What you really need to know about Scope 3 emissions and your business

Like so many companies, you’re likely working hard to reduce greenhouse gas (GhG) emissions while also reporting your progress. It’s a big effort, assessing energy use across your operations: offices, factories, warehouses and fleets. Even so, it’s only a start.

The real work — and business advantages — come when focusing on Scope 3 emissions generated beyond your company’s walls. Because these emissions are mostly carbon, they’re often referred to as carbon emissions and arise from activities in your wider value chain. Material Scope 3 impacts will vary by industry and business model, but for many companies, a large amount of emissions occur upstream via suppliers and raw materials.

While reporting on Scope 3 isn’t yet a US mandate (but could be later this year should the current version of the SEC climate disclosures proposal become a rule), it is a requirement of the Science Based Target initiative’s (SBTi) Net Zero standard, which more than 3,000 organizations globally are affiliated with. Additionally, the International Sustainability Standards Board (ISSB) and the US Electronic Subcontracting Reporting System (eSRS) have also drafted recommendations requiring some disclosure of Scope 3 emissions — with the ISSB also requiring qualitative information to explain how reported emissions were calculated.

Why you need a Scope 3 strategy now

Developing a Scope 3 strategy starts with understanding the implications for your specific business. You’ll then move on to measuring and managing those emissions, working closely with suppliers and customers. Many companies have begun to set specific targets on Scope 3, with the more advanced companies setting science-based ones. When you approach Scope 3 systematically and strategically, you not only can progress on commitments but can also reap significant benefits like growing your market share

As with most ESG areas, Scope 3 requires the attention of the full leadership team. Given its far-reaching impact, every area of the business could be affected, from supply chain and product development to reporting and tax, to marketing and, of course, sustainability. In many businesses, this cross-company understanding and collaboration is only just beginning.

What falls under Scope 3?

In all, Scope 3 spans 15 different categories. Those that are ‘upstream’ include emissions produced by the external parties that source, produce and transport the raw materials and components you use. Other upstream categories include business travel and employee commuting as well as emissions from waste generated and assets leased. On the ‘downstream’ side are emissions from the logistics, use and disposal of your products. Downstream emissions also cover those from activities like investing and franchising. 

For many companies, categories 1 and 11, which are those related to your supply chain and use of your products, are the most significant. But depending on your industry, other categories may also play a role. If, for example, you’re a financial services firm, category 15 will be key. Likewise, a retailer or hotel group might have many franchisees, category 14.

What Scope 3 means across your value chain

When it comes to Scope 3, you have to think about both your role as a supplier to your customers and your role as a customer to your suppliers. In both cases, it’s all about being able to accurately measure and report on emissions to understand where you (and they) are starting. From there, you’ll look at opportunities to reduce those emissions together.

As a supplier, where do you even begin? Consider the example of a company that makes things. Your customers want verified carbon footprint data for each of your products. For some businesses, that could mean hundreds or thousands of stock-keeping units (SKUs). Leading companies that we’ve worked with tackle this challenge by first doing a high-level analysis of their products, enabling them to home in on those with the biggest top-line impact or the biggest emissions. They then prioritize those products with the biggest potential — for revenue, for emissions reductions, or both.

As you build capabilities around data collection and reporting, a key focus will be on creating a data model so that you can assess how changes in materials, suppliers or locations affect a product’s emissions. This can be challenging and there are some common pitfalls to avoid with data modeling and extrapolation. In some cases, you might look to create a lower-carbon, or green, version of a product while also continuing to produce the higher-emissions original. While the green version might not always command a price premium, it could set your company apart from competitors and help you increase market share as customers increasingly look for green products and meet commitments.

What science-based targets mean for Scope 3

When it comes to GhG emissions reductions, science-based targets are an important concept. As part of the SBTi’s Net Zero Standard framework, companies commit to halving emissions by 2030 and getting close to zero emissions by 2050. To get there, they are required to set both near-term and long-term targets. Both may require a significant effort on Scope 3 reductions. Here’s what each covers: 

• Near-term science-based targets must be met within a 5- to 10-year period and must address 95% of Scope 1 and 2 emissions. If a company’s Scope 3 emissions make up more than 40% of its total emissions, then the near-term target must cover two-thirds (67%) of Scope 3 emissions.
• Long-term science-based targets are targets that must be met by 2050 or sooner. They also cover 95% of Scope 1 and 2 emissions as well as 95% of Scope 3 emissions. A company is considered to have reached net zero when it has achieved its long-term science-based target.

How to engage your suppliers

At the same time that you are looking at Scope 3 through a customer lens, you’ll also be asking the same of your suppliers. You need accurate Scope 3 emissions data for everything you purchase, and you’re ultimately hoping to reduce the carbon footprint of those goods. To achieve these goals, we recommend four strategies for incentivizing suppliers. These include both financial and nonfinancial measures and apply to all stages of supplier engagement.

1.  Leveraging procurement: These measures are designed to embed decarbonization into procurement processes such as including mandatory carbon reporting and carbon reduction requirements in tender proposals. Likewise, performance management contracts also have carbon reduction clauses that could mean penalties, including termination of contracts, for suppliers that fail to comply. 
2. Building capability: This involves sharing learnings and leading practices from carbon-reduction efforts at your company and might involve supplier forums and workshops. You can also help to train and upskill suppliers in key areas related to decarbonization, as well as offering peer benchmarking to let them know how they compare to competitors. 
3. Rewarding progress: This category focuses on financial incentives for achieving decarbonization. One approach is to pay for performance, financially rewarding a supplier when it meets an emissions target. Another idea is to invest in longer-term supplier initiatives such as power purchase agreements or carbon inset projects.  Paying premium prices for low-carbon products and providing preferential payment terms based on carbon reduction targets and disclosure are other methods to consider.
4. Enforcing performance: A more direct financial penalty can also act as an incentive to decarbonize. Carbon pricing shifts accountability to suppliers, while direct financial penalties can be applied for failing to meet net zero targets — which might also lead to reduced fees or elimination of discounts on purchased products. Again, the ultimate penalty is ending the contract.

How to get started

Here are five steps to take as you begin shaping your company’s Scope 3 strategy. 

1. Engage the C-suite and board. Confirm that everyone understands the implications of Scope 3 and how it will affect their area of the business. Some companies have created cross-functional steering committees to better mobilize the business. 
2. Measure emissions. You’ll want to identify high-emission hot spots and work on those decarbonization programs first.
3. Model supply chain risk. Assess how climate change and other disruptions create risks specific to your business. Then prioritize ways to address these vulnerabilities swiftly. 
4. Find low-carbon opportunities. For manufacturing companies, these opportunities may be related to product design, sourcing and production and put these into action to achieve resilient decarbonized value chains.
5. Work with your suppliers. Collaborate with your suppliers to measure and manage Scope 3 emissions. Some key activities here may include helping them establish concrete metrics to reliably measure emissions and helping them determine their potential ROI for decarbonization.

Courtesy PwC. Click here for full report