With emissions representing a primary cause of climate change, any business that wants to focus on sustainable development will inevitably need to take a long hard look at their greenhouse gas (GHG) emissions – including those produced indirectly.
Now that the ISSB requires companies reporting according to IFRS Sustainability Disclosure Standards to state their indirect, Scope 3 emissions, many companies are faced with collecting this information. And as more governments around the world, like Canada, the USA, and the EU, implement mandatory climate disclosures, it’s only a matter of time before Scope 3 reporting becomes standard.
Calculating your Scope 3 emissions is not always straightforward, however, with companies often having to choose between spend-based estimates and the time-consuming (but more accurate) process of collecting supplier-specific data.
In this article we help you explore the steps required to calculate your Scope 3 emissions and the pros and cons of various calculation methods. With expert tips on Scope 3 calculation, AMCS can help you begin the process of measuring, managing – and ultimately reducing – emissions for a more sustainable future.
What are Scope 3 emissions?
In essence, your organization’s GHG emissions can be divided into three different classifications. Scope 1 and Scope 2 cover direct emissions released by an organization and indirect GHGs that occur when a company purchases electricity, steam, heat, or cooling.
Scope 3 emissions are indirect emissions from sources owned or controlled by other companies, organizations, governments, or entities in the value chain. This could, for example, include:
· Materials suppliers
· Third-party logistics providers
· Waste management suppliers
· Travel suppliers
· Lessees and lessors
· Franchisees
· Retailers
· Employees
· Customers
Scope 3 includes any indirect emissions, that are not covered under scope 2, that occur in the value chain of the reporting company, including both upstream and downstream emissions.
How many Scope 3 categories are there?
The GHG Protocol classifies 15 reporting categories of upstream and downstream Scope 3 emissions.
Upstream Scope 3 reporting categories:
1 Purchased goods and services
2 Capital goods
3 Fuel- and energy-related activities (not included in scope 1 or scope 2)
4 Upstream transportation and distribution
5 Waste generated in operations
6 Business Travel
7 Employee Commuting
8 Upstream leased assets
Downstream Scope 3 reporting categories:
9 Downstream transportation and distribution
10 Processing of sold products
11 Use of sold products
12 End-of-life treatment of sold products
13 Downstream leased assets
14 Franchises
15 Investments
These 15 categories are intended to provide a framework to measure, manage, and reduce emissions across your value chain. They’re also designed to help avoid double-counting emissions across different categories.
Depending on the category, you might choose to use either spend-based or supplier-specific calculation methods. But how do these calculation methods differ, and what are the advantages and disadvantages of each?
What is spend-based Scope 3 calculation?
Essentially, spend-based calculation provides an estimate of your indirect GHG emissions. To run this calculation, reporting companies take the cost of a purchased good or service and multiply it by a corresponding emission factor, which is established using secondary data.
Spend-based Scope 3 emissions = cost (purchased good or service) * secondary emission factor
Secondary data on emission factors could include industry-average data (e.g., from published databases, government statistics, literature studies, and industry associations), financial data, proxy data, and other generic data. A comprehensive list of secondary data sources is available on the GHG Protocol website.
The GHG Protocol recommends the spend-based calculation method be used for Scope 3 categories 1 (Purchased goods and services), 2 (Capital goods), 4 (Upstream transportation and distribution), 6 (Business travel), and 9 (Downstream transportation and distribution).
What is supplier-specific Scope 3 calculation?
Calculating emissions using the supplier-specific method involves gathering suppliers’ activity data, identifying the right emissions factor(s), and converting the activities to CO2e. This requires the reporting company to collect operational data from all suppliers.
Supplier-specific Scope 3 emissions = supplier activity * secondary emission factor
The GHG Protocol recommends the supplier-specific calculation method be used for Scope 3 categories 1 (purchased goods and services), 2 (Capital goods), 3 (Fuel- and energy-related activities), and 5 (Waste generated in operations).
If this sounds a little confusing, you will be glad to hear that the GHG Protocol has developed a reporting standard to make navigating Scope 3 reporting easier. This document provides extensive instructions on accounting for and reporting emissions from companies of all sectors, globally.
The Corporate Value Chain (Scope 3) Accounting and Reporting Standard identifies which calculation methods are recommended for each of the 15 Scope 3 categories. This can help to simplify the process of calculating emissions across your entire value chain, exploring the advantages and disadvantages of each method.
For instance, the supplier-specific method utilizes operational data, which provides more accurate results, but also requires more effort to collect this information from suppliers and the rest of your value chain. On the other hand, the spend-based method utilizes estimates, which makes it easier for to get started, but also might not reflect that you work with suppliers whose operations are more sustainable than the current estimates.
9 steps for scope 3 calculation
To help you get underway with emissions reporting, the GHG Protocol provides a step-by-step guide to help companies understand their full value chain emissions impact. The Corporate Value Chain Reporting and Accounting Standard outlines nine steps you can take to develop your scope 3 inventory:
- Define Business Goals
- Review Accounting & Reporting Principle
- Identify Scope 3 Activities
- Set The Scope 3 Boundary
- Collect Data
- Allocate Emissions
- Set A Target (Optional) & Track Emissions Over Time
- Assure Emissions (Optional)
- Report Emissions
By following these steps, organizations can calculate emissions across their entire value chain, and where possible, begin to identify possibilities for reduction.
Regardless of whether you opt for spend-based estimates or supplier-specific calculations, however, one thing seems clear: disclosing your emissions and taking control of your environmental impact will depend on accurate data.
That’s where AMCS can help by providing easy access to all your climate data in one centralized Sustainability Platform. If you're ready to tackle scope 3 reporting, contact us today to learn more.