Understanding Scope 3 Emissions: The Key to Meaningful Corporate Climate Action

Businesses worldwide are under increasing pressure to measure, report, and reduce their greenhouse gas emissions. While many organizations have made progress addressing their direct emissions (known as Scope 1 and Scope 2), a critical component often remains overlooked: Scope 3 emissions. These indirect emissions represent the largest portion of most companies' carbon footprint, accounting for more than 70% of their total climate impact. Yet they remain the most challenging to quantify and address. For leadership teams around the world, understanding Scope 3 emissions isn't just about compliance and meaningful climate action - it's about unlocking resiliency in the supply chains that position them where they are today. Quantifying Scope 3 emissions fosters transparency, more accurate data for more informed business decision-making and trust between partners. This blog article is going into the depths of what it means to quantify these emissions and how to begin monitoring Scope 3 emissions from a business-case standpoint.

Beyond the Corporate Boundary: Defining Scope 3 Emissions

To appreciate the significance of Scope 3, we must first understand how greenhouse gas accounting categorizes emissions. You can find the definitions in our blog post about the difference between Scope 1, 2 and 3 emissions here.

• Scope 1: Direct emissions from owned or controlled sources (company vehicles, on-site fuel combustion, manufacturing processes)
• Scope 2: Indirect emissions from purchased electricity, steam, heating, and cooling
• Scope 3: All other indirect emissions occurring throughout a company's value chain

Scope 3 emissions encompass everything that happens outside an organization's direct operations but remains connected to its business activities. This includes upstream activities (suppliers, raw materials, business travel) and downstream activities (product use, end-of-life treatment, investments).

According to the CDP (formerly Carbon Disclosure Project), Scope 3 emissions are on average 11.4 times higher than operational emissions (Scopes 1 and 2 combined). For some sectors—particularly consumer goods, technology, and financial services—this disparity is even more pronounced.

The 15 Categories of Scope 3 Emissions

The Greenhouse Gas Protocol, the world's most widely used greenhouse gas accounting standard, breaks Scope 3 emissions into 15 distinct categories:

Upstream Activities:

1. Purchased goods and services
2. Capital goods
3. Fuel and energy-related activities (not included in Scopes 1 or 2)
4. Upstream transportation and distribution
5. Waste generated in operations
6. Business travel
7. Employee commuting
8. Upstream leased assets

Downstream Activities:

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

For most companies, categories 1 (purchased goods and services) and 11 (use of sold products) represent the largest sources of Scope 3 emissions. For an automobile manufacturer, for instance, the lifetime emissions from vehicles sold (category 11) dwarf all other categories combined. For a food company, agricultural emissions from suppliers (category 1) typically dominate the carbon footprint.

Why Scope 3 Matters: Beyond Compliance to Strategic Advantage

Addressing Scope 3 emissions is becoming a business imperative for several reasons:

Competitive Advantage

Scope 3 analysis reveals opportunities for innovation and efficiency:

• Supply chain optimization: Identifying emission hotspots often coincides with finding inefficiencies and waste
• Trust: Shared data metrics helps align suppliers, deepening trust in each other's services and products that create long-term partners
• Product innovation: Redesigning products for lower in-use emissions can create competitive differentiation from customers
• Risk mitigation: Companies addressing Scope 3 are better positioned to weather carbon pricing, resource constraints, and changing consumer preferences

Regulatory Pressure

Regulatory frameworks around the world are expanding to include Scope 3 reporting requirements:

• The EU's Corporate Sustainability Reporting Directive (CSRD) now mandates Scope 3 disclosure for approximately 50,000 companies
• The SEC's proposed climate disclosure rules would require publicly traded companies to report material Scope 3 emissions
• The International Sustainability Standards Board (ISSB) standards include Scope 3 reporting requirements

It is important to note regulatory pressure should not be the main driver of quantifying emissions. While it helps reduce costs, changes of government can influence the effectiveness of these legislations. The business opportunity of tracking emissions within the supply chain brings accountability and efficiency that have inherent cost savings.

Investor Scrutiny

Capital markets increasingly view unmanaged Scope 3 emissions as a financial risk. In 2023, 74% of investors in a PwC survey indicated they would be willing to divest from companies that aren't taking sufficient action on emissions, with special attention to Scope 3. Major institutional investors like BlackRock and State Street Global Advisors have made climate risk assessment, including Scope 3 consideration, central to their investment strategies.

The Measurement Challenge: Why Scope 3 Remains the Biggest Hurdle

Despite its importance, measuring Scope 3 emissions presents unique challenges:

1. Data accessibility: Companies typically lack direct access to emissions data from suppliers, customers, and other value chain partners. Third part providers are necessary to maximize data tracking.
2. Methodological complexity: Different calculation approaches can yield significantly different results
3. Resource requirements: Comprehensive Scope 3 accounting requires substantial expertise and organizational commitment
4. Double counting: Emissions may be counted multiple times across different organizations' inventories

Microsoft's journey to carbon negativity illustrates these challenges. In its 2021 Environmental Sustainability Report, the company acknowledged that while it had reduced Scope 1 and 2 emissions by 17%, its Scope 3 emissions had increased by 23%—primarily due to increased use of its cloud services and Xbox consoles during the pandemic.

Leading Approaches: How Pioneers Are Tackling Scope 3 Emissions

Despite the challenges, innovative organizations are making progress through several strategies:

1. Supplier Engagement Programs

Companies like Apple and Walmart have developed comprehensive supplier programs:

• Apple's Supplier Clean Energy Program has helped more than 175 suppliers transition to renewable electricity
• Walmart's Project Gigaton aims to reduce one billion metric tons of emissions from its global supply chain by 2030

2. Science-Based Targets

Over 4,000 companies have committed to the Science Based Targets initiative (SBTi), which requires:

• Setting Scope 3 targets when these emissions account for more than 40% of total emissions (true for most companies)
• Implementing specific strategies to meet these targets
• Regular progress reporting

3. Internal Carbon Pricing

Companies like Unilever and Shell have implemented internal carbon pricing mechanisms that account for Scope 3 emissions, influencing investment decisions and incentivizing emissions reductions throughout the value chain.

4. Product Redesign

Reducing emissions associated with product use and disposal through redesign has become a priority for many manufacturers:

• Whirlpool has focused on energy-efficient appliances that reduce in-use emissions
• Interface has transformed carpet manufacturing to create carbon-negative products

5. Collaborative Industry Initiatives

Cross-industry collaboration is emerging as essential for addressing shared Scope 3 challenges:

• The Sustainable Apparel Coalition has developed tools like the Higg Index to measure environmental impacts across the textile value chain
• The Transform to Net Zero initiative brings together companies like Microsoft, Nike, and Starbucks to develop and share best practices

The Path Forward: Practical Steps for Organizations

For sustainability professionals looking to advance Scope 3 action within their organizations, several approaches have proven effective:

1. Start with a screening assessment to identify the most significant emission sources before conducting detailed analyses
2. Focus on materiality by prioritizing the categories that represent the largest share of emissions or present the greatest reduction opportunities
3. Improve data quality incrementally, beginning with industry averages and gradually replacing them with supplier-specific data
4. Set ambitious but achievable targets with clear interim milestones. Review these on a frequent basis
5. Integrate Scope 3 considerations into procurement processes, product development, and business strategy through technologies and service providers on the market

Scrapp works with your suppliers to track the materials and good they bring into any business. Using our data we can automatically track your upstream and downstream Scope 3 emissions from waste activities across your entire supply chain. As a reader of this blog, you can book in a free 30-minute consultation with one of our TRUE certified team members to learn how we can help reduce your Scope 3 emissions today.

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The Individual's Role: Beyond Corporate Action

While organizational action on Scope 3 emissions is crucial, individuals also play an important role:

• As consumers, we can support companies with robust Scope 3 management programs and choose products with lower lifetime emissions
• As employees, we can advocate for comprehensive emissions accounting and reduction strategies within our organizations
• As investors, we can demand transparency on Scope 3 emissions and support companies taking meaningful action

Looking Ahead: The Future of Scope 3

The landscape of Scope 3 management is evolving rapidly. Several trends are likely to shape its future:

1. Technology solutions that streamline data collection and analysis are proliferating, making comprehensive accounting more accessible
2. Standardization efforts are advancing, with initiatives like the Partnership for Carbon Transparency (PACT) working to enable data exchange across value chains
3. Integration with broader ESG frameworks is occurring as companies seek to address interconnected sustainability challenges
4. Increasing focus on nature-related impacts beyond carbon, as frameworks like the Taskforce on Nature-related Financial Disclosures gain traction

Conclusion: Progress over Perfection

As we confront the urgent challenge of climate change, addressing Scope 3 emissions has moved from a nice-to-have to a business imperative. The organizations that will thrive in the low-carbon future are those that look beyond their operational boundaries to understand and proactively manage their full climate impact.

For sustainability leaders, the message is clear: the next frontier of corporate climate leadership lies in the complex but crucial realm of Scope 3 emissions. Those who master this challenge won't just be environmental leaders, they'll be positioning their organizations for long-term resiliency in a rapidly changing world.