Greenhouse Gas (GHG) Emissions Scopes?

Established in 1997 by the GHG Protocol, the three GHG emissions scopes are separated in a way that companies can use to effectively measure, manage, and reduce emissions across their operations and supply chain:

  • Scope 1 Emissions (Direct Emissions): Stem from activities directly conducted or controlled by your organization, including emissions resulting from the combustion of fossil fuels in boilers and vehicles.
  • Scope 2 Emissions (Indirect Emissions from Energy Consumption): Originate from the consumption of purchased electricity, steam, heating, and cooling.
  • Scope 3 Emissions (Other Indirect Emissions): Comprises all other indirect emissions that occur within your value chain but arise from sources beyond your direct ownership or control, including those originating from loans, investments, and the extraction of raw materials, among various other sources, in areas such as waste disposal, business travel, employee commuting, and the entire lifecycle of products sold. 

As it continues to play a vital role in categorizing and managing emissions across operations, products, and supply chains, this system helps organizations take ownership of even the emissions beyond their immediate control so that youcan develop more comprehensive decarbonization strategies.

The 15 GHG Scope 3 Categories

Still, because Scope 3 emissions encompass a diverse range of indirect activities, it can be difficult to measure, manage, and shrink them, which often results in the exclusion of these emissions from what are becoming necessary calculations.

To assist you in more effectively managing these intricacies, the GHG Protocol has further categorized Scope 3 emissions into 15 distinct categories—a structured framework for comprehensive emission management:

Category

Emission Source

Purchased Goods And Services

Production of goods or services purchased/acquired.

Capital Goods

Production of capital goods purchased or acquired.

Fuel- and Energy-Related Activities

Production of fuels and energy purchased and consumed, which are not covered in Scope 1 or Scope 2.

Upstream Transportation and Distribution

Transportation and distribution of goods and services in vehicles that are owned or controlled by a third party.

Waste Generated in Operations

Waste generated in the operations of the reporting company.

Business Travel

Transportation of employees for business-related activities in vehicles that are owned or controlled by a third party.

Employee Commuting

Transportation of employees between their homes and worksites. (Work-from-home consumption can also be included in this category.)

Upstream Leased Assets

Operation of leased assets (not included in Scope 1 or Scope 2).

Downstream Transportation and Distribution

Transportation and distribution of goods and services in vehicles that are owned or controlled by a third party after the point of sale.

Processing of Sold Products

Processing of sold products by other companies of the value chain.

Use of Sold Products

Use of goods and services sold in the use phase.

End-of-Life Treatment of Sold Products

Disposal of sold goods and services at the end of their life.

Downstream Leased Assets

Operation of assets leased.

Franchises

Emissions from franchises.

Investments

Emissions from investments (equity or debt), a.k.a. financed emissions.

Using this framework of 15 categories, businesses can gain valuable insights into the key areas where they can improve emission reduction through focused decarbonization strategies.

(For instance, a financial institution may discover that category 15—involving investments and loans—represents more than 99% of emissions, while category 12, associated with the end-of-life treatment of sold products, entails zero emissions for that organization.)

Is GHG Scope 3 Emissions Reporting Mandatory?

Once you understand where your emissions lie, is it necessary to report them? While Scope 3 emissions reporting currently remains voluntary in the U.S., significant changes are underway that will lead to mandatory requirements, particularly for publicly traded companies and those operating within the European Union (EU). Changes like:

  • California Climate Corporate Accountability Act: The most far-reaching legislation impacting Scope 3 emissions disclosure to date, this new law mandates Scope 1, 2, and 3 reporting and verification of all companies doing business in California with more than $1bn in revenue.
  • S. Securities and Exchange Commission (SEC) Climate Disclosure Rule: Proposed in March 2022, this new rule would mandate Scope 3 emissions disclosure for large filers when material—or if part of an emissions reduction target—though heated debates during the comment period created doubts about whether the final rule will include this requirement.
  • EU Corporate Sustainability Reporting Directive (CSRD): This directive requires Scope 3 emissions disclosure for EU companies and any non-EU companies with subsidiaries in the EU that:
    • Employ over 250 individuals;
    • Are publicly traded on an EU stock exchange; or
    • Generates more than €150 million in EU revenue—that’s over 50,000 organizations in the EU and more than 3,000 in the U.S.

Moreover, the International Sustainability Standards Board (ISSB) climate framework is also poised to promote the wider adoption of mandatory Scope 3 reporting.

The Benefits of Understanding GHG Scope 3 Emissions

Though most of these proposed and passed regulations for Scope 3 disclosures still mainly affect public organizations, there are benefits to be gained by private companies in tracking their emissions (despite their not being required to report them):

  • Improved Reputation: Understanding your Scope 3 emissions and their significance can positively market you as a sustainable organization.
  • Jumpstart on Possible Vendor Contract Requirements: Many prominent companies are voluntarily establishing ambitious climate targets encompassing Scope 3 emissions—in so doing, they’re incorporating contractual clauses mandating suppliers disclose their emissions, which you’ll be ready for if you’ve gotten started tracking yours.
    • Moreover, as those publicly traded companies navigate U.S. and EU regulations, they’re likely to request precise and timely emission accounting from their private suppliers.
  • Better Collaboration Throughout the Supply Chain: Whether driven by voluntary commitments or regulatory compliance, companies that increasingly embrace scope 3 emissions will also expect their vendors to disclose their emissions, fostering deeper collaboration and accountability throughout the value chain.

2 Challenges in Tracking GHG Scope 3 Emissions

Despite the benefits of tracking and reporting them—and even though they represent such a significant contribution to overall emissions—measuring Scope 3 emissions can still be considerably difficult, which is likely why, to this point, many companies have chosen to exclude them from their disclosure and target-setting efforts.

To successfully and accurately measure Scope 3 emissions, you must fight through two key challenges:

  • Acquisition of Reliable Data: Gathering data from indirect sources within your value chain—including from various stakeholders like customers, suppliers, and transportation companies—can be demanding. However, inconsistencies and gaps in your collected data sets may lead to inaccuracies that impede the establishment of Scope 3 emissions targets and your effective tracking of progress—therefore, it’s crucial you ensure the data is standardized and accurate.
  • Limited Access to Expertise and Resources: Especially prevalent and difficult for smaller companies that lack dedicated sustainability staff, Scope 3 emissions measurement requires time, personnel, and financial resources, so you’ll need to account for and allocate resources for the necessary technologies and expertise needed.

How to Reduce Scope 3 Emission Reduction

More important than tracking them is the reduction of Scope 3 emissions, as they typically account for over 75% of a company's total emissions. But that too can be challenging, given their indirect nature, so here are some effective strategies you can implement in certain areas to initiate Scope 3 emission reduction efforts:

Supply Chain Management

  • Collaborate with suppliers to establish climate targets, encourage emissions reductions, and set requirements—you may even require a commitment to an SBT as part of your procurement decisions.
  • Embrace sustainable sourcing practices for low-carbon materials and transportation to drive significant emission reductions.

Employee and Customer Engagement

  • Educate customers on adopting the least carbon-intensive ways to use and dispose of your products.
  • Encourage employees to embrace sustainable commuting practices and promote sustainable business travel methods.

Product and Service Innovations

  • Design products that optimize energy efficiency and are environmentally friendly throughout their entire lifecycle, from materials used to transportation and end-of-life considerations—this can also lead to cost savings.

The Companies Leading the Way

Two great examples of those taking active measures in these aforementioned areas are Microsoft and Walmart, who are both working to mitigate climate risks and enhance resilience within their supply chains:

Microsoft

  • Supply Chain Management: Not only has Microsoft introduced a tool that enables suppliers to measure and disclose their emissions, but they also expect suppliers to share their emissions data and establish ambitious emissions reduction targets as part of their supplier code of conduct.
  • Customer Engagement: Microsoft empowers customers to optimize their operations using their cloud computing systems, aiming to reduce their carbon footprint.
  • Product Innovations: Microsoft adopts a holistic approach by considering the entire life cycle of its products—through initiatives like the Xbox Design for Sustainability program, they focus on designing consoles that are more repairable and recyclable, thereby minimizing the environmental impact throughout the products' lifecycle.

Walmart:

  • Supply Chain Management: Walmart actively collaborates with and incentivizes suppliers to collectively measure, manage, and reduce emissions through initiatives such as the Sustainability Index, an assessment tool that enables suppliers to evaluate sustainability performance across the life cycle of their products.
  • Product Innovations: As part of their commitment to reduce Scope 3 emissions, Walmart has launched initiatives like Project Gigaton, which aims to reduce 1 billion tons of emissions across the global value chain by encouraging suppliers to report on emissions reductions and encouraging sustainable sourcing.

Demystify Scope 3 Emissions with Expert Assistance

Scope 3 emissions are the most significant scope of emissions for most companies and should be a crucial part of all decarbonization plans, as reducing them remains the most effective way to reduce your overall carbon footprint. And while the regulatory landscape is still changing—one that may or may not affect you directly—remember that you are part of someone else’s Scope 3 emissions, and so it’s likely that someone will ask you to help them measure, manage, and reduce them.

That’s why it’d be wise to get familiar and start this process sooner rather than later, and if you’re interested in getting ahead, Schellman can help your organization get credible recognition for your ESG and Sustainability strategy.

With our expertise in data management, deep understanding of carbon accounting, tools to audit emissions data, and our skills in integrating emissions reporting into compliance assurance, we can help you gain a comprehensive overview of your GHG emissions footprint—contact us today to see if we’re the right fit for you.

About Tom Andresen Gosselin

Tom Andresen Gosselin is Schellman’s ESG & Sustainability Practice Director and is responsible for ESG Assessment, Assurance, and Certification Services in all regions. Tom is an experienced assurance practitioner, having acted as Lead Verifier of sustainability reports across five continents for some of the world’s most recognizable brands. He has also developed innovative assurance protocols addressing global environmental challenges such as ocean-harvested plastics and circularity, cattle ranching and deforestation in the Amazon, and human rights in coltan mining. Tom has worked continuously in ESG for over 25 years and in 4 countries but has settled down in Atlanta with his 2 sons and a dog.