Addressing Scope 3 Emissions: A Practical Guide

Greenhouse gas (GHG) emissions are categorized into three scopes for businesses and organizations: Scope 1, Scope 2, and Scope 3. This categorization helps businesses understand, measure, and manage their carbon footprint effectively.

Scope 1 Emissions:

Scope 1 emissions are direct GHG emissions produced by a company’s own activities. These emissions are generally easy to identify and quantify as they originate from sources within the company’s direct control. Examples of Scope 1 emissions include:

• Burning fossil fuels in owned facilities: This includes burning coal, natural gas, and oil to generate heat, electricity, or power machinery.
• Industrial processes: Certain industrial activities, such as cement production, steel manufacturing, and petroleum refining, generate direct GHG emissions.
• Vehicles owned or leased by the company: Emissions from vehicles used for transporting people or goods are part of Scope 1.

Scope 2 Emissions:

Scope 2 emissions are indirect GHG emissions generated from the purchase of electricity, steam, heating, or cooling from an external provider. While these emissions do not occur directly at the company’s facilities, they result from its activities and must be considered in its carbon footprint. Examples of Scope 2 emissions include:

• Electricity purchased from the grid: Most companies rely on the electricity grid for their operations, and the generation of this electricity, often from fossil fuels, produces GHG emissions.
• Purchased steam or heat: Some companies use steam or heat generated by external providers for their operations, resulting in indirect GHG emissions.
• Refrigeration provided by third parties: Refrigeration systems that run on electricity or fossil fuels also contribute to Scope 2 emissions.

Scope 3 Emissions:

Scope 3 emissions are indirect GHG emissions that occur along a company’s value chain but are not under its direct control. These emissions can be the most complex to identify, quantify, and manage, as they involve suppliers, customers, and other external parties. Examples of Scope 3 emissions include:

• Supply chain emissions: The activities of suppliers, such as raw material extraction, product manufacturing, and goods transportation, generate GHG emissions that are considered Scope 3 emissions for the purchasing company.
• Business travel and employee transportation emissions: Work-related travel by air, car, or public transportation, as well as daily commutes by employees, contribute to Scope 3 emissions.
• Emissions from sold products: Once a company’s products are purchased by customers, their use and final disposal can generate GHG emissions that are considered Scope 3 emissions.

Challenges of Scope 3 Emissions:

Scope 3 emissions are challenging for companies for several reasons:

• Complexity: A company’s value chain can be extensive and complex, making it difficult to identify and quantify all sources of indirect emissions.
• Data scarcity: Data on supply chain emissions and other Scope 3-related activities is often not readily available or incomplete.
• Limited control: Companies do not have direct control over the activities of their suppliers, customers, and other parts of the value chain, making it difficult to influence their emissions.

Despite these challenges, companies are increasingly aware of the importance of addressing their Scope 3 emissions. Reducing these emissions not only contributes to the fight against climate change but can also improve a company’s reputation, reduce costs, and increase competitiveness.

Various tools and methodologies are available to help companies manage their Scope 3 emissions. The Greenhouse Gas Protocol (GHG Protocol) is a widely used framework for measuring and reporting GHG emissions, including Scope 3 emissions.

By understanding, measuring, and managing their Scope 1, 2, and 3 emissions, companies can take significant steps to reduce their carbon footprint and contribute to a more sustainable future.

The FTSE Russell Report: The Indexes and Benchmark Unit of LSEG Cope for Improvement: Solving the Scope 3 Conundrum

The report by FTSE Russell, the indexes and benchmark unit of the London Stock Exchange Group (LSEG), focuses on the importance of addressing Scope 3 emissions in the fight against climate change and the need to improve the disclosure and measurement of these emissions.

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Evolution of Scope 3 Emissions

The report highlights that while Scope 1 and 2 emissions (direct and indirect, respectively) have received more attention in the past, Scope 3 emissions have gained prominence in recent years. However, measuring and disclosing these emissions remains a challenge for companies due to their complexity and the lack of standardized calculation methods.

To address this problem, the report proposes several solutions, such as the development of stronger frameworks and standards for measuring and disclosing Scope 3 emissions, as well as collaboration between companies and investors to encourage greater transparency and comparability in information. Additionally, the report emphasizes the importance of integrating Scope 3 emissions into sustainability strategies and companies’ climate goals.

FTSE Russell also underscores the need for investors to consider Scope 3 emissions in their investment decisions, as these emissions can represent significant financial risks for companies. For instance, companies with high Scope 3 emissions may face higher regulatory, reputational, and operational costs in the future.

The report presents several case studies of companies that have made progress in measuring and reducing their Scope 3 emissions, demonstrating that it is possible to address this challenge and obtain both environmental and financial benefits. Some of the strategies adopted by these companies include setting science-based targets, collaborating with suppliers and customers to reduce emissions along the value chain, and investing in cleaner and more efficient technologies.

In conclusion, the FTSE Russell report highlights the importance of addressing Scope 3 emissions in the fight against climate change and the need to improve the disclosure and measurement of these emissions. To achieve this, the joint effort of companies, investors, and regulators is required, as well as the development of stronger frameworks and standards to facilitate transparency and comparability in information. Companies that make progress in managing their Scope 3 emissions will not only contribute to environmental sustainability but may also gain competitive and financial advantages in a context of growing concern about climate change.

FTSE Russell Report Proposal

1. Set science-based targets: Companies should establish clear and ambitious goals to reduce their Scope 3 emissions, aligned with the objectives of the Paris Agreement. This will enable them to develop effective action plans and measure their progress over time. Moreover, setting science-based targets can improve the company’s reputation and demonstrate its commitment to sustainability.
2. Collaborate with suppliers and customers: Scope 3 emissions often originate from activities that occur outside a company’s direct control, such as the production of raw materials or the use of products by consumers. Therefore, it is essential that companies work closely with their suppliers and customers to identify and address emissions along the value chain. This may include implementing training programs, sharing best practices, and establishing environmental requirements in contracts.
3. Invest in clean and efficient technologies: Companies can reduce their Scope 3 emissions by investing in cleaner and more efficient technologies throughout their operations. For example, implementing renewable energy systems, adopting more efficient manufacturing processes, and designing products with a lower carbon footprint can significantly contribute to emissions reduction. Furthermore, these investments can generate long-term cost savings and improve the company’s competitiveness in an increasingly climate-conscious market.
4. Improve disclosure and transparency: To effectively address Scope 3 emissions, it is crucial that companies improve the disclosure and transparency of their environmental data. This includes accurate measurement and reporting of Scope 3 emissions, as well as clear communication of objectives, strategies, and achievements in sustainability matters. Greater transparency can help companies identify improvement opportunities, demonstrate their progress to stakeholders, and gain credibility in the market.
5. Integrate sustainability into the business strategy: Addressing Scope 3 emissions should be an integral part of the business strategy, rather than an isolated effort. This involves engaging all levels of the organization, from senior management to employees, and considering sustainability in all business decisions. By integrating sustainability into the business strategy, companies can ensure that their efforts to reduce Scope 3 emissions are consistent, sustainable, and generate long-term value.
6. Seize market opportunities: Finally, the report emphasizes that addressing Scope 3 emissions can create market opportunities for companies. For example, developing low-carbon products and services can open new markets and attract more environmentally conscious customers. Additionally, companies leading the transition to a low-carbon economy can benefit from favorable regulatory policies and greater access to capital.

If you need more information or assistance on this topic, at ILP Abogados we can meet your needs. Law is not a commodity. Choose the best, not the cheapest.

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