Tackling the Scope 3 challenge

This comes as no surprise. When it comes to reducing a company’s Scope 3 greenhouse gas emissions, supply chain managers face a daunting task. Scope 3 emissions are both large (accounting for between 65% and 95% of most companies’ carbon impact) and indirect—a consequence of activities that are outside companies’ direct control. This can make estimating and tracking them, let alone reporting them, seem devilishly complicated. For example:

• One global consumer goods company we worked with had a supply chain that included thousands of suppliers and tens of thousands of stock-keeping units (SKUs). The company’s estimates of its Scope 3 emissions reflect not just how each SKU is produced but also how it’s used (and for how long), cleaned and disposed of at the end of its useful life.

• One financial institution we supported had Scope 3 financed emissions via multiple loans to various operations and activities of the same oil and gas company in different parts of the world, as well as up and down the value chain.

The good news is that while perfect data might be difficult to come by (especially beyond Tier 1 suppliers), useful and actionable data is not. In many cases, an incremental approach to data collection can ease the burden. We’ve typically found that as much as 80% of an organisation’s supply chain emissions come from as few as one-fifth of its purchases. At one public sector agency, just 20 suppliers were responsible for 94% of the agency’s Scope 3 emissions. This means that in principle, the agency could—within about ten years—cut its Scope 3 supply chain emissions in half by focusing on just those 20 suppliers.

In situations where companies can’t get direct information from suppliers, the Greenhouse Gas Protocol allows them to use industry averages, proxies and other sources to calculate their Scope 3 emissions. Any number of third-party data suppliers, as well as the International Energy Agency and various government agencies, can help.

Nonetheless, there are challenges in calculating Scope 3 emissions using incremental and third-party approaches. Here are four of the most common:

1. Collecting and reporting data can be time-consuming and resource-intensive. As companies that rely heavily on third-party sources are often not involved in Scope 3 calculations, they may struggle to understand their own Scope 3 footprint, let alone improve it.
2. Scope 3 modelling approaches may not be detailed enough to support better management decisions or help identify distinct opportunities to lower carbon emissions. In fact, an overreliance on modelling may tempt managers to pay more attention to the model and its assumptions as opposed to making real improvements to Scope 3 emissions—especially if executive rewards are tied to the model’s output.
3. While extrapolating results from a small sample of suppliers is a common and useful approach in estimating Scope 3 emissions, a lack of statistical expertise could result in unreliable estimates.
4. Even when companies have the right expertise, they may lack the organisational structure and processes to oversee the estimation, quantification and extrapolation of Scope 3 data across their business.

Key actions businesses can take now

Despite the complexity surrounding Scope 3 emissions, one thing remains consistent: the end goal of measuring and tracking emissions is to shape business decisions that mitigate the effects of climate change. For business leaders, the resulting agenda for corporate action should be equally clear—leverage your data to focus efforts where they will have the greatest impact, establish a baseline of performance, prioritise efforts with suppliers and craft meaningful performance incentives for them. Do these things and you will make a positive contribution.

One beneficiary is the broader ecosystem. After all, your Scope 1 and 2 emissions are another organisation’s Scope 3. And until all companies measure, track and report their emissions, the availability, accuracy and transparency of data will continue to be one of the biggest challenges to reducing carbon emissions. Another beneficiary? Your bottom line. The work companies do to tackle Scope 3 emissions can help strengthen relationships with suppliers and improve collaboration as well as product innovation—actions that can lead to cost savings, new revenue-generating opportunities or both.

Finally, you soon may not have a choice. Scope 3 reporting has thus far been mostly voluntary, but the pressure to make it mandatory is growing. The International Sustainability Standards Board (ISSB), the European Financial Reporting Advisory Group and the US Securities and Exchange Commission have all drafted recommendations requiring, in certain circumstances, some disclosure of Scope 3 emissions. The ISSB also requires qualitative information to explain how the reported emissions were calculated.

Forward-looking organisations will read the writing on the wall and begin to develop the capabilities and expertise needed to measure, manage and report Scope 3 emissions. In adopting an incremental approach to data collection, organisations can start to make meaningful progress—before it’s too late.

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We are ready to help you as you tackle the Scope 3 challenge. Contact us today.