The scope 3 emissions puzzle
Prioritising your emissions
You can’t manage what you don’t measure, and for most organisations, scope 3 greenhouse gas (GHG) emissions are their biggest blind spot. These emissions sit outside a business’s direct control, but they’re key to understanding your climate impact, your transition plan, and your risks and opportunities.
While scope 1 and 2 emissions are relatively straightforward to measure, and most organisations are already reporting against these categories, scope 3 is where it can get more complicated. Sometimes, the most challenging part is knowing where to start, which scope 3 categories should you be measuring?
The Greenhouse Gas Protocol defines scope 3 emissions as all other indirect emissions (i.e., not included in scope 2) that occur within a company’s value chain. These include everything from purchased goods and services to business travel, waste, financed emissions and the use of sold products. Scope 3 emissions typically account for the majority of a firm’s total emissions, and yet they are the least reported, until now. Under frameworks like the UK Sustainability Reporting Standards (SRS), other International Financial Reporting Standards (IFRS) aligned standards, and the EU Corporate Sustainability Reporting Directive (CSRD), scope 3 is no longer optional but a mandatory reporting requirement. Companies must disclose all scope 1, 2, and 3 emissions.
Deciding what matters most
This leaves organisations wondering what these standards mean by ‘all scope 3 emissions’, but the key piece of information is that organisations must disclose which categories are excluded from their scope 3 reporting and on what basis this can be justified.
To determine which scope 3 categories to report on, firms should conduct a materiality assessment. This helps companies prioritise data collection and calculation efforts on the categories that have the most significance.
However, how do you define significance? First, you need to map the value chain to identify all scope 3 activities. This involves listing all activities in the firm’s value chain and mapping them against the scope 3 categories. Once this is done, you’re ready to assess materiality. There is no single way to do this, so we suggest that organisations use a combination of the following criteria:
Estimate your firm’s emissions across each category using proxy data, industry averages, or sample data. Even rough estimates can help you rank categories by magnitude.
You can use spending data as an estimation for emissions. For certain categories, such as purchased goods and services, the cost involved can be a good proxy for the tonnes of carbon associated. Logically, the more money, the higher the emissions. However, this is not as accurate as the proxy emissions estimation outlined above, as something can cost little but have a huge environmental impact, and vice versa.
Firms may include an assessment of which scope 3 emissions they have influence over and can manage. There may be categories of scope 3 emissions that are small, but your company has complete influence over and responsibility to manage them, such as waste in operations (category 5).
These are often the easiest to manage and reduce, and may carry other sustainability impacts (e.g., plastic pollution) that matter to stakeholders. Focus on areas where you can make a meaningful impact and where reductions align with your business strategy.
Are you exposed to reputational, litigation, or regulatory risks through high-emitting suppliers or business activities? These categories may warrant prioritisation even if emissions are moderate.
Some industries have specific expectations and mandatory scope 3 categories. For example, financial institutions are expected to report on Category 15 (investments) under the IFRS framework. For insurers, insurance-associated emissions (IAEs) may be excluded, but if you are building a credible transition plan, you may still need to measure them. If you’re interested in how to calculate your IAEs, read more here.
While a lack of data does not justify exclusion, it can influence where you start. If good-quality data is readily available, it makes sense to measure it and build from there.
Most importantly, you must document your rationale
The GHG Protocol is clear that companies must account for all scope 3 emissions and disclose and justify any exclusions. That means the rationale for exclusions needs to be robust, especially if the calculations and process are subject to independent assurance. The process undertaken for the scope 3 materiality assessment should be clearly documented, alongside any decisions and rationale used.
Example scope 3 materiality grid
Measuring scope 3 emissions is more than just reporting
Link to your wider sustainability strategy
Your scope 3 materiality assessment does not sit in isolation. It can feed directly into your double materiality assessment, helping you identify where your most significant climate impacts lie, where your transition plan should focus, and help to identify and assess your risks and opportunities.
Data quality
Scope 3 calculations, for many of the categories, rely on obtaining data from third parties, and firms are unlikely to always be able to secure reliable information. That is why it is essential to understand your data:
- be transparent about data sources and assumptions
- identify data gaps and limitations
- use proxy data only where needed.
Read more about data quality and management information here.
Turn scope 3 complexity into strategic advantage
Scope 3 emissions may be the hardest to measure, but they are also the most revealing. They expose the true scale of your climate impacts, risks, and opportunities, the resilience of your value chain, and the credibility of your transition plan. However, you need to start where it matters most, through a scope 3 materiality assessment.
Through our practical and experienced team, Crowe continues to support our clients in setting their own agenda to address rapidly changing sustainability and climate-related reporting requirements.
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