To move toward a net zero carbon future more businesses are disclosing their Greenhouse Gas (GHG) Emissions into 3 different categories. These categories being Scope 1, 2 and 3 which applies to direct and indirect emissions in a company’s own operations and in their value chain. A value chain being all the activities a business does to produce a product or service.

New regulations, such as the EU taxonomy regulation and the Sustainable Finance Disclosure Regulation (SFDR), are requiring companies to disclosure their ESG risk. Many businesses are using this format of Scope 1, 2 and 3 emissions to create transparency in their company. When assessing a company’s ESG risk, it is becoming increasingly important to take all three scopes into account.

What is Scope 1, 2 and 3 emissions?

• Scope 1 – covers the direct emissions produced by the company’s operations. E.g., the direct emissions of an oil-refinery.

• Scope 2 – covers the indirect emissions produced by the company. E.g., the emissions produced by the generation of electricity needed to run the oil-refinery.

• Scope 3 – these emissions are not produced by the company, but they may be indirectly responsible for emissions. E.g., emissions from the company’s value chain, such as purchased goods, business travel or investments

Scope 1 & 2 emissions are easier to report on, as they have clear and measurable metrics that closely impact the company. Most businesses can produce definite reports on their annual Scope 1 & 2 emissions. Using the oil-refinery example, this company can measure the emissions they produce and request reports on emissions produced by the companies that supply them with electricity.

Why scope 3 is difficult to calculate

When we start looking at the Scope 3 emissions of an oil-refinery it can become more intricate. For example, analysts need to calculate the emissions associated with the production of goods the company in question has purchased. Oil-refineries need barrels to transport their oil, if these barrels were purchased the emissions produced to make the barrels would fall into the oil-refineries Scope 3 emissions.

As you can see, Scope 3 can become very complex and creates an ever-growing spider web of emissions, that aren’t directly produced by the company. The company may be responsible for these emissions through the purchasing of goods or investments.

The importance of reporting on Scope 3 

Scope 3 emissions do have the power to create an exponential spider-web down a company’s value chain. For a lot of companies, the majority of their GHG emissions are not in their own operations and a large sum of their carbon footprint is in their Scope 3 emissions. Therefore, by measuring Scope 3 emissions we can get a deeper insight into the ESG risk of a company.

Reporting on Scope 3 emissions will not only enable analysts to measure a company’s carbon footprint more accurately, but it will also be advantageous for their business. Here are three advantages to reporting on Scope 3:

• Enables companies to identify energy risk in their supply chain.
• Allows businesses to view which of their suppliers are following through with sustainability protocols.
• Get a deeper view at emissions hotspots in the supply chain to improve efficiency.

How can C2 help?

With C2’s new platform we provide an in-depth ESG risk analysis that will assess a company’s supply chain. By identifying risk in a company’s supply chain, we allow analysts to understand and calculate the Scope 3 emissions in their supply chain. This will help our clients streamline decision making, by giving them an ESG score, so that they can make steps to improve their carbon footprint.