How is Scope 3 reporting requirement bringing big compliance changes?

Blog by Purvish Shah
Published on November 15, 2022

Scope 3 emissions are the indirect emissions—both upstream and downstream—that come from a company’s value chain. Since they belong outside of companies operations, they were fairly under the radar of regulatory authorities, investors and customers since the companies were maturing to understand emissions within their boundaries first. The scenario is now changing as organisations across the globe are committing to climate pledges and assuring the investors that their company is in a leadership position when it comes to sustainability.

What is the challenge in understanding emissions in the value chain?

For companies that offer a diverse range of services or products—each with its own complex value chain—Scope 3 emissions reporting represents a herculean task. Large companies purchase goods and services; they send employees on business trips; and they have investments and assets. They also sell to retailers. They’ve woven webs of relationships that stretch across industries and geographic regions, and Scope 3 reporting requirements demand that they follow every thread of each web to determine their partners’ GHG emissions. In some cases, a thread will lead to a smaller enterprise, which can present a major challenge for large reporting companies. Many smaller businesses are not collecting quality data that can be used to calculate GHG emissions, if they’re collecting it at all. Scope 1 and Scope 2 emissions reporting requirements force companies to get their own house in order. Scope 3 requirements demand that they get their partners’ houses in order too. As an example, consider the challenge a clothing manufacturer faces with respect to calculating and reporting on Scope 3 emissions from fuel consumption. One component of that calculation is fuel consumed by employees as they commute to and from work. Then there’s the fuel consumption of their fabric suppliers and the distributors of the coats they manufacture. A large retailer may move the coats from one store to another. And some coats will be purchased online, so they’ll need to be shipped to the consumer. It’s likely that some of these calculations will be built on assumptions. But the reporting companies that have confidence in their suppliers’ and partners’ Scope 1 and Scope 2 emissions data are that much closer to accurate and defensible Scope 3 emissions reporting.

Who carries the liability for accuracy of Scope 3 data?

The challenge of gathering Scope 3 emissions data is compounded by the possible threat of liability. Companies will be held liable for the GHG emissions tied to their own operations, as they should be. But some business leaders fear that the SEC’s regulations may also hold them liable for any incorrect data from their suppliers. While the SEC has included a safe harbor for liability for Scope 3 emissions disclosure, concerns around liability will certainly be aired during the public comment period for these regulations. While reporting on Scope 3 isn’t yet a US mandate, it is a requirement of the Science Based Target initiative’s (SBTi) Net Zero standard, which more than 5,000 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.

How to know if your organisation has a mature Scope 3 emissions inventory?

As companies prepare for a more stringent regulatory environment, they need to consider several things:

1.Do they have in-house expertise that’s capable of distinguishing good data from poor data?
2.Do they have the right tools to analyze the data?
3.Do they have access to defensible emissions factors for the calculation of their Scope 3 emissions?
4.Do they have adequate governance over emissions calculators?
5.Do they have solid relationships across the value chain – both upstream and downstream – that will enable them to get meaningful information and data?
6.Do they need to build capacity along their value chain to support proper GHG emissions reporting?
7.Do they have partners who can help them overcome gaps that could compromise their reporting?

How important is it to engage with customers?

As organisations look at Scope 3 through a customer lens, the same will be required from suppliers as well. There is a need for accurate Scope 3 emissions data for every purchase made by the organisation, and ensure that carbon footprint of those goods is reduced year on year to achieve Scope 3 goals. Organisations can utilise Carboledger’s Framework to take active steps towards Scope 3 emissions :

Carboledger's Scope 3 Action Framework

1. Alignment with 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. Capability Building

An open collaborative culture and knowledge sharing with suppliers is a key foundation to help suppliers transition to a greener future. This can be achieved through communication leading practices from carbon-reduction efforts at your company and involving suppliers via forums and workshops. Training and upskilling suppliers in key areas related to decarbonization, as well as offering peer benchmarking to let them know how they compare to competitors can also enable suppliers in taking active steps

3. Enabling Incentives

Organisations providing financial incentives for achieving decarbonization have a 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. From a business perspective, a low-carbon supplier will be preferred over other suppliers in future and hence building awareness among suppliers about business case of sustainability can also be an effective strategy.

How can Carboledger's solution help in reaching Scope 3 targets

Carboledger enables enterprises to collect accurate Scope 3 emissions data for every purchase made and categorises them into 15 categories as per GHG Protocol’s Scope 3 Standard. Through accurate data collection, enterprises can transition from current estimation based methodologies to supplier-specific calculations that can provide realistic picture of progress towards climate targets.
Carboledger’s solutions have helped Fortune 500 companies report accurate and real information to their investors such that various sustainability-linked financial products offered can help increase the bottom line of the companies.