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The need for disclosure of Scope 3 emissions

The lack of reliable and specific data, the complexity of calculating emissions and the dependency and need for cooperation with value chain partners are difficulties for the disclosure of Scope 3 emissions, but the new European and international directives now make it mandatory in the annual sustainability and carbon footprint reports of companies, in order to provide transparency and accurate information to all stakeholders.

Each year, companies are required by national and international laws to disclose their sustainability report and carbon footprint based on specific guidelines. The Sustainability Report includes the disclosure of the reporting company's data and its impact on environmental, social, and governance (ESG) issues. To prepare the report, each company uses international or national standards using relevant ESG indicators. Part of the environmental aspects are the greenhouse gas emissions emitted by the company, which are divided into three categories, Scope 1, 2, and 3. Scope 1 (direct emissions) refers to emissions from sources owned or controlled by the company itself. For example, fuel combustion in boilers, furnaces, and vehicles, leakages from refrigerators, and industrial processes. In Scope 2 (indirect emissions), the company should report emissions from the consumption of purchased electricity. Finally, Scope 3 (other indirect emissions) refers to emissions that are a result of the company's activities but come from sources not owned or controlled by the company. These emissions are generated in the company's supply and value chain. For example, emissions generated during the extraction of materials and production of goods (e.g. a computer) purchased by a company belong to Scope 3 of the same company. In addition, emissions occur due to the end use, by a customer consumer, of the products and services sold by a company. Likewise, for the calculation of the carbon footprint it is necessary to record direct and indirect emissions, with the same categorisation as Scope 1, 2 and 3, in all activities of a company. This will provide a proper assessment for the achievement of the net-zero emissions target. The main focus is on the calculation of direct and indirect greenhouse gas emissions, Scope 1 and 2 respectively, as defined in the "GHG Protocol - WORLD RESOURCES INSTITUTE" or according to the "ISO 14064-1:2018" standard. So far, disclosure of Scope 3 emissions was not mandatory for businesses but changing conditions and new European and international directives have made it mandatory to include Scope 3 emissions in annual reporting since emissions from Scope 3 categories form a significant part of total emissions. The Scope 3 categories are the following:

  1. Purchased goods and services,

  2. Capital goods,

  3. Fuel- and energy-related activities,

  4. Upstream transportation and distribution,

  5. Waste generated in operations,

  6. Business travel,

  7. Employee commuting,

  8. Upstream leased assets,

  9. Downstream transportation and distribution,

  10. Processing of sold products,

  11. Use of sold products,

  12. End-of-life treatment of sold products,

  13. Downstream leased assets,

  14. Franchises

  15. Investments

So Scope 3 includes the above 15 categories, and although each company's activities are not related to all 15 categories, they represent a significant part of most companies' emissions. Of the 15 categories, the GHG Protocol identifies "Purchased goods and services" and "Use of goods sold" as those of extreme significance.

According to the World Resources Institute, there are several sectors of the economy whose Scope 3 emissions exceed 90% of their total emissions. These include financial services, the capital goods sector, the real estate sector, and the transportation of capital goods. In addition, reports in an article that in the oil and gas industry, value chain emissions (e.g., combustion of finished products - Scope 3) are up to six times higher than Scope 1 and 2 emissions combined!

But let's have a look in more detail at the significance of Scope 3 emissions compared to Scope 1 and 2 emissions. The following research was conducted by the financial firm MSCI and compares the overall carbon footprint by Scope and Category, based on the MSCI USA Investable Market Index (IMI) for US market registrants.

We notice that in all reported sectors, except Utilities, the intensity of Scope 3 emissions - categories 1, 11, and 15 (i.e. purchased goods and services, use of goods sold, and investments, respectively) far exceeds the intensity of combined Scope 1 and 2 emissions. Moreover, in sectors such as Energy, Health and Care, and Consumption of Consumer Discretionary Goods, the intensity from the use of goods sold (Scope 3 category 11) is more than four times the intensity of Scope 1 and 2 combined emissions. The same is true for the intensity from Purchased Goods and Services (Scope 3-Category 1), which in many areas far exceeds the emission intensity of Scope 1 and 2 combined It is obvious that Scope 3 greenhouse gas emissions are complex enough to be reliably calculated and published in an annual report in an accurate and comprehensive manner. Scope 3 results are largely unreliable and not comparable to previous company disclosures. In addition, investors studying annual reports cannot determine whether obligated parties are meeting their climate commitments or whether they are subject to changing conditions. But what is the reason that a company has difficulties and avoids the disclosure of its Scope 3 emissions? Lack of reliable and concrete data. For the analysis and disclosure of Scope 3 emissions, a lot of primary data needs to be collected by a company. Many companies do not have a detailed list and the right data ready to be processed. In addition, many primary data of the company itself are not accessible and are hard to collect such as fuel consumption, type of transport vehicle, business travel mileage, amount of waste and water use. This task, however, requires staff, resources, expertise and effective data management processes, which is in short supply in companies. Third-party data that are difficult to calculate can be the end use of some of the company's sold products, investments and the activities of a company's leased assets. In these cases, collecting primary data can be almost impossible. The complexity of calculating emissions. The Greenhouse Gas Protocol (GHG) has established a methodology for each category to calculate greenhouse gases. But these guidelines provide so much room for error and confusion that the final report, if it exists, tends to be inconsistent and misleading. In addition, the methodology includes four methods for each category (supplier-specific use, hybrid, average data, and spend-based) all of which are based on their own assumptions and uncertainties about the data. The "supplier specific" method involves collecting data from the supplier and is a rather time-consuming process. In the "average data" methodology, the company has to collect data on the mass or other relevant units of purchased goods or services and multiply them by relevant secondary (e.g. industry average) emission factors. "Hybrid" combines the first two methodologies and therefore reduces time and increases accuracy in the data. And finally, the "spend-based" methodology combines an activity's primary data on the amount spent on purchased products and the secondary emission factors for purchased products per monetary value. Although, it is a quick process it is not very accurate. The first and third methods require the reporting company to collect data from suppliers, so there is a reliance on suppliers for reliable data.

Lack of supply chain transparency - Reliance on value chain partners. As mentioned before, it is necessary to work with some suppliers and/or customers and continuously monitor a company's entire supply chain based on quantitative data. In fact, many companies lack direct links to the various levels of suppliers/customers and in general cooperating parties, resulting in insufficient primary data or even incorrect data.

Double-calculations. Supply and value chains are interconnected networks, and there is a need to ensure that emissions are not calculated multiple times from different areas between companies, adding to the unreliability of results and the final carbon footprint amount. For example, double-calculating can occur when a company's reported Scope 3 emissions are also classified as a supplier's Scope 1, 2, or 3 emissions and are therefore included in the calculations for both the supplier and the company submitting the carbon footprint report. Companies and suppliers must work together to ensure that each accounts for their share of emissions and that each is responsible for their emissions to achieve the goal of zero emissions. It is time for companies to get on board and invest in finding and processing the Scope 3 data so that they can start publishing the emissions from the categories that concern them. Accordingly, States should also make it mandatory to disclose them in the annual sustainability and carbon footprint reports so that there is transparency and accurate information to investors, direct and indirect stakeholders. We have the knowledge and technology to support a company throughout the Scope 3 emissions reporting process. From capturing, processing, accurately calculating, and managing the results. With our consulting services and our cloud platform RiskClima, we enable companies to clearly and interactively capture, calculate and publish their annual sustainability report and carbon footprint from all Scope 1, 2, and 3 categories. These cloud platforms have been developed according to Greenhouse Gas Protocol (GHG) and ISO 14064-1-2018 standards and always follow international and European revisions.


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