Published: 22 Dec 2022 · Last updated: 22 Dec 2022
In an earlier blog, we introduced the concept of carbon footprints and established what we mean by scopes 1, 2, and 3 emissions. We speak to a lot of portfolio companies. Over the years we've found that companies often struggle with more practical challenges when measuring their carbon footprint. These issues tend to revolve around collecting relevant data to measure emissions.
Our previous blog focused on the challenges faced when measuring scopes 1 and 2 emissions. See 'The practical challenges of measuring Scope 1 and 2 emissions'. In this blog, we will be focusing on the equivalent challenges for scope 3 emissions. But first, let's recap the different scopes.
Scope 1 Emissions: Direct greenhouse gas (GHG) emissions that stem from sources owned or controlled by the organisation. Typically, these emissions arise from the use of fuels, non-electric vehicles, and refrigerants.
Scope 2 Emissions: Indirect greenhouse gas emissions that arise from the generation of purchased electricity, heating, cooling, and steam. Typically, these emissions come from use of electricity and electric vehicles.
Scope 3 emissions are defined as all other indirect emissions not considered in scopes 1 and 2.
These emissions can originate from activities both upstream and downstream of the reporting company’s activities, including emissions from transportation, distribution, waste disposal, business travel, etc. The GHG Protocol splits scope 3 emissions into 15 constituent categories; 8 of which are upstream and 7 of which are downstream.
Regulations across multiple jurisdictions typically require scope 3 emissions to be disclosed after scopes 1 and 2 emissions. This is because they are considered less core to the company’s footprint. They are also typically more difficult to measure. However, according to research from the Carbon Trust, scope 3 emissions typically account for anywhere between 65% to 95% of a company’s carbon footprint. It is therefore vital that companies begin to tackle these emission sources now.
After numerous conversations with portfolio companies, most of which have a relatively low level of environmental, social, and governance (ESG) maturity, we have found that companies often don't know where to start with scope 3 measurement. If a company is overwhelmed, this could mean that they don't attempt to measure scope 3 emissions at all.
With this in mind, our philosophy at KEY ESG is to start somewhere. This way, year-on-year, scope 3 reporting can be gradually improved. When using an incremental approach, companies have more time to collect the relevant data. This means that they are in a better position to report on their scope 3 emissions when regulations eventually require them to do so.
For further information on scope 3 regulatory timelines, please see: 'A timeline of upcoming carbon accounting requirements'.
There are two main practical challenges that we see companies that are not using KEY ESG’s scope 3 tool encounter time and time again.
The first challenge concerns the 15 scope 3 categories outlined by the GHG Protocol. These categories are referenced in many ESG regulations as the gold standard for scope 3 reporting. However, the reality is that the categories and associated documentation are incredibly detailed and unwieldy for most. Many of the categories rarely apply to smaller companies, such as Franchises and End of life treatment of sold products, and clear guidance is not offered on how to easily measure emissions for each of these categories. Companies with minimal ESG resources do not have the time to review 100s of pages of documentation to identify the appropriate data to collect and the right methodologies to use for each category.
The second challenge we often see companies face relates to their relationships with supply chain partners. A significant proportion of possible scope 3 emissions data relies on information from suppliers/distributors both upstream and downstream of the company’s activities regarding their scope 1 and 2 emissions. However, we often hear from companies that these supply chain partners don’t have the relevant emissions information to provide.
That being said, we are seeing a promising trend towards improved cooperation from supply chain partners. This is likely because they are receiving an increasing number of requests for emissions data from other companies. In addition, they themselves will likely soon be regulated and will be required to report on their own emissions. Without this direct emissions data, there are still spend-based methodologies that can be used, which we include in our software. This may be less accurate, but it allows companies to get a better understanding of their full carbon footprint.
Our scope 3 measurement tool breaks down scope 3 emissions into measurable and industry-agnostic categories, different to the 15 GHG Protocol categories. Although these categories may not cover the entirety of a company’s scope 3 footprint, they cover the vast majority of scope 3 emissions for most companies, particularly for office-based companies.
These categories include hotel stays, staff commuting, business travel, working from home, purchased goods/services, and emissions arising from water consumption and waste production. Each category has its own bespoke estimation model developed by our team, where the data required is easily accessible to all companies.
Working from home emissions, for instance, are split into three main categories: heating, cooling, and equipment usage. In a post-COVID world, homeworking is becoming an increasingly prevalent source of scope 3 emissions. We have recently seen an increase in the number of studies examining the environmental impact of this shift, such as those by Anthesis and EcoAct. Information on average employee behaviours and home equipment is required in order to complete this data point. This can be obtained either through suggested average values obtained from research studies, which are provided within KEY ESG software, or by conducting an employee survey. Employee surveys allow companies to obtain more accurate data.
Of course, there are limitations to this scope 3 model. The categories developed cannot cover all possible sources of supply chain scope 3 emissions.
Reporting companies should contact suppliers directly for relevant data to fill in the gaps for any emissions unique to their industry/sector. These emissions can also be entered into our software directly. As previously mentioned, our priority is to get companies started on their scope 3 journey. We seek to empower them to take charge of their carbon footprint and eventually reach their net zero emissions goals.
Companies that address their scope 3 emissions can minimise their carbon footprint and reduce global emissions. This can help them to adhere to regulations, improve their reputation, attract customers, and save on energy costs.
For more information on how we tackle companies’ carbon footprint measurement, get in touch with one of our ESG experts.