To improve consistency and specificity in ESG reporting, emissions are categorised into ‘scopes’, which separate different kinds of carbon emissions depending on where they originate in production and along supply chains.
Scope 1: Refers to emissions that are created directly as a result of a company’s activities, such as the generation of power for heating and cooling systems, fuel usage from company-owned vehicles, and fugitive emissions such as leaks or spills.
Scope 2: Includes indirect emissions linked to electricity generation to undertake a company’s activities, typically energy for heating, cooling and lighting that is procured from external sources.
Scope 3: Emmissions that are produced externally, in a company’s value chain. These are often the primary sources of carbon emissions for an entity. Compared to Scope 1 and Scope 2 emissions, they are often more difficult to determine as they originate in activities that the firm does not operate, own or control.
This can be problematic for companies in their attempts to disclose their environmental impacts. However, tackling Scope 3 is a crucial aspect for entities aiming to build viable and effective decarbonisation strategies.
How can entities reduce Scope 3 emissions?
There is growing pressure from investors and regulators to curate better systems for tackling Scope 3 emissions. Plans for doing so could have radical implications for the future of business and trade.
Reducing Scope 3 emissions requires entities to examine their upstream and downstream activities and relationships. Entities may be inclined to assess which changes they could make that could contribute to fewer emissions being produced in their value chain. For example, an automobile manufacturer may look at more sustainable options for sourcing materials and parts.
There are many ways that firms can take to offset, manage or reduce Scope 3 emissions, which can be categorised as below:
Goods and services:
- Conscientious choosing of supplies, materials or products, for example, procuring products that have high levels of recycled content
- Engage with suppliers to help them set their own emissions targets
- Working with those who opt for lower-carbon methods and products
- Make methods of transport and distribution efficient with better route planning
- Choose less carbon-intensive modes of travel, such as EVs or hydrogen vehicles
- Choose local supplies or materials
- Apply these changes upstream: work with suppliers that are improving their transportation systems to reduce fuel usage, and those that have purchased less carbon-intensive vehicles
- Implement policies to reduce commuting-related emissions, such as hybrid or remote working
- Encourage and/or incentivise employees to use less-polluting alternative methods of transport (such as biking, carpools and public transit)
- Educate consumers on proper end-of-life disposal
- Design products for reuse, refurbishment or recycling
- Focus on producing energy-efficient products, that should have longer shelf lives and are not associated with large emissions at the point of use
How are ESG developments helping entities to target Scope 3 emissions?
As well as facing challenges in reducing Scope 3 emissions, companies may face more significant hurdles in their attempts to determine and measure them, compared to Scope 1 and 2.
An effective strategy for calculating and reducing Scope 3 emissions is likely to require collaboration with stakeholders across an entity’s value chain, including suppliers, producers, employees and sometimes customers. Better working relationships with partners will allow for accurate and detailed data collection up and down your value chain.
Accurate collection and reporting of Scope 3 will become even more important as ESG requirements develop across the world. Companies trading in EU member nations will face stricter rules when the Corporate Sustainability Reporting Directive (CSRD) comes into effect, including an obligation to track and disclose their Scope 3 emissions.
The directive will usher in requirements that will necessitate higher quality collection and reporting of data. This is a concern for many firms, with a survey finding that 60% of UK firms are unlikely to be ready on time.
The CSRD sits alongside a raft of measures across the world that will put a magnifying glass to emissions produced at all levels of the productive process including resource extraction, manufacturing, transportation, storage and distribution.
Some companies have expressed concerns that calculating Scope 3 emissions accurately will involve a considerable financial burden, but frequent climate disasters remind us that urgent change is a necessity.
Our advisors can help you in your ESG journey as you endeavour to create better systems for collecting, visualising, and disclosing data. Get in touch to learn more about the options you have to make sure you are ready when the time comes.