Scope 3 Emissions: What Do They Mean for the C-Suite?

Emissions of the anthropogenic greenhouse gasses (GHG) that drive climate change and its impact around the world are growing. According to the latest findings of the Intergovernmental Panel on Climate Change , to limit global warming to around 1.5C (2.7°F), the global greenhouse gas emissions would have to peak before 2025 at the latest and be reduced by 43 per cent by 2030. Global temperatures will stabilize when carbon dioxide emissions reach net zero.

As a result, the need to accelerate efforts to reduce GHG emissions is accelerating. Existing government policies will not sufficiently solve the problem. Leadership and innovation from business is vital to making progress.

Scopes 1, 2 and 3 of Carbon Emissions Explained

GHG emissions for businesses are divided into three categories known as Scope 1, Scope 2 and Scope 3. The Corporate Standard methodology requires reporting of all Scope 1 and Scope 2 emissions, while Scope 3 reporting remains optional.

What Are Scope 1 Emissions?

Scope 1 emissions are direct emissions from owned or controlled sources. Scope 1 emissions are generated by operations that are owned or controlled by the reporting company. For example, emissions from combustion in owned or controlled boilers, furnaces, vehicles, etc.; emissions from chemical production in owned or controlled process equipment, and indirect emissions.

What Are Scope 2 Emissions?

Scope 2 emissions are indirect emissions from the generation of purchased energy consumed by the reporting company. Scope 2 emissions come from the generation of purchased or acquired electricity, steam, heating, or cooling consumed by the reporting company.

What Are Scope 3 Emissions?

Scope 3 emissions are all other indirect emissions that occur in a company’s value chain and represent the largest source of emissions for companies. Scope 3 emissions occur from sources owned or controlled by other entities in the value chain (e.g., materials suppliers, third-party logistics providers, waste management suppliers, travel suppliers, lessees and lessors, franchisees, retailers, employees, and customers).

Scope 3 includes both upstream and downstream emissions from purchased product production, purchased product transportation, or sold product use.

Upstream Scope 3 emissions relate to:

• Purchased goods and services
• Capital goods
• Fuel- and energy-related activities
• Upstream transportation and distribution
• Waste generated in operations
• Business travel
• Employee commuting
• Upstream leased assets

Downstream Scope 3 emissions result from:

• Downstream transportation and distribution
• Processing of sold products
• Use of sold products
• End-of-life treatment of sold products
• Downstream leased assets
• Franchises and investments

Why Scope 3 Emissions Are So Important for Businesses

Scope 3 Emissions Account for More Than 70% of a Business’ Carbon Footprint

According to the UN Global Compact , Scope 3 emissions account for a massive 70% of the average corporate value chain’s total emissions. Addressing Scope 3 proves crucial for limiting warming to 1.5°C.

Scope 3 Emissions Are Becoming More Regulated Internationally

There is significant international pressure to establish common Scope 3 emissions regulation agreements and transparently introduce companies’ engagements publicly.

Multiple regulators – including the US Securities and Exchange Commission (SEC), the European Commission, and the Science Based Target initiative (SBTi) – are pressuring companies toward carbon footprint reduction commitments with public disclosure of strategies. Over 3,000 global organizations affiliate with SBTi’s Net Zero standard . The International Sustainability Standards Board (ISSB) drafted recommendations requiring qualitative information explaining how reported emissions were calculated.

Tracking Scope 3 Emissions Brings Multiple Benefits

Measuring and reducing Scope 3 emissions provides numerous advantages:

• Assessing emission hotspots in the value chain
• Identifying resource and energy risks in supply chains
• Identifying energy efficiency and cost reduction opportunities
• Engaging suppliers and assisting sustainability initiatives implementation
• Improving product energy efficiency
• Engaging with employees to reduce emissions from business travel and employee commuting

Why Tracking Scope 3 Emissions Is So Challenging

While Scope 1 and 2 emissions are derived from a company’s own activities making them easier to measure, Scope 3 emissions come from a company’s value chain which span the globe and depend on third parties, so it is much harder to accurately capture all the underlying data.

For some companies, developing a Scope 3 inventory may improve future carbon regulation planning. Energy or emissions taxes or supply chain regulations might significantly increase purchased goods or component costs. Understanding Scope 3 emissions guides corporate procurement decisions and product design planning.

Three Major Reasons Why Your Business Needs a Scope 3 Strategy

1. The Rising Importance of Organizational Sustainability

ESG metrics and reporting are fast becoming business imperatives. Increased scrutiny from investors and shifts in consumer and customer expectations are facing new pressure to measure, disclose and improve on ESG-related issues. “88% of investors believe companies that prioritize ESG investments represent better opportunities for long-term returns than companies that do not.”

To reduce ESG risks, companies incorporate values, objectives, and metrics into business plans. They leverage related opportunities for innovation and expense reduction – both beginning with widely recognized standard reporting familiar to and trusted by stakeholders.

2. Compliance to International Regulations

Leadership cannot ignore corporate GHG emissions. Carbon accounting becomes as vital as financial accounting. Board members hold responsibility to shareholders and owners for monitoring carbon emissions commitments. Investors increasingly make decisions based on environmental performance, while financial institutions and consumers demand carbon footprint transparency.

Multiple international regulators coordinate efforts to better regulate GHG emissions. In March 2022, the US SEC proposed rule amendments that would require public companies to provide certain climate-related financial data, and GHG emissions insights, in public disclosure filings. All public companies must now accelerate climate reporting while transitioning to effective controlled environments. Disclosures require material climate impacts, greenhouse-gas emissions, and any targets or transition plans.

The European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD) , extending the reporting requirements to all large companies and all companies listed on regulated markets (except listed micro-enterprises). It requires reported information audit and assurance plus more detailed reporting per mandatory EU sustainability standards.

3. Scope 3 Emission Challenges Can Be Turned Into Opportunities

While risks and challenges appear overwhelming, opportunities emerge through strategic planning:

Efficiency and cost savings: GHG emission reduction often corresponds to decreased costs and increased operational efficiency.

Growing innovation: Comprehensive GHG management approaches provide new innovation incentives for supply chain management and product design.

Increase in sales and customer loyalty: Low-emissions products and services gain increasing consumer value, creating growing markets for innovative products genuinely lowering entire value chain emissions.

Better stakeholder interactions: Proactive transparency and environmental stewardship display examples include upholding shareholder fiduciary duty, educating regulators, fostering community trust, enhancing client and partner connections, and boosting employee morale.

Company differentiation: External parties – customers, investors, regulators, shareholders, and others – increasingly seek documented emissions reductions. Scope 3 inventories help businesses stand out in increasingly environmentally concerned markets. Strategic Scope 3 handling yields important rewards like market share increases alongside commitment progress.

Being conscious about environmental footprints represents the next organizational evolution step. Scope 3 strategy development requires alignment and teamwork since it represents your primary CO2 emissions portion.

Scope 3 Emissions: Understanding Implications for the C-Suite

Given Scope 3’s far-reaching impact, every business area faces potential effects – from supply chain and product development to reporting, tax, marketing, and sustainability. Realizing carbon footprint reduction goals requires strategy building and board team reliance.

Key considerations:

• Engage your C-suite and assemble cross-functional teams creating GHG emissions commitment accountability. While sustainability teams provide in-depth expertise, finance functions manage accounting, controls, and ESG data veracity.

• Upskill corporate directors: Board members – particularly audit committee members – need better understanding of how Scope 3 emissions reduction fits overall business strategy for appropriate governance oversight management.

• Measure emissions: Identify high-emission hotspots and prioritize decarbonization programs first using reliable data. Ensure information availability for regulatory requirements.

• Find low-carbon opportunities: These relate to product design, sourcing, and production. Manufacturing companies could create robust decarbonized value chains.

• Work with suppliers and model supply chain risks: Assess and manage Scope 3 emissions through supplier collaboration. Helping establish concrete measurements for accurate emissions quantification and assisting ROI calculations for decarbonization constitutes primary efforts.

Each committee board member plays an important strategic definition role. Companies frequently miss the net-zero transition opportunity by concentrating on decarbonization actions without recognizing business-aspect risks requiring management and opportunities for grasping. What foundational questions should leaders pose while pursuing net-zero goals?

Chief Executive Officer

To make it work, the sustainability agenda actually needs to be the CEO’s agenda because of the breadth of business impacts that it has. The GHG emissions reduction journey raises fundamental questions: Are there markets that I previously thought were attractive that are no longer attractive? Are there entirely new opportunities that are created as a result of the transition? In a world where the pace and form of change are still unknown and we have a net-zero aim, what should my strategic positioning be?

Chief Operating Officer

The COO must remain vigilant monitoring new regulatory reporting requirements and guideline changes ensuring company compliance and existing compliance systems, processes, and infrastructure appropriateness and effectiveness.

Fundamental questions that a COO should find answers to include: Is the Scope 3 emissions risk strategy reflected across all policies related to the operations of the organization? What are the key metrics to measure the progress of achieving goals and targets? Have the short and medium-term operational emissions target been set? Is the ESG risk strategy embedded across the operations of the organization and understood by all levels of employees?

Chief Sustainability Officer

Companies have started appointing chief sustainability officers (CSOs) to drive the formulation and execution of an organization’s sustainability strategy. Their role is to present a coherent story of their organization’s purpose and how it delivers long-term value to stakeholders, including employees and shift the focus of the story from environmental sustainability to purpose-driven sustainability.

Speaking at the S30 launch event, The Prince of Wales noted that “the role is fast becoming one of the most important and influential roles in the corporate world and is increasingly central to market competitiveness. I very much hope to see major businesses around the world appoint suitably empowered chief sustainability officers to ensure sustainability is central to business strategy, decision-making, procurement, supply chains and customer engagement.”

Chief Human Resources Officer

CHROs join C-suite colleagues addressing decarbonization-related risks by developing processes and policies that enable effective, long-term remote working models. They can play a role in reducing carbon emissions from vehicles and updating performance measurement to evaluate an individual’s contribution to the net-zero goals of the organization. Additionally, they update learning and development career journey maps including ESG subjects aligning with organizational goals. CHROs bear responsibility for the complete upskilling exercise necessary for successful transition navigation.

Chief Information Officer

CIOs are confronted with data-related challenges , both in terms of compliance and data protection. Organizations exist in the ESG-driven climate of today to sift through data and reveal businesses that don’t follow ESG criteria. Bad actors now face new threat vectors: data tampering, theft, or leakage possibilities. CIO questions include: Who are the threat actors interested in your data? What drives their malfeasance – geopolitical concerns, corporate sabotage, bragging rights? How can artificial intelligence assist in information gathering and ESG risk level understanding?

Chief Financial Officer

During the transition towards a carbon-free business environment, CFOs need to ensure there is a strong connection between financial and nonfinancial reporting, and that risks and opportunities are reflected across the cash flow statement. CFOs and finance leaders should proactively work across business units understanding Scope 3 emissions risks under different future scenarios while leading integration advancement of these risks into overall enterprise risk management programs.

Chief Marketing Officer

The CMO has a significant role to play in setting the course of a company’s net-zero risk strategy and sharing the added value to the society story with employees, consumers, and stakeholders. From social media to company vision and mission statements and investor messages, CMOs should consider ESG-informed marketing strategy integration throughout company brands. Centering marketing efforts around organizational sustainability, diversity and inclusion policies, and employee well-being strategies while effectively telling that story increases brand loyalty and value.

Data Is the Key to Driving Sustainability in Your Organization

Teamwork takes you one step further into articulating the Scope 3 emissions strategy, but despite different responsibilities and roles played by the C-suite and the degree of involvement, it all narrows down to good data. Data helps better identify sustainability risks and assess opportunities, measure progress against settled emission objectives, and communicate sustainability performance to key stakeholders.

Good metrics and qualitative data will enable you to measure, among others, your energy consumption, your office space utilization degree, your office paper consumption, the number of business travels and employee commutes you are running on a yearly basis (and the amount of CO2 they generate), the amount of energy the appliances and hardware you are equipping your employees with etc. Consider adopting technologies that make your business more climate-friendly and workplace management applications helping control space usage.

To sum it up, organizations that don’t have a solid data foundation may not be able to identify risks and opportunities, measure progress, or effectively communicate their results. As the world is demanding increasingly more transparency regarding company sustainability efforts, strong policies lead toward more engaged and results-oriented practices.