What are Scope 4 emissions, and why is it so valuable to report them?

When it comes to reducing carbon emissions and business reporting, complexity increases the deeper we dive down the Scopes rabbit hole. Scope 1 and 2 are the simplest to understand. Scope 1 covers emissions an organisation owns or controls directly; for example from burning fuel in its fleet of vehicles. Scope 2 covers indirect emissions arising from an organisation’s consumption of purchased energy. Again that’s reasonably simple; a business estate uses purchased electricity to light its buildings, for example, so a forward thinking firm should measure this, report it and consider installing LEDs to help. Scope 3 is where things become more complex. This Scope is about measuring the carbon in a firms’ supply chain. The challenge here is obvious, businesses don’t directly control their suppliers. As for Scope 4, complexity rises once again. A relatively new, voluntary metric, The FT writes it covers ‘avoided emissions’; or emission reductions that “occur outside a product’s life cycle or value chain but as a result of the use of that product,” says the World Resources Institute, which established the GHG Protocol. But what are these ‘avoided emissions’ in the real world?

Scope for change

A useful example of Scope 4 emissions might be those of lighting manufacturer providing LED products. LED products replacing inefficient, legacy lighting at customer sites would lead to lower energy use, and therefore avoided emissions. Put more simply, if your products or services cut emissions when customers buy and use them, you can report these as Scope 4 emissions. The FT says Aveva, a FTSE 100 tech company, plans to develop a baseline and target for customer-saved and avoided emissions “sometimes referred to as Scope 4” by 2025, according to its 2022 annual report. America’s Pacific Gas & Electric Company recently issued a climate strategy report that referred to Scope 4, while Telefonica of Spain and Renew Energy Global of India are among groups to have disclosed specific figures for avoided emissions. That all sounds positive, and indeed reasonable. If your products do good from a carbon perspective, reporting on avoided emissions should gain you kudos and help encourage the transition to more sustainable business. As ever, it isn’t quite that simple though.

Selective Scope

Imagine if you will that a company produces a suite of remarkably carbon-positive products. Scope 4 reporting enables that company to shout out on its benefits and push its environmental credentials. But, Scope 4 does absolutely nothing to check that these useful products have been made in a carbon-light way. The most environmentally benign product might have been made and manufactured in a very energy intensive fashion, for example. Another challenge is how to measure one product’s performance against another’s. New products come to market all the time – so keeping up to date is a challenge. Companies often only have access to industry averages, which makes ranking difficult. All this has led to fears that used incorrectly, Scope 4 reporting might lead to greenwash, as companies seek to gain reputational advantage through their product’s strengths, even though these might not be accurately modelled against the whole market for said product, or against how it was made.

The future of reporting

Despite the challenges and complexities of Scope 4, it’s a useful way to encourage the net zero transition. EDIE reports that Planet Tracker’s analysis of Pepsico has found the food and beverage giant has failed to disclose the material financial impact associated with potential carbon pricing mechanisms linked to its Scope 3 (indirect) emissions, despite these emissions accounting for more than 90 per cent of the company’s total footprint. It means PepsiCo could be exposed to $4.4bn of climate-related risk per year by the end of the decade on its current emissions trajectory. The company refutes the claims, saying it has published an in-depth Climate Action Strategy identifying the key levers it intends to pull in an effort to achieve its climate reduction ambitions, and it is making progress towards its2030 and net zero goals. Better reporting across every Scope, from 1 through to 4, will help companies like Pepsico get on a better path. An additional point is that for investors, taking into account Scope 4 disclosures can make financial sense as it shows the true added value a company is making to the ESG agenda. Reporting is complex, and the truth remains it is a burden to businesses. But it’s a burden well worth shouldering in terms of aligning your company to a net zero agenda, and indeed both saving money and gaining investor appeal. Scope 4 will only gain traction as time passes. Getting onside with its complexities now is a solid decision from every business angle.