Net Zero: the scope 3 dilemma
With governmental regulations coming into effect (e.g. SECR), and an increasingly more sustainably conscious client base, Net Zero has become an essential part of a company’s business strategy. The focus on recent years has been on calculating and reducing carbon emissions linked to activities directly controlled (vehicle fleet) or indirectly controlled (electricity and gas) by companies. While this is an important step in the process, most emissions lie in a company’s supply chain, outside of its direct control, in what is known as “scope 3”. It is undeniably the most daunting scope to calculate, with fifteen different categories identified by the Greenhouse Gas Protocol, it can be hard to know where to start. Yet the easiest and most important step to take is to do just that: start.
Why are we talking about scope 3?
Scope 3 emissions represent most of the total carbon emissions released by businesses, 85% in the case of commercial real estate . It is essential to identify, calculate and reduce scope 3 emissions in order to meet the aims of the Paris Agreement, limit global warming to 1.5°C and tackle the global climate change crisis. The Paris Climate Agreement was signed at the COP21 conference in Paris in 2015, it commits countries to limit the global average temperature rise to well below 2°C above pre-industrial levels, and to aim for 1.5°C. Since its publication and ratification, research has shown that the additional 0.5°C, from 1.5°C to 2°C, would be detrimental to coastal cities and low-lying island nations. It would mean a 10-cm higher global sea-level rise by 2100 and would lead to essentially all tropical coral reefs being at risk . It would expose the global population to severe heat more often and increase the risk of drought and risks to water availability.
Figure. 1: The Impacts of 0.5°C (Source: WRI)
Global organisations have started incorporating the 1.5°C limit as the new gold standard for Net Zero guidelines. One of these is the 2021 Science-Based Targets initiative (SBTi)’s Corporate Net Zero Standard, which is the world’s first framework for corporate net-zero target setting created in line with climate science. It provides guidance, criteria and recommendations for companies who want to set net-zero targets consistent with limiting global temperature rise to 1.5°C.
In order to accomplish that, they have taken a stricter approach towards carbon removal, requiring companies to provide long-term carbon emissions cut of 90-95% by 2050 over all three scopes. With regards to the SBTi near-term target, if scope 3 represents over 40% of a company’s total emissions, then they’ll need to reduce them by 67% in 5-10 years. Figure 3 illustrates the key elements of the SBTi Net-Zero Standard and the expected carbon reduction for an organisation’s near-term and long-term targets.
Figure. 2: Key Elements of the Net Zero Standard (Source: SBTi)
Going beyond positive climate action, businesses can reap many benefits from reducing their scope 3 emissions. It allows them to identify risks in their supply chain, as well as cost reduction and energy efficiency opportunities. It reinforces positive engagement with their employees and suppliers and promotes sustainability initiatives. Further to this, it allows them to attract a tailored workforce that will be interested in working for a company with sustainability at the forefront of its strategy. Finally, it will enhance the value of their business as they address the cost reduction opportunities that can be applied to their value chain and business structure.
Going back to basics: what are scope 3 emissions?
Greenhouse gas emissions are categorised into three scopes by the most widely-used international accounting tool, the Greenhouse Gas Protocol (GHGP). Scope 1 emissions are direct greenhouse gas (GHG) emissions that arise from activities directly controlled or owned by a company (e.g.: fuel combustion in vehicles, boilers). Scope 2 are indirect GHG emissions linked to the purchase of electricity, cooling, heat or steam. Scope 3 emissions are also indirect GHG emissions, but they occur in a company’s value chain. As such, they are generated by suppliers, manufacturers and end users. The following chart developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) for the GHGP best illustrates the complexities of the different scopes.
Figure. 3: Overview of GHG Protocol Scopes and Emissions across the Value Chain (Source: Corporate Value Chain (Scope 3) Accounting and Reporting Standard – GHGP, WRI & WBCSD)
There are two main sources of scope 3 emissions: upstream and downstream activities. Emissions from upstream activities are a result of the production of goods and services that a company uses; whereas emissions from downstream activities come from the use of a good or a service produced by the company. The GHGP has identified over 15 categories within scope 3, which span across the upstream and downstream activities.
Upstream scope 3 categories include: Purchased Goods & Services (i.e. office furniture, materials for refurbishments, etc); Capital Goods (i.e. PP&E, machinery, etc); Fuel & Energy Related Activities (i.e. Well-To-Tank, Transportation & Distribution Losses); Transportation & Distribution (i.e. transportation of a supplier’s goods & services); Waste Generated in Operations (i.e. general landfill waste, waste water, project waste etc); Business Travel; Employee Commuting; Leased Assets (i.e. emissions linked to assets leased by the company from a third party).
Downstream scope 3 categories include: Transportation & Distribution (i.e. transportation of the goods & services produced by the company); Processing of Sold Products (i.e. processing of sold intermediate products by third parties); Use of Sold Products (i.e. use of the product by the consumer); End-of-Life Treatment of Sold Products (i.e. waste & recycling process of the product by the consumer); Leased Assets (emissions linked to assets leased by the company to a third party); Franchises (i.e. emissions linked to a business licensed to sell or distribute the company’s goods & services); Investments (i.e. the company’s investments).
It is important to note that some categories will not apply to certain companies. An architectural firm with no franchises and investments would not have any emissions linked to these categories and would therefore not have to report their emissions under them. An Estate owner’s scope 3 emissions will primarily be within category 1 (Purchased Goods & Services) due to the refurbishment necessity of its assets, and category 13, which are the emissions linked to downstream leased assets.
It’s Important to Set Boundaries
The first step is to calculate scope 3 emissions. In order to do that, it is important to clearly define the organisational boundary of your organisation. There are two main approaches that companies can take according to the nature of its organisation: the equity share approach or the control approaches.
Under the equity share approach, a company accounts for GHG emissions according to its share of equity in the operations. It reflects the economic interest of the company, therefore the company’s percentage ownership of that operation.
Under the control approach, a company accounts for 100% of the GHG emissions from the operations it controls. This can be defined in two ways: operational or financial. The operational control approach should be used if a company has full authority to introduce and carry out operating policies within its operations. It does not mean that a company has full authority to make all the decisions within its operations, simply that it can implement operating policies. The financial control approach should be adopted if a company bears the majority risks and rewards from the operation’s financial performance. This means that it can direct the financial and operating policies, which will allow it to reap economic benefits from the activities.
Collecting, Analysing & Improving Your Data
From keeping meticulous records of purchases, to the electricity and gas consumption of owned and leased assets, data gathering is an essential part of reducing scope 3 emissions. Having said that, some of the data will be hard, and, in some cases, impossible to gather, so estimates are expected in the early stages.
The GHGP Corporate Value Chain (Scope 3) Accounting and Reporting Standard includes the following four-step approach to collecting and evaluating carbon data:
Figure. 4: Process for collecting and evaluating data (Source: Corporate Value Chain (Scope 3) Accounting and Reporting Standard – GHGP, WRI & WBCSD)
Collecting data is not a one-stop-shop, it requires constant updates and improvement, which figure 2 illustrates. On a positive note, once an organisation starts to collect it, it becomes easier as data collection systems are created and implemented.
Engaging with suppliers, manufacturers and any businesses actively involved in the use and disposal of the products in question is essential to an overall carbon reduction approach. Some industries have created initiatives to tackle this challenge in order to collaborate on the removal of carbon of the whole supply chain. The Courtauld 2030 Scope 3 Measurement & Reporting Protocols for UK Food & Drink businesses published on the 19th of May 2022 have already been adopted by Hilton Food Group plc, Sainsburys, Tesco and Albert Bartlett among others. We are likely to see more of these initiatives launched in the coming years as industries start to work together to identify the emissions that can be removed collaboratively.
This process can be overwhelming and time consuming for companies due to the breadth of scope 3 emissions and the actions necessary to reduce them. It will be difficult to identify and apply the changes required to tackle scope 3 emissions. Greengage has the expertise and industry knowledge to guide organisations and help them on their journey to Net Zero. They can help with data collection, carbon baselining and setting a Net Zero strategy that will help tackle the most carbon intensive activities linked to a company’s operations. They can provide guidance on which scope 3 categories should be included or omitted, and which areas to prioritise in their carbon reduction plan.
The recent heatwave, forest fires and floods that communities around the world have experienced are a reminder of the urgency behind reaching Net Zero. Despite the unequivocal evidence of the extreme impacts of climate change, current global efforts have been identified as incremental, reactive and small-scale according to the IPPC. All sectors of society need to start focusing on long-term policies rather than short-term fixes. Businesses urgently need to implement stricter standards to their operations to start their journey to an efficient and consistent reduction of carbon emissions. Not only will this allow them to reduce costs and attract a tailored workforce, but it will also allow them to gain a competitive advantage and be ahead of the curve.