ESG and your Carbon Footprint: Understanding Scopes 1, 2, and 3

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ESG and your Carbon Footprint: Understanding Scopes 1, 2, and 3

Published: 21 Sep 2022 · Last updated: 15 Oct 2023

The COP26 summit, held in Glasgow in November 2021, highlighted the urgency of action required to reach the goal of the 2015 Paris Agreement - to limit global temperature rise to well below 2°C and preferably to 1.5°C compared to pre-industrial levels by the end of the century.

According to the UN, in order to meet this target, the planet must hit net zero emissions by 2050. This requires all companies, regardless of size or sector, to take action. The first step in this process is for businesses to measure their carbon footprint. However, many companies don't know where to start. This blog outlines what a carbon footprint is and exposes the challenges companies face when attempting to measure theirs.

ESG and Carbon Footprints

In the race to net zero, international agreements such as the Paris Agreement have helped to accelerate the rise of Environmental, Social, and Governance (ESG) investing. The environmental ‘E’ pillar of ESG is increasingly viewed as a method of aligning investments with the low-carbon transition.

Despite criticism from the financial sector that there are too many frameworks measuring ESG performance, one clear metric appears in all major frameworks:

The carbon footprint of a company.

This is defined as the greenhouse gas emissions produced by a company’s activities. A carbon footprint is typically measured in kilograms of carbon dioxide equivalent (kg CO2-eq). This unit system allows for all greenhouse gases to be included, while accounting for their varying global warming potentials. Emitting 1 kg of methane, for instance, is equivalent to emitting 25 kg of carbon dioxide and is therefore equal to 25 kg CO2-eq.

Challenges arising when measuring a company’s carbon footprint can vary based on the type of activities the company engages in, as well as the size of its supply chain. Companies must consider activities that both directly and indirectly contribute to the release of carbon dioxide and other greenhouse gases.

The Greenhouse Gas Protocol was established in 1998 to standardise this process and allow for comparability. Since then, it has published multiple standards for different entities and has gained worldwide recognition.

The GHG Protocol splits a company’s emissions into the three key categories, each of which has explicit requirements for data collection.

The categories are defined as follows:

Scope 1 Emissions:

Direct greenhouse gas emissions that stem from sources that are owned or controlled by the organisation.

Scope 2 Emissions:

Indirect greenhouse gas emissions that arise from the generation of purchased electricity, heating, cooling, and steam.

Scope 3 Emissions:

Other indirect greenhouse gas emissions that originate from activities relating to the value chain. These come from sources not owned or controlled by the organisation.

Reporting on Scope 1, 2, and 3 Emissions

From a regulatory perspective, ESG frameworks typically require companies to first report on Scope 1 and 2 emissions before mandating Scope 3 disclosures. This is because Scope 1 and 2 emissions are easier to measure, given that the reporting company has more control over the associated activities. This means the company can more easily access the data required to calculate emission levels.

In contrast, the complete measurement of Scope 3 emissions involves the extensive assessment of a company’s supply chain - both upstream and downstream of its activities. Furthermore, unlike the primary data available for Scope 1 and 2 measurements, Scope 3 measurements often rely on estimates and third-party data sources. 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.

KEY ESG's Approach

As shown in Figure 1, each emission scope has been further divided into sub-categories based on typical sources of emissions. These sub-categories form the basis of the carbon footprint measurement tool created by KEY ESG to help companies measure and report on their emissions.

Dividing data entries according to each of these sub-categories makes it easier for companies to enter relevant activity data. This data is then automatically converted by the software in order to produce final emission values. It is crucial that companies that have not yet begun to measure their emissions take this first step soon – regardless of how imperfect the first round of measurements may be! From there, measurement processes can be iteratively improved, emissions hotspots can be identified, and appropriate actions can be taken to reduce emissions.

The Scope 3 sub-categories have been selected because they are easily measurable and together typically account for the majority of a company’s Scope 3 emissions. This reinforces the view that companies need to ‘start somewhere’, rather than expecting to be perfect the first-time round. This enables companies to generate meaningful figures that reflect their carbon footprint without the need for a full supply chain assessment.

Figure 1 represents the different possible sources of a company’s carbon footprint. This is split according to the categories used by KEY ESG software.

Challenges when Measuring your Carbon Footprint

Measuring the carbon footprint of a company comes with several challenges. Listed below are three of the most common difficulties faced when measuring emissions in practice:

1. Measuring your carbon footprint for a shared office space:

This is an issue for any company that occupies only part of a building. Shared workspaces have become more common in the post-COVID working environment, but utility bills for gas and electricity are usually presented for the entire building or floor.

GHG Protocol guidance suggests to break this down to the appropriate subsection applicable to the reporting company based on the share of floor space occupied by the company in question.

2. Measuring your carbon footprint across different countries:

A kWh of electricity generated in one country does not produce the same amount of greenhouse gases as a kWh of electricity in another. This is because electricity is generated from different sources of energy, each with their own unique emission intensity (e.g., coal vs. wind).

To solve this issue, country/region-specific emission factors are used by our software. This has been described by the GHG Protocol as the ‘location-based method’. It reveals how clean the electricity is in different parts of the world.

3. Measuring your carbon footprint when working from home:

Working from home is an increasingly important component of Scope 3 emissions, as the practice has become far more common in a post-COVID world. The challenges of measuring these emissions emerge when trying to calculate what emissions would have otherwise occurred without the employee working from home.

Assumptions included in the model developed by KEY ESG (regarding equipment power usage, working hours, heating, cooling, etc.) are based on research examining typical employee behaviour. However, these can be edited if direct information is otherwise known.

Take the first step in tackling your carbon footprint

To find out more about how KEY ESG can help you to measure your carbon footprint, feel free to explore the resources on our Learning and Insights page.

Our friendly team are only a call or an email away and are equipped to answer any question you might have.

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