Reporting on Scope 1, 2 and 3 GHG Emissions – Opportunities and Challenges for Corporations
Why are GHG emissions critical for businesses and corporations? What are the opportunities of carbon accounting, and how can companies navigate their scope 1, 2 and 3 emissions landscape?
In this blogpost we
- provide background on GHG emissions
- discuss the fundamentals of scope 1, 2 and 3 emissions accounting
- highlight the opportunities and stakeholder expectations
- outline the first steps to take on the net-zero journey
A Global Challenge
There is a worldwide consensus that anthropogenic greenhouse gas emissions are the primary driver of climate change. The science behind climate change concludes that GHG emissions have to be reduced to 85% below the level of 2000 by 2050 to limit temperature increase (keeping global warming below 2°C) to prevent unprecedented adverse effects of climate change in all areas of life.
Having the resources to do so and being a part of the challenge, corporations find themself at the forefront confronted with terms like Scope 1, 2 and 3 emissions and net-zero.
The Drivers of Corporate Carbon Accounting
What are the main drivers for corporate carbon accounting? For the most part, it is market-driven by stakeholder demands and, to some extent, driven by regulations.
A Stakeholders Viewpoint
Stakeholders are increasingly interested in the environmental performance of corporations and their reporting on that. So they expect a lot from corporations – which is excellent news for those businesses who want to make meaningful changes. When asked what companies should do regarding climate change, the top three answers are
- reduce carbon emissions
- incorporate climate change into business strategy
- improve energy efficiency
An Investors Perspective
Carbon emissions can significantly impact society and the environment that we all share. As a result, investors worldwide are increasingly interested in knowing about an organisation’s carbon footprint and how it is being managed. Carbon accounting provides the data to answer these questions. Climate change and climate risk are understood as material financial risks, so investors will be more likely to engage with risk-aware companies and report transparently on sustainability issues. Often engaging in carbon reporting includes the entire value chain.
There are also mandatory requirements to report on carbon emissions. Carbon reporting will become an integral part of sustainability reporting with the upcoming CSRD in Europe and other UK, Canada, and New Zealand regulations. For instance, reporting according to the TCFD standard implies establishing the status-quo and then setting targets for emission reduction based on that.
Corporate Perception and Transition Risk
Managing carbon emissions can also present significant business opportunities by reducing energy use, fuel, or waste disposal costs. Furthermore, reporting on GHG emissions is often critical for sustainability reporting frameworks, and ESG reporting comes with additional benefits for corporations. So managing transition risks and aiming for net-zero are goals many companies have set.
How Report GHG Emissions?
To report GHG emissions, companies typically follow the guidelines set out by the Greenhouse Gas Protocol. The Greenhouse Gas Protocol (GHG Protocol) was developed in 1998 by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). It is widely used worldwide as the most comprehensive international accounting instrument helping to understand, quantify, and manage greenhouse gas emissions.
According to the Greenhouse Gas Protocol, three emissions levels have to be considered. These are known as scope 1 (direct emissions), scope 2 (indirect emissions) and scope 3 (other indirect emissions).
Scope 1 refers to direct emissions from company-owned or controlled sources.
Scope 2 GHG emissions include indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company.
Scope 3 emissions represent all other indirect carbon emissions. They may occur in the value chain of a given company, including both upstream and downstream activities.
With upcoming climate change mitigation policies adopted across the globe, focussing on scope 1 and 2 emissions may no longer be sufficient. Some statutes require organisations to disclose their scope 3 GHG emissions, which can be far more challenging to measure than scopes 1 and 2 due to data limitations and uncertainties.
Scope 1 Emissions
According to the GHG protocol, scope 1 emissions are direct emissions that have their origin in operations owned or controlled by the respective company, like combustion in owned or controlled boilers or emissions from chemical production. So, in a nutshell: Scope 1 emissions are all emissions that come out of pipes and smokestacks owned or controlled by the company that reports on its carbon footprint.
Scope 2 Emissions
Scope 2 covers indirect emissions that arise from purchased electricity, steam, heating, cooling or hot water used by a company. Frequently bought electricity represents one of the largest sources of GHG emissions, indicating an opportunity for significant GHG emission reduction.
Scope 3 Emission
Scope 3 emissions are a company’s indirect greenhouse gas emissions that are not covered within scope 2, which result from company activities but occur from sources not owned or controlled by the company. Scope 3 emissions are split into two subcategories:
- Upstream emissions occur before a product reaches the consumer, and
- Downstream emissions arise after the product is consumed.
When developing a strategy for reducing these indirect emissions, it’s essential to understand how they contribute to a company’s total GHG footprint.
Scope 3 – Upstream
Upstream scope 3 emissions refer to the emissions that happen during the production of the company’s product or service. “Upstream” refers to the fact that this activity occurs earlier in the supply chain than it would be within the organisation’s operations.
Scope 3 – Downstream
Downstream scope 3 emissions refer to those that happen after the organisation sells its product or service.
Opportunities and Challenges
The prominent challenge corporations face in carbon reporting is to make sure all of their emissions are accounted for – from their operations, supply chain, and product use. Unfortunately, doing so requires a lot of additional research. Another roadblock companies often find is that there’s no “one size fits all” solution. Instead, each business must determine which parts of its operations are most relevant to its stakeholders in this area and then select how best to communicate them.
However, once they’ve worked through these challenges, corporations that take on carbon reporting find some attractive opportunities.
One example is a company’s supply chain and how it can be optimised to reduce GHG emissions in collaboration with other corporations to develop innovative solutions to shared problems.
Building an inventory for scope 1 and 2 emissions is a good starting point to begin the transition towards net-zero. There is a lot of high-quality information available on the GHG Protocol website (see below) on how to build such an inventory. However, scope 3 emissions are more difficult to measure and quantify. So it may take longer to get a good overview and robust reporting in place for this category of GHG emissions.
With the baseline established, businesses and companies can develop strategies for GHG reduction based on those findings since they know where they can make the most significant impact. For some companies, the biggest impact will come from the value chain, while others will find that scope 2 energy-related emissions have the highest impact on their GHG footprint.
Reducing GHG emissions and arriving at net zero is not an easy task. It takes time to implement comprehensive solutions for sustainable, environmentally friendly practices. All companies won’t be able to reach net-zero consumption in the next decade. Still, they can start incorporating these technologies, shrinking their carbon footprint and benefiting the environment.
Discover How We Can Help
NordESG is an independent consulting firm that advises on sustainability and ESG. We support companies in navigating their sustainability landscape and develop strategies and concepts individually tailored to their requirements. This also includes managing the transition to CSRD. We look forward to hearing from you via email. You can also make an appointment with us directly for a free introductory meeting.
GHG Protocol: More information about the GHG protocol can be found here.