12 July 2024

th

Issue - V
Understanding Scope 3 Emissions and Why Supplier-
Specific Method is Preferred ?

What is Scope 3?

Scope 3 emissions are indirect greenhouse gas (GHG) emissions that occur in a company’s
value chain, outside of its direct control. These emissions are divided into two main
categories:
Upstream Activities
1. Purchased Goods and Services:
o Description: Emissions from the production of goods and services that the
company buys.
o Example: A clothing manufacturer sources raw materials like cotton and synthetic
fibers from various suppliers. The emissions generated during the production and
transportation of these materials to the manufacturer are considered Scope 3
emissions.
2. Capital Goods:
o Description: Emissions from the production of long-term assets such as
machinery and buildings.
o Example: A tech company purchases new servers for its data centers. The
emissions associated with the production, transportation, and installation of these
servers fall under Scope 3 emissions.
3. Waste Generated in Operations:
o Description: Emissions from the disposal and treatment of waste produced by
the company’s operations.
o Example: A food processing company generates waste during the production
process. The emissions from transporting and treating this waste are included in
Scope 3 emissions.
4. Business Travel:
o Description: Emissions from employees' business travel, including flights, car
rentals, and accommodations.
o Example: Employees of a consulting firm frequently travel for client meetings.
The emissions from flights, car rentals, and hotel stays are part of Scope 3
emissions.
5. Employee Commuting:
o Description: Emissions from employees commuting to and from work.
o Example: An office-based company has employees commuting to work using
personal cars, public transport, and bicycles. The emissions from these
commuting activities are Scope 3 emissions.
6. Transportation and Distribution:
o Description: Emissions from the transportation of goods in the supply chain.
o Example: An electronics manufacturer ships products to retailers worldwide. The
emissions from the transportation of these goods by trucks, ships, and planes
are included in Scope 3 emissions.
Downstream Activities
1. Use of Sold Products:
o Description: Emissions from the use of products sold by the company.
o Example: An automotive company sells electric cars. The emissions generated
from charging and using these cars over their lifespan are part of the company’s
Scope 3 emissions.
2. End-of-Life Treatment of Sold Products:
o Description: Emissions from the disposal and treatment of products sold by the
company.
o Example: A smartphone manufacturer’s devices eventually reach the end of their
usable life. The emissions from recycling or disposing of these devices are
included in Scope 3 emissions.
3. Downstream Leased Assets:
o Description: Emissions from assets leased to other entities.
o Example: A commercial real estate company leases office spaces to various
businesses. The emissions from the energy use and operations of these leased
spaces are Scope 3 emissions.
4. Franchises:
o Description: Emissions from franchise operations.
o Example: A fast-food corporation operates through franchises. The emissions
from the daily operations, energy use, and waste management of these franchise
locations are part of the company’s Scope 3 emissions.
5. Investments:
o Description: Emissions from investments and financial assets.
o Example: A financial institution invests in various industries, such as energy and
manufacturing. The emissions from the operations of the companies in which it
invests are considered Scope 3 emissions.
Scope 3 emissions are a critical part of an organization’s overall carbon footprint but are
often the most challenging to measure and manage.
Why is it Important to Calculate Scope 3 Emissions?
1. Comprehensive Carbon Footprint:
o Description: Scope 3 emissions often constitute the largest part of a company’s
total GHG emissions. Accurately accounting for these emissions provides a
complete picture of the company’s environmental impact.
o Example: A multinational corporation calculates its Scope 3 emissions and
discovers they make up 80% of its total GHG emissions. This comprehensive
view helps the company understand its true environmental impact.
2. Regulatory and Reporting Requirements:
o Description: Increasingly, regulations and sustainability reporting frameworks
(e.g., GHG Protocol, CDP, TCFD) require the disclosure of Scope 3 emissions.
o Example: A company preparing for an initial public offering (IPO) needs to
disclose its environmental impact as per regulatory requirements. Accurate Scope
3 emissions reporting ensures compliance with frameworks like the GHG Protocol
and CDP.
3. Risk Management:
o Description: Understanding Scope 3 emissions can help identify and mitigate
risks in the supply chain, such as regulatory changes, resource scarcity, and
reputation risks.
o Example: A food company identifies high Scope 3 emissions from its supply chain
due to agricultural practices. By understanding these emissions, the company can
work with suppliers to adopt more sustainable farming techniques, reducing risk
and improving sustainability.
4. Stakeholder Expectations:
o Description: Investors, customers, and other stakeholders are increasingly
demanding transparency and action on all sources of emissions, including Scope
3.
o Example: An investor group requests detailed emissions data from a tech
company before investing. Transparent Scope 3 emissions reporting meets these
expectations and builds investor trust.
5. Sustainability Goals:
o Description: Setting and achieving ambitious sustainability goals, such as net-
zero targets, requires addressing Scope 3 emissions.
o Example: A consumer goods company sets a net-zero emissions target by 2050.
To achieve this goal, it must address its Scope 3 emissions, which involves
collaborating with suppliers and improving product life cycles.
By addressing Scope 3 emissions, companies can achieve a more accurate and complete
understanding of their environmental impact, comply with regulatory requirements, manage
risks, meet stakeholder expectations, and achieve sustainability goals.

Methods to Calculate Scope 3 Emissions

1. Spend-Based Method:
o Calculates emissions based on the amount of money spent on goods and
services.
o Uses average emissions factors per dollar spent, derived from economic input-
output models.
o Pros: Easy to implement with financial data.
o Cons: Less accurate as it relies on average data and does not reflect specific
supplier practices.
2. Activity-Based Method:
o Uses physical activity data (e.g., weight, distance) multiplied by emission factors
to calculate emissions.
o Pros: More accurate than the spend-based method if detailed activity data is
available.
o Cons: Requires more detailed data, which may not always be available.
3. Supplier-Specific Method:
o Involves collecting actual emissions data from suppliers.
o Pros: Most accurate method as it reflects the specific practices and efficiencies
of individual suppliers.
o Cons: Data collection can be time-consuming and challenging, requiring strong
supplier engagement.
Examples Illustrating Scope 3 Emissions Calculation Methods
1. Spend-Based Method Example
Company: ABC Manufacturing
Scenario: ABC Manufacturing spends $1,000,000 annually on raw materials.
Calculation:
• Economic Input-Output Model: An average emission factor of 0.5 kg CO2-eq per dollar
spent on raw materials is used.
• Emission Calculation: Total Emissions=Spend×Emission Factor
Total Emissions=$1,000,000×0.5 kg CO2-eq/$=500,000 kg CO2-eq
Pros:
• Simple and quick to calculate using financial data.
Cons:
• Less accurate as it uses industry averages and doesn't reflect specific supplier
practices.
2. Activity-Based Method Example
Company: XYZ Logistics
Scenario: XYZ Logistics ships 10,000 tons of goods annually over an average distance of
1,000 kilometres.
Calculation:
• Activity Data: Total weight shipped (10,000 tons) and distance (1,000 km).
• Emission Factor: Average emissions from freight transport is 0.1 kg CO2-eq per ton-
kilometre.
• Emission Calculation: Total Emissions=Weight × Distance × Emission Factor
Total Emissions=10,000 tons×1,000 km×0.1 kg CO2-eq/ton-km=1,000,000 kg CO2-eq
Pros:
• More accurate than spend-based as it uses specific activity data.
Cons:
• Requires detailed data which may not always be available.
3. Supplier-Specific Method Example
Company: DEF Electronics
Scenario: DEF Electronics purchases electronic components from three different suppliers,
each providing specific emissions data for their production processes.
Supplier Data:
• Supplier A: 100,000 kg CO2-eq for 10,000 units (Emission factor: 10 kg CO2-eq/unit)
• Supplier B: 150,000 kg CO2-eq for 15,000 units (Emission factor: 10 kg CO2-eq/unit)
• Supplier C: 50,000 kg CO2-eq for 5,000 units (Emission factor: 10 kg CO2-eq/unit)
Calculation:
• Emission Calculation: Total Emissions=100,000 kg CO2-eq+150,000 kg CO2-
eq+50,000 kg CO2-eq=300,000 kg CO2-eq
Pros:
• Most accurate as it uses actual data from suppliers.
• Provides insights into specific supplier practices and opportunities for emissions
reduction.
Cons:
• Time-consuming and requires strong supplier engagement to gather data.

Why Supplier-Specific Method is Preferred ?

Accuracy Example:
• If Supplier A adopts new energy-efficient technology and reduces emissions to 8 kg
CO2-eq/unit, the spend-based method wouldn’t capture this improvement, but the
supplier-specific method would reflect a more accurate and lower emission factor.
Transparency Example:
• By working directly with suppliers, DEF Electronics can verify the data and understand
the specific processes contributing to emissions, leading to more credible and
transparent reporting.
Improvement Opportunities Example:
• DEF Electronics identifies that Supplier B has higher emissions due to outdated
machinery. By collaborating on an upgrade plan, both DEF Electronics and Supplier B
can reduce emissions, leading to more sustainable supply chain practices.
Credibility Example:
• Investors and stakeholders trust DEF Electronics' emissions reports more when they are
based on precise supplier data rather than broad industry averages, enhancing the
company's reputation and compliance standing.
Conclusion
Using real-world data from suppliers not only provides a more accurate and reliable calculation
of Scope 3 emissions but also opens up avenues for targeted improvements and greater
transparency. Companies that invest in gathering and utilizing supplier-specific data position
themselves better for sustainability leadership and regulatory compliance.
Want to know more!!
SS Climate Advisors LLP
Ph : +91-9930870879
Email ID : [email protected]
Website : www.climateadvisors.in