What are Scope 3 Emissions

As ESG reporting evolves, it's likely that companies will soon have to not just disclose the direct ways in which they contribute carbon and greenhouse gas (GHG) emissions, but also what happens across their entire value chain-from external distribution van pickup to the customer throwing away their product.

These impacts are what's known as scope 3 emissions, as outlined by the Greenhouse Gas Protocol. In this article, we'll talk about scope 3 reporting and what it involves.

What are scope 3 emissions?

Before a company can create its emission reduction strategy, it needs to understand where different types of carbon and greenhouse gas emissions come from. This is what's behind the three scopes approach: the need to classify the various emissions in terms of where they occur.

The category 'scope' was created as part of the Greenhouse Gas Protocol, which is the most widely used greenhouse gas accounting standard in the world. The protocol put forward three classes-scope 1, 2 and 3-so that companies understand the complete value chain emissions, and from there can enable the greatest levels of emissions reduction.

Emissions scopes are a valuable way to help organisations identify how much CO2 they emit based on every aspect of business operations.

Scopes 1 and 2 emissions are easier to measure, while scope 3 tends to be more ambiguous as they include a range of activities that can account for more significant carbon emissions.

Scope 1

Direct emissions from sources owned or controlled by a reporting company. A shorthand used for scope 1 is "burn", as it accounts for the fuel to heat or power buildings, vehicles and other equipment. Scope 1 also refers to accidental or fugitive emissions arising from chemical and refrigerant leaks and spills.

Scope 2

Indirect emissions that come indirectly from the energy purchased and used by a company in buildings and production processes - electricity, steam, heating and cooling.

Scope 3

All emissions not already covered in scopes 1 and 2, such as emissions arising from upstream and downstream operations. These are likely to be the largest share of an organisation's emissions. They can range from transportation, distribution and the processing of sold products to the energy used to grow or extract raw materials bought by the company.

As you can see, scope 3 emissions are trickier to quantify because a lot of them will occur outside the operational boundaries of the reporting organisation. They are subdivided into 15 categories reflecting upstream and downstream business activities.

Upstream

1. Purchased goods and services
2. Capital goods
3. Fuel and energy-related activities
4. Upstream transportation and distribution (i.e., in the production process)
5. Operational waste
6. Business travel
7. Employee commuting
8. Upstream leased assets

Downstream

1. Downstream transportation and distribution (i.e., the supply and consumption of goods)
2. Processing of sold products
3. Use of sold products
4. End-of-life treatment of sold products
5. Downstream leased assets (i.e., third-party carrier vehicles)
6. Franchises
7. Investments

Why report scope 3 emissions?

Scopes 1 and 2 are an effective way for companies to develop a more holistic view of where their business activities result in emissions as they look at both direct and indirect sources. Although more complex, scope 3 goes a step further, helping to provide a full and more accurate view when used in combination with other scopes. It also:

• Enables companies to spot risks and opportunities to decarbonise across the value chain
• Signals the company's commitment to ESG for its stakeholders
• Supports an organisation to set science-based reduction targets towards net zero
• Maintains compliance with evolving regulations and reporting frameworks

Because of both the complexity and the value stakeholders see in reporting Scope 3 emissions, organisations are increasingly looking for technology to support them throughout the process. Workiva Carbon is an example of a purpose-built tool that lets them collect emissions data under all three scopes and use that data for accurate reporting across internal dashboards, boardrooms, regulatory filings or other records.

Are scope 3 emissions mandatory for reporting?

Reporting rules vary based on where your business operates, but disclosure mandates they have evolved significantly in recent years.

United States

In the US, the Security and Exchange Commission's (SEC) has developed proposals that would mandate all publicly listed companies and foreign registrants to report scope 1 and 2 emissions in their annual filings. However, this mandatory disclosure rule has not yet come into effect-though that may change in the future. Requirements can vary on a state level. For instance, California, the Climate Corporate Data Accountability Act (SB-253) requires all companies operating in the state with revenues of more than $1billion to disclose scopes 1, 2 and 3.

Europe

In Europe, it is mandatory for large organisations to report scope 1, 2 and 3 emissions under the Corporate Sustainability Reporting Directive (CSRD). This is estimated to affect 50,000 organisations. Depending on the success of the directive, it may extend to smaller companies and organisations outside the EU by 2028.

United Kingdom

In the UK, some of the largest companies already disclose scope 1 and 2 as required, but not scope 3. The UK is also currently seeking evidence on the impact of reporting scope 3 as part of the Streamlined Energy and Carbon Reporting (SECR) framework.

Global

Around the world, there are dozens of jurisdictions with proposals in various stages requiring companies to disclose emissions across scope 1, 2 and 3, anchored on the ISSB IFRS S1 and S2 disclosures. Example countries include Canada, Australia, Singapore and Hong Kong.

So, even though scope 3 emissions reporting is voluntary in some regions for now, forward-thinking companies would be wise to consider scope 3 metrics and adopt ways to mitigate emissions across the value chain.

How to manage scope 3 emissions

When carrying out carbon reporting, it's advised that you use guidance documents like the Scope 3 Standard and GHG Protocol Scope 3 Calculation Guidance, which, on top of other things, provide different methodologies of how to calculate scope 3 emissions accurately.

Through our partner organisations, we can support your organisation with calculating scope 3 emissions. The Workiva Marketplace Scope 3 GHG Emissions Calculator & Dashboard streamlines data collection and analysis for all 15 categories defined by the GHG Protocol. Workiva Carbon offers a technical solution to facilitate emissions calculations across scopes 1, 2 and 3, and can serve as a powerful tool to support advisors and partners working with corporate clients.

Beyond higher efficiency, users can also customise the accelerator so that it can support different combinations of calculations and methods. This can help to fully understand your carbon footprint and the scale of total GHG emissions.

Best practices for scope 3 reporting

An effective carbon reduction strategy means understanding precisely what emissions you are trying to reduce and where they come from.

Accounting for these emissions involves prioritising which ones to tackle, creating a plan to do so and communicating with stakeholders across the value chain as you do it:

1. Create a baseline

A full picture of total emissions sources needs to take account of the entire process for manufacturing and consuming a product. This is what companies can separate into upstream and downstream, as the 15 categories of scope 3 show.

From here, you can identify which business activities, and their corresponding GHGP categories, contribute the most to your inventory and where significant mitigations should be made.

2. Start with the obvious

Once you've categorised emission sources into each defined scope, you can consult the departments who are responsible for each area. The key is to focus on a case-by-case basis. Begin with the data you have and work through the upstream or downstream sources one-by-one. For instance, plenty of organisations look at commutes and other employee or business travel data first because this information can be easily pulled by an operations team or external agent.

3. Improve data quality and collection

Under the EU Corporate Sustainability Reporting Directive (CRSD), around 50,000 companies will soon have to report scope 3 emissions. To ensure compliance, organisations need transparent, high-quality data that is easily traced and ready to verify. Since the indirect emissions on a value chain cover a vast amount of data points, you'll need to streamline reporting as best you can before things get too hairy and overwhelm the organisation.

With an automated end-to-end collection and reporting system, you can boost the efficiency of accurate data management and gain visibility over the process so that stakeholders within the company can understand scope 3 impacts and collaborate with each other. For working with suppliers, this will support the quality of data sharing and help to foster a good working relationship.

4. Engage with suppliers

Talking with the people involved throughout the supply chain can be a strong step in elevating the sustainability of production processes. Engage with the external agents you work with and incentivise them to reduce emissions. It is important to maintain a strong communication channel during this time.

You should also keep a scorecard of key suppliers you work with to monitor whether or not they're holding up on their end. By leveraging procurement in this way, you can embed decarbonisation across the value chain. Make carbon reporting and reduction requirements a mandatory part of tender contracts. If suppliers don't meet these requirements, you can have clauses for penalties or even termination.

5. Communicate with customers

Some direct ways to engage customers include providing educational content around the product-not just in marketing materials but within product packaging, reminding buyers to correctly dispose of the products. Consumer disclosure laws are already emerging to support transparency for buyers. For example, the EU's Packaging and Packaging Waste Regulations (PWWR) detailing material composition, reusability and waste stream categories.

Another popular method has been for some consumer-packaged goods companies to incentivise sustainable usage by offering to exchange used containers, which are often disposed of incorrectly. Brands like Proctor & Gamble have even engaged in educational campaigns to educate consumers on how to realise the sustainable benefits of products.

Check out our guide for more information on ESG reporting and how to develop a solid sustainability reporting strategy. You can also take a look at how Workiva is powering transparent reporting for a better world.

Centralised carbon accounting with Workiva

As the demand for sustainability reporting grows, you and your stakeholders need greater accountability over emissions tracking. Plenty of organisations are already working towards their individual ESG commitments and voluntary net-zero ambitions, and gaining oversight is vital to meet these goals.

Workiva Carbon offers you an intuitive, integrated way to measure, manage and communicate your progress. With it, you can automatically calculate carbon emissions across scopes 1, 2 and 3. You can also track GHG emissions across different facilities and locations, using thousands of systems integrations, along with supplier surveys for auditing your network's sustainability.

Our solution lets you account for thousands of externally verified emissions factors, covering 240+ countries and territories, as you scale your business. To find out more information about Workiva Carbon and see if it's the right fit for your organisation's carbon accounting, carbon management and decarbonization programme, request a demo today.

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