In an era where environmental consciousness has become paramount, corporations across the globe are grappling with the challenge of measuring and managing their carbon emissions. With carbon reporting becoming a mandatory practice in at least 40 countries, more companies are taking steps to comply, though a significant portion of their carbon footprint remains unaccounted for.
Scope 3 emissions, in particular, are difficult to assess and manage, emerging as a critical focal point in the quest for decarbonization.
Carbon emission types
- Scope 1 emissions are direct emissions from sources that a company owns or controls, such as fuel burned in company-owned vehicles or equipment.
- Scope 2 emissions are indirect emissions from the generation of purchased energy, such as electricity, steam, heat, or cooling.
- Scope 3 emissions are all other emissions associated with a company’s activities, including both upstream and downstream emissions. They are indirect emissions that occur in the value chain of the reporting company but are not owned or controlled by it. For example, a food and beverage company’s Scope 3 emissions can come from various sources, such as transportation and distribution of its products, retail and consumer emissions from refrigeration and cooking, and emissions generated when manufacturing packaging materials.
Measuring Scope 3 emissions
In November 2022, the Alliance of CEO Climate Leaders, a community of CEOs representing major companies operating in 26 countries across 12 industries, disclosed that 80% of the 4.3 billion metric tons of carbon emitted by their companies originate from their supply chains, and are therefore considered Scope 3 emissions. Some of these emissions may come from unexpected sources. For example, Unilever’s brand, Pukka disclosed that part of its carbon emissions stems from its customers using kettles to boil water and brew tea.
Scope 3 emissions not only account for the bulk of all carbon emissions, but they are notoriously difficult to measure and control too. According to a survey conducted by Deloitte in 2022, 86% of executives surveyed admit to struggling with tracking these emissions.
There are various ways of tracking Scope 3 emissions, though they typically fall under two main categories:
- Spend-based methods primarily revolve around financial transactions. They rely on financial reports to track various types of spending such as the purchase of capital goods, business travel expenses, and payments to vendors and suppliers. These methods may be preferred by entities looking to simplify the carbon accounting process as it generally involves straightforward dollar amounts.
- Activity-based methods encompass using a wide array of measurement units, including kilograms, kilowatt-hours, and metric tons.
“For example, the most precise way to collect data for car driving would involve attaching meters to monitor [the vehicle’s] emissions continuously, which is often impractical. The next best option is to use calculations based on known emission factors [while making some] assumptions, such as the types of engines and the distance traveled. While there are some assumptions involved, this approach still tends to be more accurate than the spend-based method in estimating emissions,” said Cedric Chong, senior sales director for the Asia Pacific region (excluding Japan) at Persefoni.
Carbon reporting is slowly transitioning into a mandatory requirement. The release of the global sustainability disclosure standards by the International Sustainability Standards Board (ISSB), namely IFRS S1 and IFRS S2, has prompted countries such as Hong Kong, Singapore, and Australia to align with these standards for climate-related disclosures. Listed companies are most impacted by these changes, facing challenges primarily revolving around data availability, accuracy, and quality.
“Many organizations haven’t been diligent in tracking this data in the past, and addressing this issue will now require a higher level of collaboration with multiple stakeholders,” said David Fogarty, head of environmental, social, and governance (ESG) consulting at CBRE Singapore.
Tracking Scope 3 emissions is a resource and time-intensive endeavor, particularly for large organizations that have complex supply chains with numerous stakeholders spread out across the value chain. “Since they are relying on data from suppliers and stakeholders, organizations may lack clarity and accuracy [of data] as they do not have direct control,” said Hari Nair, co-founder and CEO of Zuno Carbon.
Adding to the challenge is the fact that large corporations usually have small and medium enterprises (SMEs) embedded at the end of their supply chains.
“While large organizations possess the purchasing power to comply with carbon accounting requirements, the same cannot be said for SMEs. Most regulations only affect large organizations, hence SMEs may lack the urgency [to follow suit] while being constrained in terms of purchasing power,” Chong said.
According to Chong, the absence of these three factors: need, urgency and purchasing power, may hinder the ability of SMEs to engage in carbon accounting practices, deterring adoption.
How can we better track Scope 3 emissions?
While financial data is generally easier to collect and analyze, spend-based methods can be problematic if done manually.
“Many stakeholders that I’ve engaged with are still relying on manual methods, often entailing complex spreadsheets. Some perceive it as a minor task, assigning interns to read the frameworks and subsequently create carbon reports. Regrettably, this approach often leads to errors and classification problems. We previously [engaged] a company in Hong Kong with a [substantially sized] team investing about six months annually in generating these reports [for the company]. However, upon examining their spreadsheets, we discovered discrepancies and classification issues,” Chong said.
Programmatic solutions could aid in efficiently tracking and calculating emissions to address this issue. However, relying solely on financial data may not be optimal. Financial data is most applicable when calculating emissions falling within Category 15 (investments) of Scope 3 emissions as defined by the GHG Protocol. This category accounts for emissions from a company’s investments, including equity investments, debt investments, or long-term project financing, which are most relevant to financial institutions.
However, if a company wants to calculate their emissions for other categories like Category 6 (business travel), financial data may not be the most appropriate approach to calculate emissions resulting from employee transportation for business-related purposes.
“Spend-based methods would take the financial value of purchases plainly and equate it to an emissions value without considering the actual emissions of assets,” Nair said. Calculations need to be more nuanced in certain instances such as air travel, where data collected from the aircraft—its fuel efficiency, the specific make and model of the plane, the type of fuel used, and the distance covered—would be better indicators of the emissions, rather than the amount spent on the air ticket.
Therefore, tailoring the types of data used to the precise scope of each emissions calculation is crucial to achieving accurate carbon accounting. SMEs, however, may find this process challenging as they lack the tools and motivation to collect a broad spectrum of data.
“Driving the adoption of carbon accounting practices requires a top-down approach, and it must be offered without cost,” Chong said. Persefoni recognizes the importance of encouraging SMEs to adopt carbon accounting practices and is collaborating with multinational corporations to provide its Scope 3 data exchange product to their main suppliers at no cost.
Additionally, Fogarty recommends using a methodical approach for carbon accounting, starting with supplier engagements to understand their current practices and whether they are already tracking certain types of emissions data.
“Some may find the scale of the challenge overwhelming, but you can start by addressing the basics, engaging with key suppliers, educating your team about the importance of Scope 3 emissions, and gradually working your way forward,” Fogarty said.
Regulatory changes on the cards
The convergence of countries like Australia, Hong Kong, and Singapore toward the ISSB’s global sustainability disclosure standards has been seen as a welcome move in a world bloated with various carbon accounting frameworks, including the Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), Sustainability Accounting Standards Board (SASB), among others. With standardization, compliance is easier to accomplish for multinational companies operating across multiple jurisdictions.
Another issue lies in carbon reporting for non-listed companies, which can be considerably more challenging to enforce compared to their listed counterparts. Nevertheless, Singapore has taken a progressive step in this area by requiring non-listed companies with an annual revenue above SGD 1 billion (USD 740 million) to report their emissions as well. The hope is that more countries will embrace the trend and introduce mandatory disclosures in the coming years.
“Singapore’s proactive stance in this regard is commendable and indicative of the eventual norm. Drawing parallels to the world of financial accounting, today, companies, whether public or private, publish their annual reports. However, the latter group does so voluntarily, with some opting for transparency, especially when they perform well,” Chong said.
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Future outlook
With the 2030 deadline of achieving a 45% reduction in global emissions looming large, countries face an uphill task in achieving this goal. One of the biggest hurdles will be getting organizations to report their emissions.
While technology advancements could enhance existing carbon accounting methods, Fogarty and Nair envision the eventual development of a standardized platform that will consolidate all data collection efforts, simplifying emissions tracking and reporting, especially for companies operating in multiple markets. However, the realization of such a platform remains a distant prospect and will likely require, at the very least, several years to materialize.
For now, the best way to approach carbon accounting is with prudency: dividing this uphill task into manageable stages.
“You don’t necessarily need to jump straight to step ten, which is full-scale disclosure. However, if you’re not already measuring your carbon footprint, take the first step by finding a way to begin measuring. This foundational step will be essential to achieving meaningful progress in your sustainability journey,” Chong said.