In today's rapidly changing business landscape, the need for organizations to address environmental sustainability has become increasingly crucial. As concerns about climate change and its impact on the planet continue to grow, businesses are under mounting pressure to measure and reduce their carbon footprint.   

Scope 3 emissions — those occurring in a company’s supply chain — are the most difficult to assess but frequently the most material. This article explores why, despite the challenges involved, there are real incentives for companies to prioritize these aspects of their operation. Whilst regulatory demands are set to necessitate reporting, a commercial advantage can also be gained from a robust measurement approach; better emissions reporting should be viewed as a catalyst for business performance rather than simply as a regulatory requirement. 

Understanding the complexity of Scope 3 emissions

The Greenhouse Gas Protocol, a widely recognized standard for accounting and reporting, categorizes emissions into three scopes: 

• Scope 1: direct emissions from company-owned sources, such as vehicles and on-site equipment.
• Scope 2: indirect emissions from purchased electricity, heating and cooling.
• Scope 3:  indirect emissions that occur in the company's supply chain, both upstream. Examples include those from product use, purchased goods and services, and transportation of goods not using company-owned vehicles.

Today, many companies have well-established practices for calculating Scope 1 and 2 emissions. Scope 3 calculations, however, are less advanced despite being the dominant source of emissions in many sectors, as shown in Exhibit 1.  

Key challenges in calculating Scope 3 emissions

Data availability and quality issues for Scope 3 emissions

Gathering accurate and reliable data on Scope 3 emissions can be challenging due to the involvement of multiple stakeholders across the supply chain. Companies often face difficulties in obtaining complete and consistent data; inaccurate or incomplete data can lead to skewed emission calculations and hinder effective decision-making. 

Methodological limitations of spend-based approach

The most used method of estimating Scope 3 emissions is a spend-based approach, where the company’s emissions are linked to their spend. This means when a company’s revenue (and therefore spend) grows, so do their estimated emissions. This coupling of emissions and growth negates a company’s abatement efforts and disincentivises Scope 3 reporting. It also fails to consider the potential for companies to strategically invest in low-carbon alternatives or adopt sustainable practices that may result in business growth but lower emissions. Consequently, this approach represents a barrier to informed decision-making. 

Complexity of defining Scope 3 emission boundaries

Defining the boundaries of Scope 3 emissions can be complex. Different interpretations and variations in reporting practices can make it difficult to compare emissions across companies or industries and reduce the transparency of disclosures. 

Addressing these challenges requires robust data management systems, stakeholder engagement, and standardized methodologies. Ensuring these frameworks are in place will enable companies to meet regulatory frameworks and, crucially, to unlock untapped potential within their business.  

Regulatory pressure to act on Scope 3 emissions reporting 

The emphasis on reporting Scope 3 emissions is expected to grow in the coming years, driven by a rapidly expanding regulatory environment focused on climate change and sustainability. New regulations aim to enhance transparency and accountability across the supply chain, compelling companies to disclose their indirect emissions more comprehensively. This shift reflects a growing recognition of the importance of Scope 3 emissions in achieving overall sustainability goals. Key developments in this regulatory landscape include various initiatives and requirements, as outlined in Exhibit 2. 

The evolving landscape of emissions reporting underscores the need for robust data collection, accurate measurement, and transparent reporting to meet regulatory obligations and demonstrate commitment to sustainability. Failing to meet these demands may risk losing access to certain markets, but there are several other clear business incentives for improved emissions reporting. 

Six strategic benefits of enhanced emissions reporting

Despite the regulatory demand, better emissions reporting should not be considered a burden. It is a business opportunity to boost top and bottom-line business performance and improve operational resilience. Here, we focus on six key areas where a better grasp of Scope 3 emissions can drive success. 

Unlocking the “Green Premium” 

Increasingly, customers are seeking products with lower greenhouse gas emissions. In several sectors, there is a growing trend where products with lower carbon intensity products are rewarded with premium prices. Examples of such opportunities include green steel, sustainable aviation fuels (SAF), and certain agricultural commodities. 

Achieving cost savings through compliance 

Adopting energy-efficient solutions can lower operational costs and increase profitability. Additionally, transitioning to more sustainable practices, such as using thinner plastic bottles or switching transportation methods from air to sea freight, can also lead to significant savings. 

Attracting investors and lenders  

ESG ratings are increasingly influencing investment decisions. Businesses that actively measure and reduce their carbon emissions are more likely to attract environmentally conscious investors, and an increasing number of investors are actively considering ESG performance as an indicator of future profitability. Organizations with strong ESG performance can also benefit from cheaper debt; recent research shows that companies with lower emissions and clear environmental targets consistently borrow at lower interest rates than their competitors. Additionally, these organizations may benefit from lower insurance premiums, as insurers recognize the reduced risk associated with sustainable practices. 

Developing tangible emission reduction strategies

Calculating Scope 3 emissions accurately allows a company to drill down into the main drivers of its emissions. Only with this granular view—built upon operational data—can companies set realistic, actionable abatement strategies that can materially reduce emissions across the supply chain so that any stated emissions reduction targets can be met. 

Encouraging innovation through emissions insights

A better understanding of key emissions sources can drive conversations around business innovations that may not be considered. Examples include the increased use of recycled materials in manufacturing, the development of more energy-efficient products, and downstream initiatives such as take-back schemes and recycling. These changes reduce emissions and can be a strong commercial advantage by improving consumer appeal and long-term cost reductions. 

Enhancing risk management capabilities 

Effective risk management is a key incentive for businesses to calculate carbon emissions in their supply chain. By better understanding their supply chain and its environmental footprint, organizations can identify potential vulnerabilities and seek to mitigate operational risks associated with supply chain disruptions proactively, exposure to fluctuating energy prices due to inefficient suppliers, and the impacts of new regulations such as the Carbon Border Adjustment Mechanism (CBAM). 

The challenges and importance of calculating carbon emissions for businesses cannot be overstated. But by embracing the measurement and reduction of carbon emissions, organizations can effectively manage risks, achieve cost savings, and access lower-cost capital thanks to improved ESG ratings. As the world moves towards a more sustainable future, businesses that proactively address their carbon footprint will contribute to global climate action and position themselves as leading performers in their industries. 

How our 3D Carbon Accounting solution can help with Scope 3 reporting

We offer a range of tools and methodologies designed to support businesses navigating the complexities of carbon management. One of our key offerings is our 3D Carbon Accounting solution, which delivers a quick and comprehensive framework for companies to calculate their emissions across Scopes 1, 2, and 3 using their operational data. Our sophisticated tools, including large language models and mapping APIs, result in a nuanced view of a company’s emissions profile, essential for fostering informed decision-making. 

Our solution also enables businesses to benchmark their emissions against peers in their sector and project future emissions based on bespoke abatement strategies. We work closely with our clients to formulate informed, quantifiable strategies aligning with their sustainability goals across the supply chain. 

We focus on providing organizations with the necessary tools and insights to navigate their carbon management journey. By fostering a deeper understanding of emissions and supporting the development of targeted strategies, we aim to contribute to meaningful progress in sustainability efforts.