Climate change is an urgent and critical issue demanding immediate attention due to its profound consequence on ecosystems, biodiversity, and human well-being leading to rising temperatures, extreme weather events, and shifting precipitation patterns. In 2023, the climate crisis accelerated leading to wildfires and flash floods across Africa, Europe, and North America. In the same year, the U.S. Fish and Wildlife Service declared 21 species in the U.S. including mussels, birds, and fishes such as Flat Pigtoe, Birdled white-eye, and Scioto madtam as officially extinct due to climate change, exploitation, and pollution. According to a 2021 study by the U.S. Environmental Protection Agency, CO2 was responsible for nearly 80% of the reducing greenhouse gas (GHG) emissions, with human activities profoundly contributing to the rapid increase in industrial Carbon Dioxide (CO2) emissions through transportation activities and the transmission and distribution of electricity. Businesses face increasing scrutiny from external and internal agents to assess, disclose, and reduce their carbon emissions due to their negative impact on climate change, necessitating corporations to incorporate carbon accounting to accurately measure and quantify their GHG emissions.
Emission types and their significance in mitigating Climate Change:
Companies use a variety of carbon accounting techniques to measure, estimate, and report their emissions in line with the GHG protocol or ISO 14001 Environmental Management standards. To mitigate the climate change potential and current impacts, the GHG protocol has classified emissions into three scopes, which are scope 1, scope 2 and scope 3 emissions.
Scope 1 emissions are direct GHG emissions that create immediate environmental impact from an organization’s operations whereas scope 2 emissions are indirect GHG emissions resulting from the generation of purchased electricity, heat, or steam consumed by the reporting organization. Scope 3 emissions are indirect emissions that occur along the supply chain of the reporting organization, including both upstream and downstream activities. These are both large and indirect and make up nearly at least 65% of the total carbon emissions recorded by a business. Scope 3 emissions are difficult to capture as they come from a variety of sources in the company’s value chain.
The Carbon Disclosure Project (CDPs) Global Supply Chain Report 2020 shows that scope 3 emissions are 11 times higher than the operational emissions (scope 1 & 2 emissions) of a firm. In this context, apart from monitoring and reducing their scope 1 & 2 emissions, firms would need to understand and manage scope 3 emissions to manage their overall carbon footprint.
The challenge for climate change mitigation and addressing Scope 3 emissions
From an organizational perspective, tackling climate change requires comprehensive carbon accounting followed by effective management of emissions, necessitating organizations to adopt advanced emissions reduction strategies. In a CDP study conducted in 2022, 85 companies from India were surveyed to understand the number of companies disclosing their third-party verified scope 1,2, and 3 emissions. The research found that only 64% of the firms had disclosed their scope 3 emissions, compared to the 78% of the firms that disclosed the scope 1 emissions signalling the concerns with measuring and reporting scope 3 emissions.
- Complexity and diversity: Scope 3 emissions cover a wide range of indirect sources, including supply chain activities, product use, and end-of-life considerations alongside several other sources across the entire value chain. Identifying, measuring, and managing these emissions require firms to work with their suppliers in a systematic and strategic manner.
- Lack of accurate data: The data accuracy of supplier-reported scope 3 emissions varies due to the hybrid nature of data collection methods used by the supplier for calculating the emissions and variability in data quality, availability, and reporting standards. This adds to a certain level of uncertainty in measurement and voluntary disclosure of scope 3 emissions data. A 2021 study by Boston Consulting Group (BCG) highlights that less than 10% of companies on average, accurately and comprehensively measure and report their scope 3 emissions. While, machine learning techniques and integration of Artificial Intelligence (AI) are considered as the ‘future’ to improve scope 3 emissions’ measurement, predicting scope 3 emissions, specifically downstream emissions are complex and the accuracy of predicting scope 3 emission is quite low the Machine Learning (ML) techniques according to a new, 2023 study on data quality and prediction accuracy of machine learning on scope 3 emissions.
- Lack of regulation and guidelines for disclosure: Sustainability reporting frameworks such as the Global Reporting Initiatives (GRI), Sustainability Accounting Standards Board, and others do not provide detailed recommendations regarding the disclosure of scope 3 emissions. Further, despite recent developments to regulate the disclosure of scope 3 emissions, there are no binding rules for firms to disclose scope 3 emissions. This makes the disclosure unsystematic and unregulated.
Improving scope 3 emissions measurement & disclosure
Accurate measurement of scope 3 emissions is non-negotiable for organizations committed to sustainability and climate action. It fosters better-informed decision-making and reduces the overall carbon footprint. Climate-change experts argue that integration of AI and using ML to measure and predict scope 3 emissions may be cost-effective and accurate for a corporate firm. Nevertheless, the consideration of these advanced technologies in capturing and presenting scope 3 emissions have limitations.
A 2022 Harvard Study found that using ‘Adaptive Boosting ML techniques can help predict scope 3 emissions with higher accuracy; however, this is only subject to the ‘most reported’ scope 3 emission types. Some studies indicate that there are a lot of prediction errors while using machine learning techniques to estimate scope 3 emissions. This may be possible due to divergence in the estimated and reported scope 3 emissions and the incomplete composition of emissions disclosure by category.
Overall, in addressing the complexity and diversity of scope 3 emissions measurement and disclosure, a concerted effort is required from businesses, investors, legislators, and policymakers. A collaborative approach where innovative measurement techniques are used is essential, alongside fair regulations and disclosure guidelines for measuring and calculating scope 3 emissions. As organizations strive to reduce their carbon footprint, there is an urgency around acknowledging these challenges and developing solutions for improving scope 3 emissions disclosure.
Beyond Scope 1,2, and 3 emissions: Scope 4 emissions
The World Resources Institute in 2013 introduced a new concept called ‘scope 4’ emissions to measure the impact of a firm’s product or service during its life cycle on GHG emissions. Also known as ‘avoided emissions’ this denotes emission reductions occurring during the use of a product or a service, and is considered as emissions occurring beyond its life cycle or value chain. For example, a customer may avoid emissions from a particular product/service if he is using an energy-efficient one instead of a product that is less efficient. Firms reporting scope 4 emissions can show the environmental friendliness of their products or services and give them competitive advantage. However, like scope 3 emissions, quantifying scope 4 emissions can be challenging. This can be due to interconnectedness of these emissions with complex systems, making it challenging to isolate and accurately measure the direct impact of specific actions on avoided emissions. In addition, obtaining accurate and comprehensive data on emissions, especially in the context of avoided emissions, can be difficult and more research is required in this area.
