UK businesses are becoming increasingly aware of the importance of Scope 3 emissions – at least, that’s if the number of queries on the topic received by the Hub is anything to go by. It’s not yet compulsory to include most Scope 3 emissions in your GHG reporting, but many businesses are futureproofing their compliance by getting to grips with the subject now. Here we answer some of the more common questions.
What are Scope 3 emissions?
Scope 3 emissions are greenhouse gas emissions associated with the activities of a business, but not directly generated by that business or the energy it uses. That’s in contrast with the direct emissions covered by Scope 1, which might include the fumes from a company’s own lorries or emissions from a boiler owned by your business. It’s also different from Scope 2, which covers emissions arising from the energy that businesses buy from suppliers for their own use, such as for heating or lighting. Scope 3 emissions come from sources connected to a business, such as suppliers or distributors, rather than directly from the business itself. That’s why they’re often known as “value chain emissions”.
Why do Scope 3 emissions matter?
Scope 3 emissions make up a surprisingly high percentage of total emissions for many businesses, often the largest portion of the total. When food giant Kraft mapped out the sources of its own emissions, it found that over 90% of total emissions associated with the company were Scope 3. This isn’t untypical; the best estimates place Scope 3 emissions somewhere between 80% and 97% of total emissions for a large business.
So, while many businesses do focus solely on Scope 1 and 2, this means only tackling a small percentage of the emissions linked to your business. Ignoring the emissions in your value chain means that you will never get a grip on your company’s true carbon footprint. It’s a huge missed opportunity.
Is it compulsory to report your Scope 3 emissions?
The rules about Scope 3 are part of the UK government’s Streamlined Energy and Carbon Reporting (SECR) policy.
At the time of writing (August 2020), only one type of Scope 3 emissions is compulsory to report, and it’s only compulsory for large unquoted companies and large LLPs. The emissions that are compulsory are those from fuel burned during business-related travel if the vehicle involved is a rental or belongs to an employee who buys the fuel. In practice, this means they have to report how much energy is used by these vehicles as fuel and then use a conversion guide to calculate the associated emissions. It is not compulsory for these companies (large unquoted companies and LLPs) to report any other kind of Scope 3 emissions, although it is strongly encouraged.
For companies that are listed on a stock exchange (quoted companies), it is not mandatory to report any Scope 3 emissions, although it is strongly encouraged for them as well.
However, it is highly likely that the rules around energy and carbon reporting will change as the UK gets closer to its net zero deadline. This will almost certainly mean compulsory reporting for more categories of Scope 3 emissions.
In order for companies to take a lead in achieving net zero and driving change throughout the value chain, it is vital for companies to measure and report on scope 3 emissions to understand their full impact on climate change.
Why not wait to act until reporting becomes compulsory?
As the old saying goes: failing to plan is planning to fail. It is unrealistic to think that the current situation, whereby businesses can ignore most of the emissions generated as a result of their activity, will continue. The UK is currently the biggest net importer of emissions in the G7 because of our reliance on goods manufactured abroad, and criticism of our tendency to “outsource” emissions has been growing stronger in recent years. A credible national net zero strategy will look beyond direct emissions, which make up such a small proportion of emissions both nationally and at the level of individual businesses. This will almost certainly mean legislative changes ensuring that businesses will no longer have the luxury of ignoring their own “outsourcing”.
There are also very strong positive motivations for getting a handle on your Scope 3 now. As more people recognise the urgency of tackling climate change, it pays for businesses to be seen to be proactive. Potential customers, investors and employees increasingly want to know if you’re doing the legal minimum or setting more ambitious targets.
Many businesses also find that because tackling Scope 3 involves engaging more closely with your value chain, this means building stronger relationships with stakeholders and recognising opportunities to work more efficiently together, which in turn drives innovation.
Conversely, businesses that don’t do the work are missing out on opportunities to improve their processes and exposing themselves to reputational risk.
What categories of Scope 3 emissions are there?
The concept of the three scopes is set out in the Greenhouse Gas (GHG) Protocol, which is the internationally recognised standard for measuring greenhouse gas emissions. The GHG Protocol splits Scope 3 emissions into two broad categories: upstream (from your suppliers) and downstream (from whoever buys your company’s goods or services). These are further divided into 15 distinct categories by the GHG Protocol.
Upstream Scope 3 emissions
- Purchased goods and services
- Capital goods
- Fuel and energy use
- Upstream transport and distribution
- Waste generated in company operations (if you don’t own or control the waste management facilities)
- Business travel
- Employee commuting
- Upstream leased assets
Downstream Scope 3 emissions
- Downstream transport and distribution
- Processing of sold products
- End-use of sold goods and services
- Waste disposal and treatment of products
- Downstream leased assets
- Operation of franchises
- Operation of investment
The Greenhouse Gas Protocol website has much more information on how to define emissions in these categories and where to set the boundary that marks them out as part of a specific company’s value chain.
As we explained above, only one category of Scope 3 emissions is covered by the current rules on compulsory reporting (the category of business travel) and even this doesn’t apply to quoted companies.
However, it is very likely that the rules for quoted companies will be brought into line with the rules for large unquoted companies, and not the other way round. It is also very likely that, as part of a stronger legislative landscape on emissions reporting, other Scope 3 categories will become subject to compulsory reporting in the future. Any company that wants to avoid being caught unprepared should start looking into which Scope 3 categories of emissions are most significant for its operations. For example, if your company relies heavily on materials that are imported by suppliers from overseas, upstream transport and distribution may be the Scope 3 category to look at first.
How do you measure your company’s Scope 3 emissions?
First you need to identify the emissions sources in your company’s value chain, both upstream and downstream, then decide which of the 15 categories set out by the Greenhouse Gas Protocol they fall into. Then you can start measuring the energy use and calculating the associated emissions.
All this is a lot easier said than done, despite the detailed and helpful guidance from the GHG Protocol. The best way to start measuring your company’s Scope 3 emissions is to seek expert help. Experts like the team at BiU will start by mapping your company’s unique emissions profile, showing exactly where emissions are being generated in its value chain.
Some businesses, rather than engaging outside help straight away, will do the work of gathering information and transposing it into the right format in-house, but then ask a specialist organisation to verify their calculations. The feedback given by this process is particularly valuable if you’re concerned you may have fallen into bad practices or if a reporting requirement is new to your business.
