The Manufacturer Editor Joe Bush speaks to Deloitte’s Mike Barber to discuss the importance of measuring Scope 3 emissions.
Scope 1, 2 and 3 is a way of categorising the different kinds of carbon emissions a company creates in its own operations, and in its wider value chain. For many businesses, Scope 3 emissions account for the majority of their carbon footprint, however, they are far more complex and difficult to measure and manage.
What are Scope 1, 2 and 3 emissions?
MB: Scope 1 emissions result from an organisation’s own emissions of carbon dioxide or their equivalents. For example, burning gas in a boiler to heat a building, or the fuel that an organisation’s own distribution fleet uses. Scope 2 is about the carbon dioxide that’s implicit in the electricity that an organisation has bought from a third-party.
Depending on where you are in the world, your default supply of electricity might be very green, if you’re in Iceland or the Nordics for example. However, it might be very dirty if you are surrounded by coal fired power stations. Of course, in most markets you can choose what type of electricity you procure, which directly offers a way of managing your Scope 2 emissions. Scope 3 is where it gets tricky.
Scope 3 is broken down into 15 different categories of emissions, but fundamentally it looks at the broader value chain in which an organisation operates – the carbon implicit cost of work-related travel of employees for example. It’s the carbon implicit in the products and services an organisation buys and also in the use of the products and services that a company offers.
For example, the Scope 3 emissions of a lift manufacturer will include the CO2 embodied in the metals of the manufacturing process that was required for the manufacture of the lift, and those involved in bringing the lift to its point of installation. But also, it will be the CO2 used during the lifetime of the lift as it takes people up and down the floors of the building.
Are Scope 3 emissions the most important in terms of achieving net zero?
Scope 3 emissions represent the biggest challenge, and numerically they are often several times bigger than Scope 1 and 2. If you looked at an organisation’s total carbon footprint, typically Scope 3 would account for 80-90% of the emissions, because there’s such significance to the carbon, both in the underlying supply chain but also the future use of the manufactured products. They are very significant, but they are also different to Scope 1 and 2 because they are harder to measure, as in many cases, they lie outside the direct control of the manufacturer.
In the example for Scope 2 emissions, where a manufacturer has a choice of where to procure its energy, it’s pretty easy to determine whether that is going to be high carbon, dirty electricity or renewable clean electricity. It can be a lot harder to influence your supply chain via Scope 3 emissions. It can be done, but it takes time and requires a different way of thinking. In addition, you may have designed a product that’s best in class and capable of low energy usage, and therefore capable of having a low Scope 3 carbon footprint.
However, once that product has been sold and placed in the hands of the customer, how they then use it is down to them, not you. So, the concept of the value chain in which a manufacturer finds itself stretches both above and beneath the role of the organisation, and increasingly organisations are trying to improve both parts of that landscape.
What are the challenges of measuring Scope 3 emissions?
The challenges are around supply chain transparency and visibility, and the project set criteria that an organisation puts in place prior to embarking on a new/ renewal supplier arrangement or a new CAPEX programme. It’s also about offering the opportunity to build different value chains and ecosystems. For example, one of the trends that we’re currently hearing about is circularity.
How can the component parts of a product be designed, manufactured and used in a way that either hyper-extends its product life or offers a way of returning elements of the product back into future manufacturing processes? Going back to the example of a lift manufacturer, they normally have a continuing involvement in the maintenance and service of the lifts they supply. As such, they also have a lifetime interest in the product.
That is beneficial to the customer, who’s paying for the electricity to move the lift, plus the costs associated with repair, servicing and the replacement cycle. So, Scope 3 really offers an opportunity to think about lifetime costs in its fullest sense – not just financial, but also the carbon lifetime costs. People are becoming increasingly more aware of carbon, and in the future, it will have an explicit cost associated with it. Therefore, factoring that into the economic decisions that people are making now, becomes something that’s absolutely vital to resilience and ultimately, competitive advantage.
Due to their challenges, have Scope 3 emissions traditionally been a low priority, and are they only now (thanks to emerging technology) being paid more attention?
The short answer is yes. As organisations began to build more sophistication around environmental, social and corporate governance (ESG), Scope 1 and 2 is obviously where most started out. As they started to look at Scope 3, the first element they tended to pick out was business travel, which for some organisations can be significant.
Now we’re seeing organisations getting increasingly sophisticated about seeking to understand their Scope 3 emissions, from the perspective of the supply chain and use of products. There are also other external moves that are helping that focus. For example, the Science Based Targets Initiative (SBTI) previously allowed organisations to set net zero targets that focused exclusively on Scope 1 and 2 emissions. Now, if organisations want to engage with the SBTI, they’re expected to set targets that include Scope 3 footprints.
What is changing around Scope 3 reporting requirements? What do manufacturers need to do/be aware of?
At the moment, the explicit requirements are less arduous than you might think, simply because of the 15 different categories of Scope 3. Organisations choose which of them are relevant to report, and that relevance decision tends to be a mixture of what is material (i.e., what is quantitively significant to the organisation), and what data exists in order to make the assessment of materiality and then enable the reporting.
There’s an interplay between the challenge of doing this and deciding where to focus, and then being able to focus, based on the tools and data sources available. So, over time, that’s becoming more possible, but the cold, hard regulation behind it is still developing. What we are seeing is an increasing level of interest from the providers of finance, i.e., investors, banks, etc, who are asking more questions of organisations around their carbon footprint and their ability to understand and manage future opportunities and risks associated with climate change.
There is a need for more information and there’s quite a lot of regulation that is going to drive the behaviour of providers of finance, and that will inevitably translate into the questions they ask of corporates before they agree to renew or extend financing.
How can businesses go about gaining more control over Scope 3 emissions?
You’ve got to start by understanding where the material sources of Scope 3 emissions will be. You can do that by looking at the 15 different categories, and then working through them and identifying the hotspots to focus on. There’s a lot of good data out there – some of it is publicly available, some you need to subscribe for, but that will enable you to do some benchmarking and suggest approaches of where to focus. Once you know that, which is the easy part, you can start to explore measurement in your own right and think about the levers the organisation has to pull in order to start managing carbon footprints. An organisation should start to think about how it might want to configure its place in the value chain differently in the future. How might new thinking and data help build relationships with suppliers, customers and clients, to mutual advantage and tackle this issue at the same time?
How critical is collaboration up and down the supply chain?
Fundamentally, a large part of the world has realised that carbon dioxide is a pollutant. It’s something that is currently not priced outside of the regulatory industries, and consequently, we emit far too much of it. And in the future, we’re going to have to make a lot less, fundamentally because implicitly or explicitly, we’re going to have to pay for it. So here’s the choice; either we work together mutually to reduce the amount of carbon, and therefore reduce the amount of carbon tax that a value chain in industry and its consumers pay, or we don’t.
But if we don’t then there’s an additional cost that’s going to have to be borne somewhere else. Whether that’s in the supply chain, by the manufacturer, or by its clients, someone will be bearing that additional cost and that’s bad news for everybody. Because it either means the supply chain is less resilient, the manufacturer is less profitable, or customers are buying less output.
So, recognise the challenge as an opportunity to think differently. Saving energy is often consistent with reduced costs. If you’re having longer-term relationships with your supply chain and with your customers, those things are consistent with having more value in those relationships. So get ahead of the challenge, and the opportunity, and make it work to your advantage.
Is technology and digital transformation changing the landscape of Scope 3 emissions?
There’s far more automated reading of data going on now. There’s the opportunity to use artificial intelligence to optimise processes and distribution chains, and to take advantage of low energy routing and decision making. However, there’s also the ability to crunch this data, aggregate it, and start creating coalitions of the willing who come together to try and share data.
There are a number of industry initiatives, most of which are informative, where organisations are coming together to solve what’s seen as a neutral problem. There are also a number of platform providers, from very large enterprise wide software vendors to more focused technology and software organisations, that are either enhancing their existing platforms or building out new ones that will help collect workflow and visualise data in the space – there’s lots going on.
The 15 categories of Scope 3 emissions
- Purchased goods and services
- Capital goods
- Fuel and energyrelated activities
- Upstream transportation and distribution
- Waste generated in operations
- Business travel
- Employee commuting
- Upstream leased assets
- Downstream transportation and distribution
- Processing of sold products
- Use of sold products
- End-of-life treatment of sold products
- Downstream leased assets
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