This instalment of our series on calculating Greenhouse Gas (GHG) emissions delves into Scope 3 emissions.

Entities subject to the new mandatory climate reporting regime in Australia will be required to disclose their GHG emissions, including Scope 3. Furthermore, for an entity to create an effective emissions reduction plan, it must understand what emissions it is trying to reduce and where these come from, both within the entity and across its value chain. Typically accounting for 80% to 90% of an entity’s overall emissions, Scope 3 emissions have a significant impact on its carbon footprint.

What are Scope 3 emissions?

Scope 3 emissions are those emissions not already covered in Scope 1 and Scope 2 that an organisation is responsible for but which are generated by activities outside its direct control, for example, emissions generated by suppliers during the manufacturing of products purchased by the organisation. Although the organisation itself did not emit these gases, it assumes responsibility for them due to its purchase and utilisation of the products.

Scope 3 emissions are divided into two categories:

  • Upstream emissions occur within an organisation’s supply chain and include all activities that take place before a product or service reaches the organisation. For example, a supermarket selling fruit and vegetables will need to account for emissions from processes such as planting and cultivation, the use of fertilisers and pesticides, the operation of machinery for planting and harvesting, temperature control in greenhouses, packaging and transportation – all of which are undertaken by its suppliers.
  • Downstream emissions are indirect emissions generated after a product or service leaves an organisation’s premises. These include emissions associated with the distribution, storage, usage and eventual disposal of goods and services. For instance, in the case of a supermarket, downstream emissions for fruit and vegetables sold would encompass transport to consumers’ homes, energy used for refrigeration and food preparation and disposal of food waste.

Scope 3 categories

The GHG Protocol Standards outline fifteen Scope 3 categories.

The eight upstream emission categories are:

  1. Purchased goods and services – goods and services purchased by the organisation including raw materials, professional fees and office supplies
  2. Capital goods – purchased capital items including plant and equipment
  3. Fuel and energy related activities – extraction, production and transportation of fuels not already captured in Scope 1 or 2
  4. Upstream transportation and distribution – transporting materials from suppliers to the business by third party logistics providers
  5. Waste generated in operations – disposal and treatment of waste generated by the organisation
  6. Business travel – transportation for business-related activities including flights, taxis and hotel stays
  7. Employee commuting – employee travel to and from work
  8. Upstream leased assets – operation of assets leased by the organisation

Downstream emissions include seven categories being:

  1. Downstream transportation and distribution – transportation of sold products from the organisation to end consumers
  2. Processing of sold products – further processing of sold intermediate products by customers
  3. Use of sold products – emissions generated during product use including from electricity or fuel consumption
  4. End of life treatment of sold products – emissions generated from the disposal, recycling or treatment of products at their end of life
  5. Downstream leased assets – operation of assets leased to customers
  6. Franchises – operation of franchises not owned by the organisation
  7. Investments – emissions from the activities of projects financed by the organisation

Organisations can determine which categories to include in their boundary by assessing factors such as relevance to stakeholders, data availability and accuracy, compliance with regulations and stakeholder expectations, materiality and alignment with business goals.

For example, a supermarket might exclude processing of sold products if it primarily sells finished goods and exclude franchises or investments if it lacks substantial franchise operations or investments. Any Scope 3 categories that are excluded must be disclosed along with justification for the exclusion.

Data collection

To calculate scope 3 emissions, the following types of data are needed:

Spend data

Emissions can be estimated based on the dollar amount spent on goods and services. For example, this includes the cost of purchasing raw materials or total expenditure on airfares and hotel accommodation.

Activity data

This involves gathering information on the quantity or mass of goods and services consumed. Examples include the number of product units acquired, weight of raw materials purchased, kilometres travelled per mode of transport, the number of hotel nights stayed or the number of flights taken.

Actual emissions information from suppliers

This is carbon emissions data provided directly by your suppliers based on their own carbon assessments, offering the most precise and accurate data.

To calculate emissions, spend data and activity data are multiplied by corresponding emissions factors. These factors incorporate estimated emissions generated by all activities necessary to deliver a product or service to your organisation.

There are several methods for calculating emissions across different Scope 3 categories. The GHG Protocol Scope 3 Standard and the Scope 3 Calculation Guidance contain detailed guidance for entities calculating their Scope 3 inventories.

Tackling Scope 3 emissions

Measuring Scope 3 emissions can be arduous for many organisations due to challenges in obtaining reliable data and the need to place reliance on estimations. However, prioritising which sources of Scope 3 emissions to focus on, formulating an achievable plan, and utilising a carbon accounting software like Sumday to measure and track emissions, will support an organisation to measure, report and hopefully reduce their Scope 3 emissions.

Creating a complete picture of your carbon inventory, including the sources of emissions created during the production of a product or delivery of a service, as well as its subsequent consumption, is a good place to start. This helps identify which business activities contribute the most to your carbon footprint and where meaningful mitigations can be made. This is known as setting your baseline.

Once you have calculated and categorised your emissions, you can bring the relevant internal stakeholders and departments together to assist in developing strategies to reduce the emissions intensity of the operations. Start with the data that is available for each relevant upstream and downstream source. You may identify the areas of highest emissions as the areas to focus on, or alternatively, areas with the quickest and easiest payoff. For example, employee commuting and business travel might be easy places to start as the data will be readily available.

With time, processes can be refined to streamline data collection across your organisation and improve the quality of data collected. Communication between internal stakeholders such as finance and procurement teams will be important to facilitate collaboration and innovation to promote efficient and accurate data management.

Engagement with suppliers is a critical part of reducing emissions. If suppliers can provide you with their actual emissions data for purchased products or services, this will assist your organisation in taking strategic decisions to reduce Scope 3 emissions. You may choose to map your supply chain to identify hotspots and then engage with those suppliers to understand their climate maturity and how you could collaborate to reduce emissions within the supply chain. Starting this conversation with key suppliers may be challenging at first, however continuous dialogue can aid in bringing suppliers along the journey.

Let us assist you on your journey

At HLB Mann Judd we are well-positioned to assist you with your carbon accounting needs as we have seamlessly integrated audit ready carbon accounting practices into our existing services. Get in touch with your local HLB Mann Judd contact to learn how we can assist you on your journey.

Article was authored by Rebecca Zuromski, Associate Director at HLB Mann Judd Adelaide.
This article was first published in Issue 22 of The Bottom Line.