Scope 3 emissions

The challenge of reducing scope 3 emissions and how companies are addressing it

Chipman Koty

The US tech giant Apple recently called for the US Securities and Exchange Commission (SEC) to require companies to disclose in-depth emissions information, including scope 3 emissions in corporate value chains.

In a statement released on April 13, 2021, Apple’s head of Global Energy and Environmental Policy, Arvin Ganesan, said that Apple “believes that the SEC should issue rules to require that companies disclose third-party-audited emissions information to the public, covering all scopes of emissions, direct and indirect, and the value chain.”

Apple’s calls for greater attention to scope 3 emissions reflects growing awareness of their importance in combating greenhouse gases. Until recently, most companies have focused on reducing their direct emissions, known as scope 1 emissions, or those caused by energy consumption, known as scope 2 emissions. However, it is emissions in upstream and downstream value chains outside of direct control – scope 3 emissions – that make up the largest share of emissions for most companies.

Since scope 3 emissions occur outside of a company’s direct control, they are harder to measure and reduce than scope 1 and 2. This challenge requires that companies look beyond their immediate operations to develop solutions for the entire value chain, from suppliers to consumers and beyond.

Why scope 3 emissions are difficult to tackle

Scope 3 emissions encompass a wide variety of activities, including emissions from suppliers, distributors, and consumers, as well as those relating to the life cycle of a company’s products and the impacts of its investments. This includes employee commuting and business travel, waste disposal, and, the production and distribution of purchased goods and services.

Measuring scope 3 emissions is not just difficult because the activities are outside of a company’s immediate operations, but because the expectation that they should be reported on in the first place is new. As such, scope 3 technical guidance and reporting methodologies are mostly experimental.

Compared to scope 1 and 2 emissions, which companies can largely measure with primary data, scope 3 emissions often depend on estimates and reliance on outside parties to conduct measurements. Likewise, scope 1 and 2 reductions tend to be a higher priority, while companies set more modest targets for scope 3 reductions.

Companies will often bundle scope 1 and 2 reduction targets together, and set a separate timeline for scope 3 emissions. For example, healthcare technology company Royal Philips committed to reduce scope 1 and 2 emissions by 75 percent by 2025 and 90 percent by 2040, and to reduce scope 3 emissions by 4 percent by 2025 and 11 percent by 2040. Likewise, pharmaceutical company Bayer pledged to reduce scope 1 and 2 emissions by 42 percent by 2030, compared to 12.3 percent for scope 3 emissions.

That is not to say that tackling scope 3 emissions is less important than scope 1 and 2 emissions. Only about 1 percent of Apple’s emissions fall under scope 1 and 2, partly because the company runs its own facilities on renewable energy. The remaining 99 percent are scope 3 emissions, including 76 percent from supplier manufacturing and 14 percent from consumer product use.

Apple’s experience shows that for many businesses seeking to become carbon neutral, the bulk of progress must be made in reducing scope 3 emissions – especially for companies selling physical products.

Engaging the entire value chain

Given the range of activities they cover, scope 3 emissions are best approached not as a single issue, but as an umbrella for various categories. The Greenhouse Gas Protocol, for instance, delineates 15 categories of scope 3 emissions, of which eight are in upstream value chains and seven are in downstream value chains.

Companies may opt to prioritize categories that are responsible for an outsized portion of their emissions, align with broader corporate goals or risk management considerations, or are more readily reparable.

Working with suppliers

Due to the nature of scope 3 emissions, close engagement with suppliers is essential for addressing emissions. Companies can screen suppliers and work with those that are willing to share primary emissions data, since this information is not otherwise available. This data may be possible to obtain from tier 1 suppliers, but difficult to obtain from lower tier ones.

Companies may ultimately have to resort to estimates from a combination of government, academic, and industry data, purchasing data based on weight and spending, and other proxy indicators. In practice, companies use primary supplier data, and estimates to fill the gaps.

Identifying where a company’s scope 3 emissions are coming from is the first step in building a more sustainable supply chain. From there, companies can share sustainability initiatives with their suppliers, or work with ones that demonstrate higher standards than their competitors.

Walmart’s ‘Project Gigaton’, launched in 2017, is an example of one such initiative. As part of this project, Walmart built a platform for suppliers to set and track emission reduction targets, and the company hosts events to share best practices with suppliers. Similarly, Mars encourages suppliers to mirror its own climate action commitments through an initiative called ‘Pledge For Planet’.

Reducing downstream impacts

In addition to engaging upstream with suppliers, reducing scope 3 emissions requires companies to look downstream in their value chains, including with end consumers. Gaining information about how consumers use and dispose of products, however, can be even more difficult than obtaining data from suppliers, and may require qualitative research methods like focus groups and consumer surveys.

In some cases, companies can reduce emissions by offering consumers clear information on how to use and dispose of products in an environmentally conscious way, such as an appliance maker encouraging washing machine users to use cold instead of hot water. Companies can communicate suggestions such as these more effectively by providing consumers with hard numbers that demonstrate the tangible impacts of using products more sustainably.

Nonetheless, building environmental considerations into the R&D and product design stage has significantly more impact. For many consumer electronics and appliances, where the majority of product emissions come from home electricity usage, the largest area of concern is energy efficiency. For example, only 8 percent of the emissions associated with a single Philips shaver come from materials and production, while 85 percent come from the product’s use.

But products can also be designed more sustainably by substituting carbon-intensive materials for less harmful ones, decreasing the weight of products, and improving the recyclability of components and packaging. The trend towards lightweight design is particularly strong in the auto industry – where a 10 percent reduction in vehicle weight can cause a 6-8 percent improvement in fuel economy – but also applies to reducing transport-related emissions of all products.

Integrating scope 3 emissions into corporate strategy

As scope 3 emissions cover the full breadth of a company’s carbon footprint, reducing them requires a whole-of-business approach that go beyond corporate social responsibility teams. Indeed, sustainability must be integrated into all corporate functions, from procurement to finance to R&D. Innovative solutions may ultimately have the dual effect of reducing emissions and making products more competitive on the market.

Despite their importance, many companies do not report on their scope 3 emissions, and some companies with ambitious scope 1 and 2 emissions reduction targets lack plans for scope 3 emissions, reflecting the complexity of the issue.

Nevertheless, scope 3 emissions are where many companies could most significantly cut their overall emissions. With growing expectations from investors, policymakers, and the public for action on climate change, scope 3 emissions are likely to become a priority concern. Companies that proactively take steps to address scope 3 emissions, like Apple, will be ahead of the curve when the area becomes a focal point for corporate sustainability action.

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