Scope 3 emissions, encompassing a company's indirect supply chain impacts, are often the largest source of greenhouse gases. The Greenhouse Gas Protocol defines 15 categories of these emissions, both upstream and downstream. Companies must strategically prioritize data collection and calculation, using methods ranging from spend-based estimates to supplier-specific data. While data challenges exist, accurate Scope 3 reporting is crucial for effective emission reduction and sustainability.
Introduction
Scope 3 emissions are greenhouse gas emissions that happen throughout a company's supply chain from material extraction till end of a product's life. These emissions are indirectly caused by the company. Direct emissions and emissions due to energy purchase are excluded, these are called Scope 1 and Scope 2 emissions. Scope 3 emissions constitute more than 80% of total emissions for most companies. Therefore, tracking and reducing these emissions is crucial.
Consider a garment manufacturer. The production of raw materials like cloth, threads, and buttons generates emissions (Category 1: Purchased Goods and Services). Additional emissions occur when these materials are transported to the factory (Category 4: Upstream Transportation and Distribution). Once the garments are manufactured, shipping them to retailers contributes to emissions from downstream transportation (Category 9: Downstream Transportation and Distribution). Finally, the disposal of these garments at the end of their lifecycle also results in emissions (Category 12: End-of-Life Treatment of Sold Products). These emissions, along with others like them, collectively form the manufacturer's Scope 3 emissions, which have a significant environmental impact and occur beyond the company's direct operations.
Understanding the 15 Scope 3 Categories with an example
The Greenhouse Gas Protocol defines 15 distinct categories of Scope 3 emissions, which are essential for companies to understand their full carbon footprint. These categories are divided into upstream and downstream emissions for clarity. The category division signifies the different stages of a product's lifecycle in relation to a company's operations.
Upstream Scope 3 Categories
These refer to the emissions generated in the supply chain before the input material reaches the company. This includes everything from raw material extraction to the transportation of purchased goods. Understanding upstream emissions helps companies identify the carbon footprint associated with their suppliers and the materials they use.
In our garment manufacturer example, the emissions stemming from the production of cloth, threads, and buttons—from the initial growing or extraction phase through to their delivery—are classified as upstream emissions. However, this is just one piece of the upstream puzzle. Several other categories contribute to a company's upstream footprint, each representing a distinct stage in the supply chain.
Upstream Scope 3 Categories
Emissions that occur in the supply chain before the company's operations
Purchased Goods and Services
Emissions from extraction and production of purchased products and services
Capital Goods
Emissions from production of capital goods (e.g., equipment, buildings)
Fuel and Energy-Related Activities
Emissions related to fuel and energy not in Scope 1 or 2
Upstream Transportation and Distribution
Emissions from transportation of purchased products
Waste Generated in Operations
Emissions from disposal and treatment of waste
Business Travel
Emissions from employee business travel
Employee Commuting
Emissions from employees traveling to and from work
Upstream Leased Assets
Emissions from operation of assets leased by the company
Downstream Scope 3 Categories
Emissions that occur in the value chain after the company's operations
Downstream Transportation and Distribution
Emissions from distribution of sold products to end consumers
Processing of Sold Products
Emissions from processing intermediate products by third parties
Use of Sold Products
Emissions from use of goods and services sold by the company
End-of-Life Treatment of Sold Products
Emissions from disposal and waste treatment of sold products
Downstream Leased Assets
Emissions from operation of assets owned by company and leased to others
Franchises
Emissions from operation of franchises not in Scope 1 or 2
Investments
Emissions associated with the company's investments
Category Details (Upstream)
Category 1 - Purchased Goods and Services
This category includes emissions from the extraction and production of goods and services purchased or acquired by the company. This includes both tangible products and intangible services.
Common emission sources within the 'Purchased Goods and Services' category include those from the mining, agricultural, or forestry activities required to extract raw materials. Crucially, this category also captures emissions generated during the intermediate processing of these materials. For example, the energy used to spin cotton into yarn or mold plastic buttons contributes here.
Category 2 - Capital goods
This category encompasses emissions from the production of capital goods purchased or acquired by the company. Capital goods are those used by a company to produce, store, or transport its products and services, including buildings, machinery, and vehicles.
Common emission sources within the 'Capital Goods' category involve the extraction of raw materials, manufacturing processes, and transportation required to produce these assets. This includes emissions from the mining of metals for machinery, the energy used to fabricate manufacturing equipment, and the emissions generated during the construction of buildings.
In our garment manufacturer example, this would include the emissions from producing the sewing machines, cutting tables, and even the factory building itself.
Category 3 - Fuel and Energy-Related Activities
This category includes emissions related to the extraction, production, and transportation of fuels and energy purchased by the reporting company, that are not already included in Scope 1 or Scope 2.
In our garment manufacturer example, this would include the emissions from extracting and refining the fuel used in the delivery trucks that bring materials to the factory, and the emissions from the electricity generation that powers the factory, even though those electricity emissions are being accounted for in scope 2, this is about the upstream impact of that electricity. It also includes the emissions from the extraction and processing of the fuel used in any backup generators or on-site machinery, that are not directly included in the companies scope 1.
Category 4 - Upstream Transportation and Distribution
This category includes emissions related to the transportation and distribution of products purchased by the reporting company, occurring in the reporting company's upstream value chain.
In our garment manufacturer example, this would include the emissions from transporting the raw materials—cotton, threads, and buttons—from the suppliers' facilities to the garment manufacturer's factory. It captures the emissions from the trucks, ships, or trains used in this process, as well as any storage or warehousing activities involved before the materials reach the manufacturer. This category specifically focuses on the transportation and distribution that happens before the materials are under the direct control of the garment manufacturer.
Category 5 - Waste Generated in Operations
This category includes emissions from the disposal and treatment of waste generated in the reporting company's operations.
In our garment manufacturer example, this would include emissions from the disposal of fabric scraps, packaging waste, and other materials generated during the manufacturing process. It captures the emissions from landfills, incineration, and other waste treatment methods used for the company's operational waste.
Category 6 - Business Travel
This category includes emissions from the transportation of employees for business-related activities.
In our garment manufacturer example, this would include emissions from flights, train journeys, and car travel undertaken by employees for sales meetings, supplier visits, or other business purposes.
Category 7 - Employee Commuting
This category includes emissions from the transportation of employees between their homes and their places of work.
In our garment manufacturer example, this would include emissions from the daily commutes of factory workers, office staff, and other employees, regardless of the mode of transportation used.
Category 8 - Upstream Leased Assets
This category includes emissions from the operation of assets leased by the reporting company that are not included in Scope 1 or Scope 2.
In our garment manufacturer example, if the company leases warehouse space or delivery vehicles, the emissions from the operation of those leased assets would be included here, specifically the upstream activity relating to the leased assets.
Downstream Categories
These categories include emissions that occur after a company's products are no longer under its direct control, concentrating on the downstream phases of the value chain. This covers aspects such as the transportation and distribution of sold products, as well as their final disposal. By understanding downstream emissions, companies can evaluate the environmental impact of their products throughout their entire lifecycle, extending beyond their factory premises.
In the case of our garment manufacturer, emissions from transporting finished garments to retail stores, the energy consumed by customers when washing and drying those garments, and their eventual disposal are all considered downstream emissions. However, this only provides a snapshot of the downstream landscape. Numerous other categories also contribute to a company's downstream footprint, each representing a unique stage in the product's journey.
Category Details (Downstream)
Category 9 - Downstream Transportation and Distribution
This category includes emissions from the transportation and distribution of products sold by the reporting company, occurring in the reporting company's downstream value chain.
In our garment manufacturer example, this would include the emissions from transporting the finished garments from the manufacturer's factory to retailers or directly to consumers. It captures the emissions from trucks, ships, and planes used in this downstream distribution.
Category 10 - Processing of Sold Products
This category includes emissions from the processing of intermediate products sold by the reporting company.
In our garment manufacturer example, if the company sold unfinished fabric to another company for further processing, the emissions from that further processing would be included here. (This category is less directly applicable to a typical garment manufacturer selling finished goods.)
Category 11 - Use of Sold Products
This category includes emissions from the end-use of products sold by the reporting company.
In our garment manufacturer example, this would include the emissions from consumers washing and drying the garments, as well as any other energy-consuming activities related to the use of the sold products.
Category 12 - End-of-Life Treatment of Sold Products
This category includes emissions from the disposal and treatment of products sold by the reporting company at the end of their life.
In our garment manufacturer example, this would include the emissions from the landfilling, incineration, or recycling of the garments after consumers have finished using them.
Category 13 - Downstream Leased Assets
This category includes emissions from the operation of assets leased by the reporting company that are not included in Scope 1 or Scope 2.
In our garment manufacturer example, if the company leases retail spaces or distribution centers, the emissions from the operation of those leased assets would be included here, specifically the downstream activity relating to the leased assets.
Category 14 - Franchises
This category includes emissions from the operation of franchises of the reporting company.
In our garment manufacturer example, if the company operates through franchises, the emissions from the operations of those franchises would be included here.
Category 15 - Investments
This category includes emissions from the reporting company's investments.
In our garment manufacturer example, if the company invests in other businesses, the emissions from those invested businesses would be included here.
Emission Calculation Methodologies
To effectively address Scope 3 emissions, companies need structured approaches for calculating and managing these indirect emissions sources. Let's explore the key methodologies and considerations.
Choosing Scope 3 Categories
The Scope 3 GHG Standard rightly emphasizes a strategic approach to data collection. Given the complexity and breadth of Scope 3, companies must prioritize their efforts to maximize impact and resource efficiency. This begins with a thorough screening process.
Strategic Prioritization Steps
-
Identify significant GHG emissions
The initial step involves identifying which Scope 3 activities are likely to contribute the most substantial greenhouse gas (GHG) emissions. This requires a preliminary assessment, often using spend-based data or industry averages, to pinpoint emission hotspots within the value chain. For instance, in our garment manufacturer example, the emissions related to purchased goods (raw materials) and downstream transportation are likely to be significant.
-
Explore reduction opportunities
Beyond sheer volume, it's crucial to identify categories where significant emission reduction opportunities exist. This might involve exploring alternative materials, optimizing logistics, or engaging with suppliers on sustainability initiatives. Categories with high reduction potential warrant more detailed data collection and analysis.
-
Align with company goals
Scope 3 efforts should align with the company's broader business objectives. Categories that are most relevant to these goals—such as those impacting customer satisfaction, brand reputation, or regulatory compliance—deserve prioritized attention.
-
Consider stakeholder relevance
While categories with the highest emissions generally demand the most precise data collection, a nuanced approach is essential. Smaller categories, even if they contribute minimally to the overall footprint, may be critical to stakeholders. For example, employee commuting might be a smaller category, but it is very important to employees, and can be used to improve company culture.
-
Assess data availability & quality
Scope 3's expansive nature, encompassing numerous categories and diverse value chain activities, presents a significant data challenge. Each category necessitates specific data to produce reliable and accurate emission calculations. Evaluating potential data sources and their quality is critical before committing resources.
Common Data Challenges
- Reliance on Value Chain Partners: Companies often depend on suppliers and other partners for data, which can lead to inconsistencies in data quality and availability.
- Limited Influence Over Data Practices: Organizations have less control over how their value chain partners collect and manage data, which can lead to variability in data quality.
- Knowledge Gaps: Companies may lack sufficient knowledge about the types of data available from their partners, leading to difficulties in assessing data quality.
- Need for Secondary Data: There is often a broader requirement for secondary data, which may not be as reliable as primary data.
- Assumptions and Modeling: Due to gaps in data, companies frequently have to rely on assumptions and modeling, introducing uncertainty.
- Iterative Improvement: Data collection and quality assessment is an ongoing process that should improve over time.
General Principles of Scope 3 Emission Calculation
Scope 3 emission calculation needs two data types. One data type pertains to activity data. This data relates to the activity that causes emission. In our garment example, this would mean quantifying the amount of raw materials purchased, such as kilograms of cotton or units of buttons or the monetary value of the purchased threads. This data gives us an idea of the scale of emission generating activity.
The second data type is what is called emission factors. Emission factors are a multiplier that converts activity data into emissions. Taking our garment example, if we know the kilograms of cotton purchased, we would multiply that by the emission factor for cotton production (expressed in kg CO2e per kg of cotton). Similarly, if we know the kilometers driven by delivery trucks, we would multiply that by the emission factor for truck transportation (expressed in kg CO2e per kilometer). Or, if we used spend data for threads, we would multiply the monetary value of the threads by an emission factor relating to average emission per dollar spent in that industry. Emission factors are typically derived from industry averages, scientific studies, or established databases. They allow us to translate the 'how much' of the activity into the 'how many' of the emissions, providing the crucial link between activity and environmental impact.
Basic Formula
- Emissions: kg CO₂e
- Activity Data: quantity of activity (e.g., kg, kWh, $)
- Emission Factor: kg CO₂e per unit of activity
Example Application
For cotton purchases:
- Activity Data: 1,000 kg of cotton
- Emission Factor: 5.5 kg CO₂e per kg cotton
- Emissions: 1,000 × 5.5 = 5,500 kg CO₂e
Scope 3 Emission Calculation Methodologies
Calculating Scope 3 emissions is a journey that gradually increases accuracy with effort. Companies typically start with broader estimations and progress towards more precise measurements as they gather more data and refine their methodologies. This progression can be visualized in a 2x2 framework, illustrating the relationship between data specificity and effort:
| Method | Data Specificity | Effort |
|---|---|---|
| Spend-Based Method | Low | Low |
| Average-Data Method | Medium | Medium |
| Supplier-Specific/Site-Specific/Fuel/Distance Method | High | High |
Spend-Based Method
This method, requiring minimal effort, uses financial expenditure data and applies environmentally extended input-output (EEIO) emission factors. It's a quick, albeit less precise, estimate of emissions, suitable for initial assessments when detailed activity data is limited. For our garment manufacturer, this means estimating emissions based on the monetary value of purchased materials and transportation services.
Average-Data Method
This method relies on industry-average data and emission factors, providing a moderate level of accuracy with a medium level of effort. It's useful when company-specific data is unavailable but industry benchmarks can offer a reasonable approximation. For the garment manufacturer, this means using industry average emissions for a certain process in textile manufacturing.
Supplier-Specific/Site-Specific/Fuel/Distance Method
These methods, requiring the highest effort, involve gathering detailed, supplier-specific or site-specific data, or using fuel consumption and distance measurements. They offer the most accurate emission estimates by utilizing precise activity data and relevant emission factors. For our garment manufacturer, this entails collecting data directly from suppliers on material production, tracking fuel usage in transportation, and measuring distances traveled.
Getting Started
Begin with spend-based calculations for a baseline assessment
Intermediate Stage
Progress to average-data methods for improved accuracy
Advanced Approach
Develop supplier-specific calculations for highest accuracy
Conclusion
In essence, Scope 3 emissions, often the largest part of a company's footprint, demand attention. Understanding and calculating these emissions across 15 categories is crucial for a complete environmental view. Companies should strategically prioritize emission sources, improve data quality, and pursue reduction opportunities. While data challenges exist, progressing towards accurate reporting is essential for driving sustainable practices and long-term value.
Accelerate Your ESG Reporting
Discover how QuikESG can help you streamline reporting, reduce fatigue, and ensure environmental compliance.