As the planet continues to warm and consumers, activists, investors and regulators push for action, more than one-third of the world’s 2,000 largest publicly traded companies have set goals to achieve net-zero carbon emissions. While this is welcome news, a glaring issue remains: 65% of these company targets don’t meet minimum procedural reporting standards and an even higher percentage don’t have realistic roadmaps in place to achieve neutrality. While there are external factors that affect a company’s ability to meet their objectives, many are particularly struggling with how to abate emissions in their value chains. A growing number of standards, from organizations such as the Greenhouse Gas Protocol, are highlighting how data and analytics can help companies manage scope 3 emissions and accomplish their sustainability goals.
Every company’s greenhouse gas (GHG) emissions can be exhaustively broken down into three scopes. Scope 1 emissions are direct emissions from owned or controlled assets of the company. These emissions are directly emitted by buildings, vehicles and equipment like boilers. Scope 2 emissions come from purchased electricity, heat and cooling in buildings—consider emissions that are directly emitted from power plants but indirectly tied to you as the purchaser of electricity.
Then there are the troublesome scope 3 emissions, which are all other indirect emissions associated with a company’s upstream and downstream operations. On average, they account for 75% of a company’s emissions and are the most difficult to track. An easy way to think about it: Your scope 3 emissions are the scope 1 and scope 2 emissions from your suppliers, distributors and customers that can be attributed to your company’s existence. For example, if your company makes smartphones, your scope 3 emissions would be those associated with mining the minerals, assembling parts of the phone in an outsourced factory, transporting it to stores or customers and using the phone over its life, among other activities. These are all emissions-emitting activities for which your company is not directly responsible—but they are all linked to your operations.
Why should companies care about scope 3 emissions? The reasons go far beyond altruism. Tracking and reporting these emissions will soon be legally required in the U.K. and the EU. In the U.S., the Securities and Exchange Commission (SEC) has proposed a rule to require public companies to report scope 1 and scope 2 emissions, as well as scope 3 emissions if a company has set a goal that includes them, or if scope 3 emissions are “material.” Supply chains that account for half of the world’s GHG emissions, such as freight, fashion, electronics, automotive and food will likely be deemed material.
The SEC is currently weighing public comments and will likely release final rules later in 2023. It’s important for companies to be proactive and implement best practices now, so they don’t have to scramble if it becomes a legal requirement.
There are also serious financial considerations for suppliers. In 2021, suppliers reported cost savings of $29 billion, stemming from the reduction of 1.8 billion metric tons of carbon dioxide equivalents (CO2e). Operational efficiencies and returns on renewable energy investments both played a role in this reduction. That’s not to mention that large companies are beginning to require their suppliers to comply with their goals. Last year, British retailers cancelled $9.6 billion in contracts with suppliers that didn’t meet their ethical and sustainability standards.
Lastly, there are softer benefits attributed to environmental sustainability. Limiting emissions can improve a company’s reputation and valuation. In a recent study, 65% of office workers said they’re more likely to work for a company with a strong environmental policy.
Scope 3 emissions are commonly divided into 15 categories and there are different methods for tracking each, thus requiring companies to work with disparate forms of data. For example, emissions from employee commuting (category 7) will require different data sources and calculations from upstream leased assets (category 8).
The first step every company should take is evaluating which of the 15 categories are relevant to their business. The EPA and Greenhouse Gas Protocol recommend using a simple survey to evaluate category relevancy, based on your business model and everyday business practices. In most cases, companies won’t have to report on all 15 emissions categories (see example in Figure 1). In 2021, the average number of scope 3 categories reported per company was 5.7.
After mapping out the relevant categories, you should identify which of them have readily available data and which lack it, as it’s common for data quality to be poor and vary greatly across categories. With the Greenhouse Gas Protocol’s calculation guidance in mind, you can match your available data with compatible calculation methodologies. Some of these methodologies are more accurate than others at estimating emissions, however. That’s why it’s also important to set a target date to achieve an ideal data type that’s more accurate for reporting and then outline tactical next steps to get there.
Many companies start with a spend-based method that multiplies a CO2e per dollar average coefficient by your dollar spend in a category to calculate total CO2e emissions. While this can provide general guidance and is a good start, it is still an exceptionally inaccurate approach.
After you have evaluated category relevance and current data quality, Pareto’s 80/20 rule is helpful when prioritizing which categories to tackle cutting emissions in first. We recommend starting with focusing on the 20% of categories that represent the largest percentage of your company’s total GHG emissions. These categories are where you should prioritize accurate data collection and focus on incentivizing your suppliers and buyers to reduce their emissions. Given the relative size of scope 3 emissions, even small percentage reductions in a few categories will have a large impact on total company emissions. The 80/20 approach ensures the efficient use of limited internal resources, though costs and the size of the data gap between current and ideal states will inevitably also be considered when deciding where to invest.
Just 56% of U.S. companies that reported emissions in 2021 disclosed any scope 3 emissions, compared to 71% of companies in the EU and 80% in Australia. We’ve found there are five key reasons why many companies have not made progress on scope 3 emissions tracking:
Data volume: Scope 3 emissions calculations require aggregating all scope 1 and scope 2 emissions up and downstream within your supply chain and then determining how much of those are attributable to your company’s existence. Aggregating millions of data points across your supply chain, in some cases manually, leads to a greater possibility for errors in calculation. Additionally, as you move up supplier tiers, the number of suppliers connected to your company grows exponentially, especially in the case of commodities. This makes it challenging to know all of your suppliers—much less their emissions—and leads to gaps in data.
Third party dependence: You won’t have an accurate picture of your scope 3 emissions until your suppliers and distributors start tracking and reporting their scope 1 and scope 2 emissions to you. This can be daunting because it requires the willingness of third parties to be transparent with those outside of their organization and to bear the expense of accurately and frequently tracking emissions. Of course, even after you know the emissions of your suppliers and distributors, it still may be a challenge to convince them to actually reduce their emissions.
Disparate tech systems: Ensuring that information properly flows between systems is complicated. Not all organizations have the same technology, and the links or application programming interfaces (APIs) between your systems and a third party’s emissions systems might not function properly. Companies should establish clear standards for data sharing with supply chain partners and collaborate with them on an ongoing basis.
A lack of universal regulations: Tracking emissions isn’t currently legally required in many countries. For now, leveraging industry standards for measurement, target setting and reporting is just a best practice—although certain standards may already be required to do business with specific companies. Given the lack of existing regulations, companies may be using different reporting methods, which could lead to heterogenous emissions data across companies. And in the case of multinational corporations with globalized supply chains, it’s difficult to gather scope 3 emissions data from parties in countries that don’t legally require reporting.
High level of resources required: Accurately tracking scope 3 emissions is resource intensive. It requires accurate and timely data, a robust tech infrastructure to track inputs for emissions calculations and well-trained personnel to run calculations and generate reports. But rather than ignoring scope 3 emissions completely, companies should consider at least using the spend-based method to estimate emissions across categories as a start (see Figure 1).
Tracking scope 1 and scope 2 emissions are the first step toward environmental leadership. Best practices for doing so—especially around data excellence—fundamentally overlap with scope 3 tracking guidance. However, due to the complexity of tracking scope 3 emissions, there are several additional best practices that can accelerate progress.
Materiality: Focus on the emissions categories that represent the largest share of your scope 3 emissions footprint. Most companies don’t have the resources to tackle every scope 3 category, and it’s easier to make emissions improvements in larger categories because even small changes can lead to greater impact.
Take an incremental approach: Companies should first track and set science-based reduction targets for scope 1 and scope 2 emissions. When you begin also focusing on scope 3 emissions, you will see that scope 3 emissions data for every company is currently far from perfect. Companies should be comfortable making rough estimations based on limited data while also preparing to incrementally improve data collection over time. We recommend starting with your most salient tier 1 suppliers and branching off from there.
As data collection improves and carbon coefficients change over the years, you should make sure that you are calculating carbon emissions consistently. Progress can’t be measured accurately if a company uses different calculation methodologies every year, so as methodologies improve, be sure to change data from prior years retroactively.
Collaborate with members of your supply chain: While it’s important to collect as much primary data from suppliers and distributors as possible, not every supplier and distributor will be up to speed on emissions tracking. Upstream members of your supply chain can be particularly concerned about sharing emissions data, fearing future financial repercussions for not meeting emissions targets. There should be certain assurances, at least at the beginning of this process, to assuage these fears.
The best collaboration approach is to offer your supply chain partners standardized templates and trainings, while frequently meeting to help them achieve carbon targets that are mutually beneficial. Providing suppliers with the necessary tools and realistic timelines for them to comply with your scope 3 needs allows you to make educated supplier decisions—and potentially walk away from nonessential suppliers that don’t meet emissions reduction targets. Over time, standing up a sustainable procurement team will grow your company’s ability to manage supplier sustainability and select greener alternatives if necessary.
Public companies unconcerned with tracking scope 3 emissions will likely be left scrambling if the SEC passes its anticipated scope 3 regulations. Large private businesses will also face growing pressure from customers and investors to track these emissions. Doing so can feel overwhelming because of its novelty, data complexity, third party dependence and expense. Still, taking an incremental approach, instituting good data management practices and collaborating with stakeholders across your supply chain makes it possible. As best practices continue to improve, tracking scope 3 emissions will become easier in the years to come. Through a commitment to collaboration, companies can create a better, cleaner future together.