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Scope 3 emissions: why we need to report first, reward later

When it comes to the story of carbon accounting, Scope 3 is the silent character.

30 August 2022 | 2 min read
Megan Davis Kapil Kulkarni

Sustainability

Asia Pacific

Australia

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Scope 3 emissions are the indirect emissions (excluding purchased energy) generated along a company’s value chain. And they’ve typically taken a backseat to the Scope 1 and 2 emissions that are far easier to trace and count.

After all, it’s much easier for an organisation to monitor the direct emissions coming from its factory chimney stacks, or account for purchased electricity, than it is to measure those generated by the felling of trees (often in some far-off country) to create the paper that feeds the head-office printer.

Scope 3 greenhouse gas (GHG) emissions are harder to track accurately - and some have argued that trying only leads to double counting, as products move through the supply chain.

But by ignoring them, we are creating a plot hole in the story of decarbonisation.

Permitting carbon capture utilisation.png

Step 1: understanding the problem through reporting

To address the indirect emissions problem, we need to look at it in the right order. And the first step is committing to Scope 3 reporting.

As it stands, Scope 3 emissions are sometimes accounted for, sometimes not. And while work is being done to introduce accounting and disclosure standards - such as those developed by The International Financial Reporting Standards Foundation (IFRS) - Scope 3 policies are inconsistent, reporting is voluntary, and there's no one technical standard for reporting. Here in Australia, the National Greenhouse and Energy Reporting currently has mandatory reporting requirements for Scope 1 and 2 only, not 3. 

Creating a clear and consistent reporting process is where we need to focus

By helping companies get a complete picture of the emission profile of their operations – from raw materials and transportation to end of product life – we can understand the impact Scope 3 is having. We’ll get a more accurate picture of an individual business’ carbon footprint. And a clearer picture on a national and global scale.

Infographic defining Scope 1, 2 and 3 emissions. Scope 1: fuel combustion, company vehicles and fugitive emissions. Scope 2: purchased electricity, heat and steam. Scope 3: purchased goods and services, business travel, employee commuting, waste disposal, use of solid products, transportation and distribution, investments and leased assets and franchises.

Step 2: Reaping the benefits of natural market incentive

Once a company acknowledges the full scope of its emissions – 1, 2 and 3, then the market (customers, investors, stakeholders and communities) will know the full story. And markets can and will act on that information.

In a world that’s more environmentally conscious than ever before, big emitting brings significant reputational risk. Social licence to operate is challenged. Access to capital takes a dip. Profits fall.  

The market will provide many of the incentives needed to encourage organisations to do better. Companies are designed to make money, so they will react.

They’ll also be much better placed to take action. By undertaking the reporting, they will know exactly the scale of the problem that they’re dealing with. They can set measurable goals and targets and demonstrate to the market that they’re good corporate citizens.

The benefits will also flow down the supply chain. By innovating new emissions-reduction strategies, companies can influence others in the supply chain to reduce their footprint, too.

Inland Rail train carrying multiple shipping containers, Australia

Back to step 1

If we don’t report Scope 3, we risk incentivising practices that lead to carbon leakage – where organisations can make carbon someone else’s problem by moving their indirect emissions overseas.

We need a system that promotes a level playing field. Reporting will strengthen carbon policies around the world and lead to more accountable production decisions across the value chain.

The world is changing. Countries are exploring mechanisms, like import tariffs, to address different carbon and climate policies of trading partners. States are considering a range of nature-related disclosures as they try to combat the associated biodiversity loss.

The message being, it’s a good idea to get on board now. Our hope is that most organisations would want to reduce GHG emissions – and see the potential in full transparency.

Scope 3 - a golden opportunity to rapidly reduce carbon, globally

By not counting all the indirect emissions that go into business operations we are undermining the global effort to meet net zero targets.

Widespread mandates to report Scope 3 would make carbon reduction markets more global in focus. And this is what we need, as inputs and outputs are not bound by borders. 

A more global carbon reduction reality provides incentives for organisations to reduce their carbon footprint irrespective of local policy or legislation.

Acknowledging and accounting for Scope 3 emissions doesn’t have to be hard – it just needs to happen. Let’s start with knowledge. That might be incentive enough.