Scope 3 Emissions

Emissions in a company’s supply chain are on average 11 times higher than direct (scope 1) emissions and reflect >70% of total emissions. As such, value chain decarbonization represents one of the most significant opportunities for companies to play their part in reaching net zero globally before 2050.

Source: Science-Based Target Initiative

Several reporting frameworks and platforms, such as CDP, TCFD, and setting science-based targets, require Scope 3 emissions reporting, as do regulations like CSRD and California regulations SB 253 and SB 261

What are Scope 3 Emissions?

The GHG Protocol is the universal standard for defining and computing a corporation’s greenhouse gas emissions. As a reminder, Scope 1 refers to emissions directly associated with sources owned by a company; Scope 2 refers to emissions from purchased electricity, heating, and cooling.

Scope 3 emissions are a consequence of the activities of the company but occur from sources not owned or controlled by the company. The GHG Protocol’s Corporate Value Chain (Scope 3) Accounting and Reporting Standard (“Scope 3 Standard”) further divides Scope 3 emissions into emissions related to upstream activities and downstream activities and classifies them into 15 categories, as shown in the figure below. Not all categories are applicable to a company; identifying relevant categories is part of the GHG inventory process that should be done before starting a carbon footprint exercise.

In this article, we will summarize the guidance provided in the GHG standard to compute and report each category of Scope 3 emissions. We review the data needs for each category, and examine actions available for emission reduction specific to that category and present an example of how some companies have tackled that category.

Why Scope 3 and the Challenges of Scope 3 reporting

Not every category is relevant to every company, identifying relevant categories requires an assessment of the operations, services and products at the company and creating a Greenhouse Gas Inventory. The example below from Saint-Gobain integrated report depicts the process of identifying all the relevant categories for a product – the decarbonated home.

Source Page 46: SAINT-GOBAIN • 2022/2023 INTEGRATED ANNUAL REPORT

Scope 3 Emissions Challenges

Corporations face a number of challenges when it comes to calculating Scope 3 emissions:

• Breadth of data sources – Organizational systems like ERP and finance systems that contain spend-based data, data from aggregators for waste and recycling categories, third-party data for business travel, survey data for employee commuting
• Calculation methodology – based on the data type, the GHG protocol recommends a variety of calculation methods: Spend-based, Hybrid or Average Method, Supplier Specific method.
• Emission factors and currency exchange data – Besides, the variety of data types and calculation methodology requires emission factors and currency exchange data for spend-based methods. Keeping emission factors updated at different rates, and fluctuating currency exchange rates add to the difficulty of Scope 3 emission calculations.

GHG Protocol – Technical Guidance for Scope 3 emissions

A software tool can be invaluable for capturing, organizing, visualizing, and analyzing Scope 3 data and calculating Scope 3 emissions. The tool is also helpful in managing and tracking decarbonization programs that target Scope 3 emission reductions.

In the following sections, we review each Category of Scope 3 emissions.

Category 1: Purchased Goods and Services

This category includes all upstream (i.e., cradle-to-gate) emissions from the production of products purchased or acquired by the reporting company in the reporting year. Products include both goods (tangible products) and services (intangible products)

Data needs for Category 1

To collect data for Category 1, it might be useful to further divide Category 1 into goods and services for production-related and non-production-related activities. Production-related goods and services are used in the products and services provided by the company. Data for these goods might be available in procurement systems. Examples of non-production-related goods are office supplies and services like telephones and the Internet. Data for these might be available in billing and payment systems.

The spend-based method is the easiest method to estimate emissions for these categories. EPA’s supply chain GHG emission factors are based on US Environmentally-Extended Input-Output models and are presented in emissions per dollar of spend. The emission estimates can be improved by using the “Average-data method” by collecting data on the mass or relevant units of purchases. These methods provide directional information on the materiality of emissions from all the goods and services purchased by the organization and allow the company to identify and prioritize suppliers for a more accurate supplier-specific emissions method.

Companies can then ask top suppliers to provide product-level cradle-to-grave data for more accurate Category 1 emissions.

Note that Category 1 and especially Category 2 account for emissions from purchases in the year the goods are purchased not used, thus accounting for future emissions of purchases if the goods are used in subsequent years.

Climate actions for Category 1 – Supply chain engagement

Working on Category 1 emission reductions will require working with your suppliers, involving your procurement teams, creating a Supplier Code of Conduct, or adding language related to sustainability expectations in RFPs and supplier contracts. Working with suppliers to get Life Cycle Assessment (LCA) or Environment Product Declarations (EPDs) for the products can help get emissions information for products and services in Category 1. Supplier information can also be collected through platforms like CDP or EcoVadis that rate suppliers’ performance. Companies can also create programs that help suppliers with know-how and financing to accelerate and achieve sustainable operations.

Companies like Ikea and Walmart have worked with their suppliers to increase the amount of renewable energy used in the supply chain.

For example, Mars is optimizing recipes by considering the carbon intensity of the ingredients in the recipe.

Recipe optimization

We’re innovating to source the best ingredients in the most climate-friendly way.

When considering the impact of our food, we can’t forget about our ingredients. Varying production practices means different suppliers and farms operate at different carbon intensities. Adding carbon intensity to the differentiating criteria among suppliers (alongside quality, price and other factors) has the opportunity to drive competition and innovation in our supply base. It also lets us reward farmers and suppliers who have acted early to reduce emissions. In some cases, this could mean changing suppliers or making geographic shifts in sourcing.

Source: Achieving Net Zero emissions by 2050 | Mars Incorporated

Category 2: Capital Goods

This category addresses the emissions that result from the production or manufacturing of capital goods that are acquired by the reporting company. Capital goods are tangible, physical assets an organization uses to produce products, service customers or perform normal operations.

Data needs and Climate actions for Category 2

The calculation methods for Category 1 (Purchased goods and services) and Category 2 (Capital goods) are the same. So, reduction levers for Category 2 are like those for Category 1, working with suppliers and choosing products from suppliers that have lower emissions. The only difference is that Capital Goods are likely to last many years, and decisions made in purchasing capital goods are going to be locked in for many years. So, emissions related to the use of capital goods, i.e., energy required to use the good, should also influence the purchase decisions and choices made in Category 2 goods.

Category 3: Fuel and energy-related activities

Category 3 covers emissions from fuel and energy-related activities that aren’t covered in Scopes 1 and 2. “Energy” refers to electricity, cooling, heating, and steam.

This category covers the following fuel- and energy-related activities:

• Upstream emissions of purchased energy or fuels, meaning the transportation, creation, and extraction of fuels consumed by the reporting company or fuels consumed in generating energy that the reporting company uses.
• Transmission and distribution (T&D) losses, meaning the generation of energy consumed by a T&D system.
• Generation of purchased electricity sold to end users, meaning the generation of energy (including upstream emissions and combustion) purchased by the reporting organization and sold to end users – reported by the utility company or energy retailer.

Data needs for Category 3

Data for T&D losses for electricity purchased can be found at the same source as emission factors for Scope 2. In the US, U.S. Energy Information Administration (EIA)  estimates the grid loss to be about 5%. Emissions associated with energy sold to end users are computed using the methods used to compute Scope 1 and Scope 2 emissions and is based on the emission factors of the type of fuel used. Transportation costs of fuels and emissions associated with extraction of fuels, data needs to be acquired from suppliers.

Climate actions for Category 3

Since Category 3 is associated with energy use, the actions available to reduce emissions in this category are reducing energy consumption, purchasing energy generated from renewables or low-emission energy sources, and generating onsite using renewable sources.

Category 4: Upstream transportation and distribution

This category looks at emissions generated from third-party transportation and distribution services paid for by the reporting company. This can include the emissions generated to transport supplies between warehouses and from the storage of goods in warehouses or distribution centers.

Data needs for Category 4

For transportation emissions, fuel-based or distance-based methods can be used to compute emissions. To get more accurate supplier-specific data, ask your logistics service providers to provide GHG emissions data for freight transportation services. The GLEC framework provides guidelines for computing GHG emissions for multi-modal transportation.

Climate actions for Category 4

Actions to reduce Category 4 emissions include: reducing the distance between supplier and customer, sourcing materials locally, optimizing the efficiency of transportation and distribution, replacing higher-emitting transportation modes (e.g. air transport) with lower-emitting modes (e.g. marine transport), shifting towards lower-emitting fuel sources.

Category 5: Waste Generated in Operations

Category 5 looks at emissions created by the third-party treatment and disposal of waste from a company’s controlled or owned operations. This covers all future emissions from waste and includes both wastewater and solid waste. Emissions from category 5 can optionally include the transportation of waste from the reporting company to the waste vendor. These emissions include the scope 1 and scope 2 emissions of an organization’s third-party waste management company(s), when available.

Data needs for Category 5

The EPA GHG Emissions Factor Hub (https://www.epa.gov/climateleadership/ghg-emission-factors-hub) provides emission factors for different materials (for example, aluminum, glass, paper, plastic, etc.) and the associated disposal method (recycled, landfilled, combusted, composted, etc.). Data required for emissions includes the weight and disposal method for each type of waste generated in the organization.

If amount and type of waste is not available, the following calculator from CalRecycle can be used as a proxy to calculate based on the number of FTEs and type of business.

An example for estimating and calculating Category 5 emissions can be found in Unilever’s 2024 CDP report. Emissions are calculated by multiplying the total waste generated by the relevant emission factors.

For manufacturing sites, solid waste and water discharge volumes per site are extracted. Solid waste categorized as “recycled” or “reused” is assumed to be recycled, while the remainder is assumed to be disposed of in landfill.

For logistics sites, the total floor area used by Unilever is multiplied by industry benchmarks for physical waste production, obtained from the National Solid Waste Association, to estimate total waste volumes. Water discharge and treatment volumes are assumed to be the same as the water supply volumes. It is assumed that 60% of waste is recycled and 40% is disposed of in landfill.

For non-manufacturing sites, the total number of FTEs per site, is multiplied by the industry benchmark for
physical waste production per FTE per year, obtained from the Waste and Resources Action Programme (WRAP), to estimate physical waste volume by geographical area. It is assumed that 60% of waste is recycled and 40% is disposed of in landfill.

Emission factors per waste treatment type (recycled or disposed of in landfill) in kgCO2e per kg of waste are obtained from DEFRA. These emission factors are then multiplied by the total waste volumes per waste type to calculate total emissions.

Climate actions for Category 5

Using frameworks like the TRUE program from GBCI and implementing reduce, reuse and recycle programs are ways to reduce waste and emissions from waste.

For example, Colgate-Palmolive has more TRUE Zero Waste certified facilities than any other company on the planet. As of this writing, 18 sites in 10 countries on 5 continents, including the first facilities ever TRUE Zero Waste certified in Africa, Latin America, continental Europe, India, China and Vietnam.

Category 6: Business Travel

This category includes emissions from the transportation of employees for business-related activities in vehicles owned or operated by third parties, such as aircraft, trains, buses, and passenger cars. Emissions from business travel may arise from air, rail, or bus travel and automobile travel (e.g., business travel in rental cars or employee-owned vehicles other than employees commuting to and from work). Companies may optionally include emissions from business travelers staying in hotels.

Data needs for Category 6

Data for business travelers can be collected from travel expense reporting systems. These forms might need to be updated to capture more details on modes of transportation and additional details that improve the ability to apply the correct emission factor to compute emissions.

Climate actions for Category 6

Reducing travel and encouraging more efficient travel are ways of directly reducing emissions. If air travel is unavoidable, then investing in new technology research and development, like sustainable aviation fuel or electric vertical takeoff and landing planes (eVTOLs), and buying offsets are some actions available to companies.

Category 7: Employee Commuting

Data needs for Category 7

Data needed to compute emissions from employee commuting is based on the fuel used in commuting or distance traveled and the mode of travel by employees. For emissions from working at home, emissions are allocated by a proportion of emissions from utilities and at the employee’s home used for their job. This data can be collected by using employee questionnaires. If data is not available, then GHG protocol recommends using secondary data like average daily commuting distances and modes of transportation of typical employees or extrapolating from surveys of a representative sample of employees.

Climate actions for Category 7

Several large and small climate actions can be taken to reduce emissions in Category 7:

• Work from home, with the co-benefits of reducing traffic and providing a popular employee benefit.
• Offer shuttle services so employees can work during the commute and reduce traffic.
• Provide incentives for employees to use mass transportation, low-emission vehicles, or walk/bike to work.
• Advocate for the development of mass transportation and urban planning policies to address the problem in a larger context and better infrastructure for low-emission means of transportation.

Category 8: Upstream Leased Assets

This category looks at emissions from the operation of assets the reporting organization leases from other organizations in the reporting year and not yet included in the reporting organization’s scope 1 or scope 2 inventories. Organizations will include the lessor’s scope 1 and 2 emissions in their emissions for the leased asset.

Data needs for Category 8

Data needs for this category include Scope 1 and Scope 2 information for leased assets, including fuel usage for heating, cooling in buildings and vehicles and electricity usage.

Climate actions for Category 8

Green leases offer features like energy efficiency, water conservation, submetering, indoor air quality, green certifications for building, renewable energy and sustainable purchasing options.

Category 9: Downstream Transportation and Distribution

Category 9 focuses on emissions generated from transportation and distribution services paid for by the company’s customers – whether that’s a downstream intermediate customer (e.g. Final manufacturer or wholesaler) or the final end customer.

Organizations that sell an intermediate product should report on the transportation and distribution from the point of sale to either the end-user or the business customer when that transportation is paid for by the downstream entity. Organizations can also optionally include emissions from storage and retail customer travel to and from stores.

Data needs and climate actions for Category 9

Data needs and actions are similar to the needs for Category 4, Upstream Transportation and Distribution and GLEC framework can be used to reduce emissions. Innovation in new business models like “freight-as-a-service” and the use of new technologies like electric and autonomous vehicles also help reduce emissions in this category.

Category 10: Processing of sold products

Category 10 includes emissions from processing of sold intermediate products by third parties (e.g., manufacturers) subsequent to sale by the reporting company. Intermediate products are products that require further processing, transformation, or inclusion in another product before use.

Data needs and climate actions for Category 10

Technical Guidance for Calculating Scope 3 Emissions provides the methodology for these computations:

• Site-specific method, which involves determining the amount of fuel and electricity used and the amount of waste generated from processing of sold intermediate products by the third party and applying the appropriate emission factors.
• Average-data method, which involves estimating emissions for processing of sold intermediate products based on average secondary data, such as average emissions per process or per product.

The site-specific method in this category requires collaboration with the customer that is further processing the sold product; and is probably one of the most difficult data collection requirements. If site-specific data is unavailable, companies collect data on the type of downstream process(es) involved in transforming or processing sold intermediate products into final products and apply relevant industry average emission factors to determine emissions using the average-data method.

Category 11: Use of Sold Products

This category includes emissions from the use of goods and services sold by the reporting company in the reporting year. A reporting company’s scope 3 emissions from use of sold products include the scope 1 and scope 2 emissions of end users. End users include both consumers and business customers that use final products

This category is particularly large for companies that sell products that use energy because Category 11 includes the total expected lifetime emissions from all relevant products sold in the reporting year across the company’s product portfolio.

Data needs for Category 11

Data requirements for category 11 include total lifetime expected use of products, fuel or energy consumption of product and any other relevant emission source like refrigerant leakage or methane production.

Because the scope 3 inventory accounts for total lifetime emissions of sold products, companies that produce more durable products with longer lifetimes could appear to be penalized because, as product lifetimes increase, scope 3 emissions increase, assuming all else is constant. To reduce the potential for emissions data to be misinterpreted, companies should also report relevant information such as product lifetimes and emissions intensity metrics to demonstrate product performance over time. Relevant emissions intensity metrics may include annual emissions per product, energy efficiency per product, emissions per hour of use, emissions per kilometer driven, emissions per functional unit, etc.

Climate actions for Category 11

Climate Action for Category 11 lies in the product development strategy as depicted in the Trane example below. The two main levers are increasing the energy-efficiency of the product and electrification or moving the product to use lower emission energy. This is particularly true for HVAC equipment, transport equipment and any equipment that currently run on fossil fuels. For example, for Trane Technologies, a company that sells HVAC equipment, Scope 3 emission for this category makeup over 90% of emissions.

Source: Trane Technologies / 2022 ESG Report

Category 12: End-of-life Treatment of Sold Products

Category 12 includes emissions from the waste disposal and treatment of products sold by the reporting company (in the reporting year) at the end of their life. This category includes the total expected end-of-life emissions from all products sold in the reporting year.

Data needs for Category 12

End-of-life treatment methods (e.g., landfilling, incineration, and recycling) are described in category 5 (Waste
generated in operations) and apply to both category 5 and category 12.

Climate actions for Category 12

Product take-backs and recycling is an action available to reduce emissions in Category 12.

Category 13: Downstream Leased Assets

Category 13 covers emissions generated from the operation of owned or leased assets leased or subleased to other entities that aren’t included in scopes 1 or 2.

Data needs for Category 13

Data needs for this category include Scope 1 and Scope 2 information for leased assets, including fuel usage for heating, cooling in buildings and vehicles and electricity usage.

Climate actions for Category 13

Real estate managers that manage and operate buildings leased out to other entities can use frameworks like the GRESB framework to understand emissions from the buildings assets and implement energy efficiency and electrification initiatives to reduce emissions. See our article on Sustainable Buildings.

Category 14: Franchises

Category 14 includes emissions from the operation of franchises not included in scope 1 or scope 2. A franchise is a business operating under a license to sell or distribute another company’s goods or services within a certain location. This category is applicable to franchisors (i.e., companies that grant licenses to other entities to sell or distribute its goods or services in return for payments, such as royalties for the use of trademarks and other services).

Franchisors should account for emissions that occur from the operation of franchises (i.e., the scope 1 and scope 2 emissions of franchisees) in this category

Franchisees (i.e., companies that operate franchises and pay fees to a franchisor) should include emissions from operations under their control in this category if they have not included those emissions in scope 1 and scope 2 due to their choice of consolidation approach. Franchisees may optionally report upstream scope 3 emissions associated with the franchisor’s operations (i.e., the scope 1 and scope 2 emissions of the franchisor) in category 1 (Purchased goods and services).

Data needs for Category 14

Calculating emissions from franchises Companies may use either of two methods to calculate emissions from franchises: • Franchise-specific method, which involves collecting site-specific activity data or scope 1 and scope 2 emissions data from franchisees • Average-data method, which involves estimating emissions for each franchise, or groups of franchises, based on average statistics, such as average emissions per franchise type or floor space.

Activity data needed Companies should collect data on either: • Scope 1, scope 2, and (optionally) scope 3 emissions data from franchisees • Site-specific fuel use, electricity use, and process and fugitive emissions activity data if applicable.

Climate actions for Category 14

Category 14 emission reduction actions include getting franchisees to implement greenhouse gas emission reductions starting with their Scope 1 and Scope 2 emission and eventually working on their Scope 3 emissions. The parent company can provide funding and create templates and guidelines for emission reductions at franchisee locations.

For example, Wendy’s Near Term Science Based Target goals include reducing Scope 3 GHG emissions intensity by 47% per franchise restaurant. Their actions have focused on energy efficiency and procuring renewable energy for franchise restaurants. The Wendy’s Energy Challenge also provides a roadmap for franchisees to implement energy-efficient improvements in their restaurants.  

Category 15: Investments

This category also referred to as “financed emissions” includes scope 3 emissions associated with the company’s investments and depends on the type of investment: equity investments, debt investments, project finance, or managed investments.

This category is fundamental for financial institutions, contributing to more than 99% of financial institutions’ overall emissions. In addition to increasing global climate risk, unaccounted financed emissions expose financiers to reputational and financial risk.

Data needs for Category 15

Like collecting data from suppliers, collecting data for Category 15 requires working closely with portfolio companies, encouraging them to report on GHG emissions, set targets, and implement reduction actions. Several ranking services, MSCI, S&P Global CSA, and Morning Star Sustainalytics, rank and rate companies on their ESG performance. Investors can use these ratings to select companies for their portfolios.

Climate actions for Category 15

Like Category 1 and 2 show the potential of using purchasing power to influence emission reduction actions from suppliers, Category 15 shows the potential influence of investors in driving companies to measure and reduce their emissions. Investors can also provide finances for innovative solutions and accelerate new technologies like carbon removal and storage, sustainable aviation fuel, sustainable building materials like greener cement and steel providing solutions for hard to abate sectors.

Resources

• https://www.persefoni.com/learn/scope-3-emissions
• The “No-Excuse” Opportunities to Tackle Scope 3 Emissions in Manufacturing and Value Chains, Industry Net Zero Accelerator Initiative, White Paper December 2023, World Economic Forum, in collaboration with Capgemini and Cambridge Industrial Innovation Policy, University of Cambridge
• Scope 3 – Category 15 GHG Emissions
• How circular strategies can be used to decarbonize Scope 3 GHG emissions