Overcoming Barriers to Action

In our last blog, Counting What Counts, we explained the basics of Scope 3 GHG emissions. You may recall that it makes sense to capture Scope 3 emissions because these emissions often account for as much as 75-90% of the total emissions associated with the manufacturing, distribution, and use of a company’s products or services. While there’s clearly substantial potential value to be captured in developing a Scope 3 inventory, the diversity of Scope 3 emissions sources and the complexity of the process make it much more difficult than accounting for just Scope 1 and 2 (direct emissions and indirect emissions from purchased energy).

This complexity means that Scope 3 inventory development can be challenging for many companies. IBM, for example, has gone so far as to post its Position on Scope 3 GHG Emissions on its website where it cites various reasons as to why it does not plan to account for its Scope 3 emissions. IBM argues that due to the fact that it has thousands of suppliers all around the world, estimating the correct assumptions and variability surrounding them would be prohibitive and would not allow for accurate calculations. Simply put, the biggest hurdle companies see in accounting for their Scope 3 emissions is the perception that the process complexity is so high as to make it cost prohibitive. It’s understandable that a company’s quick assessment of this newly released, complex accounting standard can make Scope 3 emissions seem daunting and that valuable time and effort might better be spent elsewhere.

While there are real challenges in accounting for Scope 3 emissions, the initial investment in the process of developing a rigorous, comprehensive GHG inventory including relevant Scope 3 emissions will pay back in terms of insights gained leading to higher impact emissions reductions and efficiencies in future reporting years. Though the initial inventory development process will indeed require a significant investment of time and resources, one of the primary intents of the Scope 3 Standard is to help companies realize supply chain insights that can offset these upfront costs. Scope 3 inventory management provides an analytical tool that allows companies to identify supply chain inefficiencies and opportunities in the form of materials, processes, suppliers, or logistics pathways that could be better optimized, and in many cases drive down both costs and GHG emissions.

In addition to the complexity/cost argument, IBM “believes real results in GHG emissions reduction are best achieved when each enterprise takes responsibility to address its own emissions and improve its energy efficiency.”[1] While this is true and CGA agrees with the principle that all companies need to take responsibility for their own impacts, ultimately IBM does have control over its procurement and can make a real impact through its purchasing and supply chain choices. Scope 3 information can be used as a catalyst for supply chain efficiency which can be much more substantial than the impact that can be managed within a company’s own walls.

This was the realization behind Walmart’s 2010 reduction commitment of 20,000,000 metric tons. The retail giant is strongly committed to reducing its direct Scope 1 and 2 emissions but it realized that these impacts are dwarfed by the impact of their supply chain. In response to this, the company set a five year reduction target across its supply chain which is equal in magnitude to 1.5 times the company’s anticipated emissions growth (Scope 1 and 2) over the same time period. They would never have been able to achieve anything close to this magnitude of reductions on their own but by leveraging their supply chain impacts this became an achievable target.

Less frequent but perhaps more problematic is the concern that Scope 3 information may be used for comparisons that project poorly on the reporting company. This concern is however misplaced, as Scope 3 data is specifically not intended as a consumer comparison tool. Instead, the primary goal of the standard is “to help companies understand their full value chain emissions impact in order to focus company efforts on the greatest GHG reduction opportunities, leading to more sustainable decisions about companies’ activities and the products they buy, sell, and produce.”[2] In short, comprehensive GHG accounting (including Scope 3 emissions) provides a depth of insight that is not possible when accounting for only Scope 1 and 2 emissions. A comprehensive GHG emissions inventory is an extremely valuable management tool, full of business intelligence and actionable information that can guide and support organizational decision-making.

While IBM has turned its back on efforts to understand and manage its value chain emissions, other large companies have managed to begin the process of Scope 3 accounting and rightly see it is the best way to understand and leverage the highest value GHG reduction opportunities. The nonprofit Environmental Investment Organization (EIO) lists 35 companies that publicly report at least three Scope 3 categories. The Scope 3 Standard includes 15 Scope 3 emissions categories that are divided into upstream and downstream activities (see table 5.3).

Only one company, BASF, reported on all 15 scope 3 emissions categories, which shows that accounting for all scope 3 emissions is challenging. But this isn’t necessarily a problem. Not all Scope 3 categories are relevant to all companies and in fact for most companies, only a subset of these categories is truly material to their business.

The Scope 3 Standard acknowledges this reality and encourages companies to balance comprehensiveness in reporting with business realities and resource constraints. This idea is reflected in the Accounting and Reporting Principles, which provide guidance to companies trying to understand the level of depth they need to bring to their inventory. The five principles articulated in the guidance are relevance, completeness, consistency, transparency, and accuracy and its no coincidence that relevance is listed first.

The fact that relevance is the first principle listed in the Scope 3 standard reinforces the point that the purpose of the inventory development process is to help companies understand their value chain impacts and use this information to make informed decisions in choosing the most impactful emissions reduction opportunities. Despite the inherent complexity in the process, the Scope 3 standard is designed for usability with the intent to provide a tool to help companies understand and act upon what matters (what is most relevant) from a GHG perspective.