What is it About Scope 3 Emissions That Makes Them So Challenging?

Scope 3 - Introduction

Embarking on a journey to demystify the world of Scope 3 emissions, I find myself at a crossroads of knowledge and assumption. Diving deep into the realms of corporate carbon footprinting, terms like Scope 1, 2, and 3 GHG emissions measurements have become a part of my daily lexicon—a familiarity born from countless discussions, analyses, and implementations. Yet, it's easy to forget that outside the bubble of sustainability professionals, these concepts aren't as widely understood or integrated into the everyday. Why embark on this exploration? Because Scope 3 emissions represent a unique frontier in corporate responsibility, one that extends beyond the confines of any single department or a single organization, weaving through the entire fabric of an organization and its value chain. It's a shared responsibility that calls for a collective understanding and action.

In response, I've committed to unraveling the Scope 3 ecosystem through a series of posts, aimed at shedding light on this complex yet critical area of sustainability. This series, structured in six parts, begins with an introduction to the landscape of Scope 3 emissions, moving through the drivers and challenges, and delving into the ecosystem, possible solutions, the future prospects including Product Carbon Footprint (PCF), and culminating with practical case studies. With the first two posts already shared on my Linkedin profile, this newsletter is designed to synthesize these initial explorations—covering the introduction, drivers, and challenges of Scope 3 emissions—and set the stage for the detailed discussions to follow.

Diving Into the Depths of GHG Emissions: Understanding Scopes 1, 2, and 3

At the heart of our quest to address corporate sustainability and combat climate change lies the critical task of understanding and managing greenhouse gas (GHG) emissions. Central to this endeavor is the Greenhouse Gas Protocol (GHG Protocol), a globally recognized framework that categorizes emissions into three distinct 'Scopes.' This classification not only aids organizations in pinpointing the sources of their emissions but also guides them in crafting effective strategies for reduction.

Scope 1: Direct Emissions Scope 1 emissions are those that originate directly from sources owned or controlled by an organization. This includes emissions from combustion in owned or controlled boilers, furnaces, vehicles, etc. Managing Scope 1 emissions is often the first step for companies looking to reduce their carbon footprint, as these emissions are typically the most visible and directly manageable.

Scope 2: Indirect Emissions from Purchased Energy Scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company. Despite being indirect, these emissions are closely tied to the company's operations and energy choices, offering a clear pathway for emissions management through energy efficiency measures and renewable energy sourcing.

Scope 3: The Broader Impact Scope 3 emissions, the focus of our exploratory series, encompass all other indirect emissions that occur in a company's value chain. This includes emissions associated with purchased goods and services, business travel, employee commuting, waste disposal, and the use and end-of-life treatment of sold products.

Why Focus on Scope 3? While Scope 1 and 2 emissions provide a direct line of sight into an organization's carbon footprint, Scope 3 emissions often account for the largest portion of a company's overall GHG emissions. However, due to their indirect nature and the complexity of tracing these emissions through the supply chain, they present both a significant challenge and a substantial opportunity for meaningful sustainability impact. Addressing Scope 3 emissions is essential for companies committed to comprehensive climate action, aligning with both global sustainability targets and increasing regulatory and stakeholder demands for transparency and accountability.

Following our exploration of the GHG Protocol and the pathways companies often take to reduce Scope 1 and 2 emissions, we find ourselves at the precipice of a more daunting challenge: Scope 3 emissions. Unlike their Scope 1 and 2 counterparts, where reduction strategies are more straightforward and within a company's direct control, Scope 3 emissions unfold across a sprawling network of activities beyond immediate operational boundaries. This expansive reach introduces a maze of complexities, not least of which is the ambiguity around responsibility.

Scope 3 - Drivers

Amidst the complex web of challenges surrounding Scope 3 emissions lies a compelling force driving companies towards action: regulatory pressure. The landscape of environmental regulation is undergoing a significant transformation, emphasizing the critical role of comprehensive emissions transparency.

Central to this shift is the Corporate Sustainability Reporting Directive (CSRD) in the European Union. Expanding upon the existing Non-Financial Reporting Directive (NFRD), which impacts around 11,700 companies, the CSRD is set to cast a wider net, bringing approximately 49,000 firms under its purview. A key aspect of this directive is the requirement for companies to report on Scope 3 emissions, acknowledging the substantial part these indirect emissions play in a company's overall environmental impact. Starting in January 2024, entities currently subject to the NFRD will begin reporting for the 2024 data under the new CSRD framework in 2025.

This push towards inclusivity in emissions reporting is mirrored in other jurisdictions as well. In the United States, the Securities and Exchange Commission (SEC) has introduced new climate disclosure rules that, while initially focusing on Scope 1 and 2 emissions, signal a broader move towards integrating Scope 3 emissions transparency. Similarly, Japan's Financial Services Agency (FSA) is advancing its guidelines, requiring Tokyo Stock Exchange-listed companies to adopt the Task Force on Climate-related Financial Disclosures (TCFD) guidelines, which include considerations for Scope 3 emissions.

The narrative of regulatory pressure does not end with directives explicitly targeting GHG emissions. A new wave of complementary regulations is emerging, emphasizing the critical importance of due diligence throughout the supply chain. These regulations not only reinforce the significance of Scope 3 emissions but also demand a transformative approach to how companies gather, manage, and report data related to their indirect environmental impact.

One such pivotal legislative development is the Corporate Sustainability Due Diligence Directive (CSDDD) in the European Union. This directive sets a precedent by establishing clear obligations for large companies to address both actual and potential adverse impacts on human rights and the environment. Crucially, these obligations stretch beyond the confines of a company's direct operations, extending into the intricate web of its business relationships. This encompasses activities both upstream and downstream, bringing into focus the entirety of a company's value chain—a domain where Scope 3 emissions lie.

These complementary regulations signal a broader shift in the corporate sustainability landscape. They underscore the necessity for a holistic view of environmental responsibility that includes the due diligence of supply chains. For businesses, this means not just an obligation to look inward at their direct emissions but also to scrutinize and influence the practices and impacts of their suppliers and partners.

Beyond regulatory influences, companies face pressure from stakeholders and the marketplace. Shareholders and consumers alike demand transparency and action on sustainability, pushing firms to disclose and mitigate their Scope 3 emissions. This shift not only satisfies growing calls for environmental stewardship but also offers companies a competitive edge, as proactive management of Scope 3 emissions aligns with the values of an increasingly eco-conscious public and market.

Scope 3 - Challenges