In recent years, private and public firms have made significant strides in measuring and managing scope 1 and scope 2 emissions – direct and indirect emissions from their own operations. However, a more elusive, yet equally critical aspect of carbon emissions remains largely untapped: Scope 3 emissions. These emissions, which stem from an organization’s value chain, are often the largest source of greenhouse gases (GHGs), yet they are the most difficult to track and manage. The climate crisis continues to intensify, with more than 80% of global GHG emissions stemming from scope 3 activities within business value chains.
The Relevance of Scope 3 Emissions in Today’s Business Landscape
As global sustainability goals and regulatory pressures increase, the consideration of scope 3 emissions has never been more important for companies in the public and private landscape. According to CDP (Carbon Disclosure Project) research, value chain carbon emissions can be as much as 11.4 times greater than a company’s own operations. In fact, scope 3 emissions account for approximately 75% of companies’ total greenhouse gas emissions, with some sectors, such as financial services, reaching nearly 99.98% on average. Scope 3 reporting is evolving fast. The Securities and Exchange Commission (SEC) currently excludes Scope 3 emissions from its climate disclosure requirements. However, the Corporate Sustainability Reporting Directive (CSRD) in Europe mandates a phased approach to Scope 3 disclosures for companies. Additionally, California’s recently enacted climate disclosure laws are expected to impact over 10,000 public and private companies. In this context, apart from monitoring and reducing scope 1 & 2 emissions, firms would need to understand and manage scope 3 emissions to manage their overall carbon footprint.
Measuring and reporting scope 3 emissions is not just a matter of regulatory compliance as demanded by investors in private markets, but an opportunity to drive meaningful change across their entire value chain. Global climate reporting frameworks, such as those developed by the CDP and the Task Force on Climate-Related Financial Disclosures (TCFD), are increasingly encouraging businesses to include scope 3 emissions in their disclosures. As consumers, investors, and regulators demand transparency in environmental practices, organizations that fail to report or underestimate their scope 3 emissions risk damaging their reputation and losing competitive advantage.
Beyond meeting stakeholder expectations, tracking scope 3 emissions provides companies operating in private markets with the chance to:
- Identify emission hotspots within their value chain and target the most impactful areas for reduction.
- Collaborate with suppliers to foster sustainable practices and innovation that benefit the entire supply chain.
- Enhance climate strategies with actionable data that drives more efficient operations and reduces long-term costs.
By understanding and managing scope 3 emissions, companies can take a proactive role in shaping their climate impact, reduce risks associated with future regulations, and align with global efforts to mitigate climate change.
The Challenges in Calculating Scope 3 Emissions
Despite clear advantages of reporting scope 3 emissions, many companies face significant challenges in data collection and reporting process. 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 signaling the concerns with measuring and reporting scope 3 emissions.
The complexity of measuring these emissions lies in their indirect nature, as they are not under the direct control of the company. Below are some of the common obstacles businesses encounter:
- Data Collection and Reporting: Gathering the necessary data from suppliers and third-party sources can be an arduous and resource-intensive task for private and public companies. Companies often struggle to get direct access to the information needed to calculate scope 3 emissions, especially when suppliers aren’t directly involved in the emission calculations themselves.
- Modeling Complexity: Many companies rely on spend-based modeling for estimating scope 3 emissions, which uses industry-average emissions factors. While this method is useful, it may not provide a true reflection of a company’s actual emissions footprint. Moreover, overreliance on such models can lead to a disconnect between reported data and real emissions reductions, particularly when executive performance is tied to model outputs.
- Sample Extrapolation: To estimate emissions, organizations may extrapolate data from a small sample of suppliers. However, when lacking the necessary statistical expertise, these extrapolated figures can be unreliable, leading to skewed conclusions and misaligned strategies.
- Lack of Organizational Infrastructure: Even with the right expertise, companies often lack the internal processes and structures needed to manage scope 3 data. Due to the subjective nature of the estimations and the absence of standardized methodologies, organizations may inadvertently overlook critical emissions sources, focusing instead on those that are easiest to measure.
How NeoImpact Can Support Your Scope 3 Emissions Journey
Data Collection Strategy
We work with companies to establish clear expectations with suppliers and engage them in emissions reporting. By leveraging advanced carbon accounting tools, we ensure the collection of accurate and reliable data across your supply chain.
Emissions Calculation Methodologies
NeoImpact offers expertise in applying robust and standardized methodologies, ensuring that your emissions calculations are accurate and reflective of your business’s unique footprint. We assist in applying industry best practices to avoid issues like double-counting and misrepresentation.
Strategic Insights and Reporting
Beyond calculation, we provide insights that help you prioritize reduction strategies, collaborate with suppliers on emission reductions, and build a comprehensive, transparent sustainability report that meets regulatory requirements and enhances your brand’s reputation.
In an era of increasing scrutiny and evolving regulations, proactively managing scope 3 emissions positions your company as a leader in sustainability. By taking control of this hidden impact, you can drive innovation, foster supplier collaboration, and meet your climate goals—now and in the future.
Conclusion: Embrace the Challenge, Unlock the Opportunity
As scope 3 emissions continue to play a pivotal role in shaping corporate sustainability, the need for comprehensive tracking and reporting has never been more urgent. While the journey to calculating and managing scope 3 emissions may seem daunting, NeoImpact is here to guide you every step of the way. With our expertise, tools, and strategic support, your organization can unlock the full potential of Scope 3 emissions reporting, mitigating climate-related risks and positioning itself for long-term success.
Explore the unexplored: Reach out to NeoImpact today to learn how we can help you navigate the challenges of scope 3 emissions and drive meaningful changes within your organization and supply chain. Together, we can create a sustainable future.
This article was written by Divyansh Daga, Technical Lead – ESG Consulting at Neoimpact. With over five years of experience in the ESG domain, Divyansh specializes in ESG research, emissions reporting, and sustainability reporting. His key areas of interest include GHG accounting, research analysis, and broader sustainability initiatives.
