Understanding Scope 3 Emissions

Sumday Team
October 10, 2023
5 minutes

Understanding Scope 3 Emissions

Scope 3 emissions refer to indirect greenhouse gas emissions that occur in a company's value chain. These emissions are a result of activities that are not directly owned or controlled by the company but are associated with its operations. It's important to consider scope 3 emissions because they can account for a significant portion of a company's overall carbon footprint.

So, what do Scope 3 emissions look like?

Let's take a closer look at what constitutes Scope 3 emissions. 

Scope 3 emissions can be broken down into 2 subcategories: upstream and downstream.

  • Upstream emissions are associated with the material acquisition and pre-processing of a given good or service (example - what goes into making a pair of jeans).
  • Downstream emissions are associated with the distribution and storage, use, and end of life of the same good (example - what goes into getting the jeans to the store and what emissions are involved with owning them until you get rid of them).

Within upstream and downstream emissions, there are a further 15 categories as illustrated in the GHG Protocol extract. We’ll be taking a more in-depth look at each category over the next few blog posts. 

The 8 upstream Scope 3 categories are:    

  1. Purchased goods and services.
  2. Capital goods.
  3. Fuel and energy-related activities (not included in Scope 1 or 2).
  4. Upstream Transportation and Distribution.
  5. Waste generated in operations.
  6. Business travel.
  7. Employee commuting.
  8. Upstream leased assets.

The 7 downstream scope 3 categories are:

  1. Downstream transportation and distribution.
  2. Processing of sold products.
  3. Use of sold products.
  4. End-of-life treatment of sold products.
  5. Downstream leased assets.
  6. Franchises.
  7. Investments.
Overview of GHG Protocol scopes and emissions across the value chain (Corporate Value Chain (Scope 3) Accounting and Reporting Standard, p.5

What’s the big deal about Scope 3 emissions?

Scope 3 makes up the majority for nearly every company’s emissions; they have also been put in the 'too hard basket' too often.

They are notoriously difficult to record, track and calculate. As a result, they’re often skimmed over or ignored by businesses attempting to measure their emissions. For a typical business, around 80-90% of their emissions will come from the Scope 3 category, so it's critical that these are accounted for properly.

Scope 3 emissions occur from sources not owned or controlled by the business. They are often referred to as value chain emissions. So basically, any goods or services a company buys will have emissions associated with them. A cafe for example will buy coffee cups and beans; the emissions associated with those purchases fall with the cafe's Scope 3 emissions.

For a long time, stakeholders have said, "How am I supposed to know the emissions associated with companies I can't control?" or, "That's too hard, let's start with Scope 1 and 2." But as the world focuses on reaching net zero, it’s increasingly important to actually understand the emissions of those suppliers we buy goods and services from or those companies we invest in. Again, in most cases they make up over 90% of the overall footprint.

Accounting for scope 3 emissions has been voluntary in the past, but it won’t be for long. Standards such as the International Sustainability Standards Board (ISSB) and regulations like the  Californian Bills for Mandatory Scope 3 Accounting are moving the world of accounting and reporting to mandatory scope 3 emissions for large organisations, which means they will be tapping companies on the shoulder for this data through their own supply chains. So basically, it may as well be mandatory for most businesses. 

In a practical sense, what does this actually look like to start accounting for Scope 3 emissions?

It's not as impossible as it sounds. Here are the steps a business may take to account for scope 3 emissions in the purchased goods and services category (often the most significant source of emissions):

  1. For upstream Scope 3 emissions, extract the financial transaction listing by supplier and by cost code from the accounting system.
  2. Assign each transaction to the correct category under the Greenhouse Gas Protocol (we'll go through these in more detail and Sumday makes it easy for you to do this).
  3. Send a request to each supplier through Sumday, asking if they currently measure, to avoid using an industry average. If they don't, we'll ask if they are willing to start. Suppliers will be asked this question more and more; it is an obvious starting point in an effort to collect primary data, and now their accountant can help. With your Sumday subscription you can pass on access to free training and support with Sumday to help them get started.
  4. Where you can't get primary data, Sumday will provide the average emissions factor to use for each purchase which is multiplied by the amount spent (as a worst case) or by activity (such as liters consumed, tonnes purchased etc and we strongly encourage the effort to get this data). You'll be able to see where that average emissions factor was sourced from so you can access information on the methods used by that database, enabling you to explain this to your client or the business if required.

This is truly a best practice approach and one you should be proud of taking. As you can see, by leveraging existing accounting systems and professionals, it’s far from impossible to start. 

As Scope 3 emissions become better understood by your stakeholders, including customers, the need for businesses to be thorough in their Scope 3 carbon accounting is vital. 

Take the following example:

Your company has a $100,000 travel budget each year. You're loyal FlightX customers (Elon is at it again, hopefully with a better logo this time). There are significant emissions associated with flying, obviously. In 2023 they miraculously discover a way to reduce emissions for each flight by 50%. You've been accounting using industry averages. Even though emissions associated with your FlightX travel have gone down, you still don't see that in your calculations. Because of this, it's hard for anyone to know for sure then that FlightX is a better procurement decision from a carbon perspective compared to their competitors, Flights R Us. The Flights R Us marketing budget is 10 times that of FlightX and they are making incremental changes they're very loud about, so most businesses associate sustainable travel with Flights R Us.

You can see the problem, right...

That's a big picture example, but it is the same for any suppliers who have made decisions to reduce their impact. You want to be able to account for that in your Scope 3 assessment. It is quite literally the only way you’ll be able to track progress towards net zero or make any real reduction to your scope 3 emissions. 

This is the level of transparency we need to keep working towards in order to understand how we can  reduce our impact through informed purchasing decisions. The more businesses that start carbon accounting, the easier this will become.

Let’s do a quick recap over the three categories of emissions under the standards

  • Scope 1 emissions are the direct emissions from business-owned or controlled sources. 
  • Scope 2 emissions are indirect emissions from the generation of purchased electricity. 
  • Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organisation, but that indirectly impact the organisation through its value chain (GHG Protocol, 2022). 
As an example, let's think of a fruit and veggie shop (a fancy one with a good deli and Tasmanian cheese from Coal River Farm who are in fact carbon accounting).

Scope 1

Their Scope 1 emissions would include emissions such as those from their van as they deliver groceries to other businesses, and those coming from their gas cooker that emits the GHGs methane and nitrous oxide, or fugitive emissions released from the refrigeration system used to keep their produce fresh. 

Scope 2

Their Scope 2 emissions would include the emissions associated with the electricity they’ve purchased to power their store, including cash registers, heating units, lights and speakers.

Scope 3

Their Scope 3 emissions will include the emissions associated with producing the fruit and vegetables on the farm, those produced by the truck that delivered their fruit and veggies from the wholesaler, the emissions associated with the waste from the food they don’t sell, the emissions associated with their recycling, and even the emissions from the cars their employees use to get to work. Nearly every good or service they purchase will have some form of emissions associated with it. 

The wrap up on Scope 3 emissions

Scope 3 emissions make up the majority of emissions for nearly every company and can’t be ignored anymore. This scope of emissions represents the greatest opportunity for reduction and path towards net zero. It’s time to get started! And that’s as easy as upskilling your finance team with the Sumday Academy or asking your accountant to prepare a first pass at your baseline emissions. It’s not going to cost you the earth to do that either. 

Want to learn more about Scope 3 emissions and other aspects of carbon accounting? Start a free trial so you can jump into the Introduction to Carbon Accounting Course which has plenty of chapters on how to account for scope 3 emissions, all set out in a logical way with worked examples.