Many businesses are endeavoring to lower their GHG emissions and keep track of their progress. Analyzing energy consumption across different areas of your company, such as offices, factories, storage facilities, and transportation, is a significant task. Yet, it’s just the beginning, the real effort and business benefits arise when you focus on Scope 3 emissions that are generated outside of your company’s premises. These emissions, often referred to as carbon emissions, result from activities in your extended supply chain. The impact of these Scope 3 emissions varies by industry and business model, but often, a substantial part of emissions come from upstream suppliers and raw materials. 

The regulations regarding Scope 3 emissions reporting are quickly evolving, Europe has implemented the Corporate Sustainability Reporting Directive (CSRD) that will gradually introduce Scope 3 disclosures for companies that meet certain standards. 

Understanding Scope 3 Emissions 

Scope 3 emissions are both an elusive and an essential part of greenhouse gas (GHG) inventory. Unlike scope 1 emissions which are direct GHG emissions from a company’s operations and scope 2 emissions that come from purchased electricity, scope 3 emissions are all the indirect GHG emissions that occur in a company’s entire value chain. This means that it includes emissions from the extraction and production of purchased materials and fuels, transport-related activities, and even the disposal of sold products.  

Even though it may seem overwhelming, understanding and reducing scope 3 emissions is crucial if we want to achieve a more sustainable future. As a result, more companies are now tracking, reporting, and reducing their scope 3 emissions to have a clear picture of their environmental impact and work towards carbon neutrality. 

Upstream & Downstream Complexity 

To better understand the complexities associated with Scope 3 emissions, it’s essential to distinguish between upstream and downstream activities. The table below provides a comparison of these two categories: 

	Upstream Emissions	Downstream Emissions
Definition	Emissions from activities related to the production of goods and services purchased by the company.	Emissions from activities related to the products after they leave the company’s control.
Examples	Extraction and production of raw materials; manufacturing processes performed by suppliers; business travel; waste generated in operations.	Use of sold products; end-of-life treatment of sold products; investments; franchise operations.
Data Collection Challenges	Requires detailed data from multiple suppliers; often lacks transparency and standardization.	Requires data on product usage and lifecycle impacts; often difficult to obtain reliable end-user information.
Impact on Carbon Footprint	Significant contributor to overall emissions; often represents a large portion of a company’s carbon footprint.	Also, a substantial portion of total emissions; critical for understanding full environmental impact.

Understanding these differences can help companies prioritize their efforts in managing and reducing Scope 3 emissions, creating comprehensive strategies for both supply chain and product lifecycle emissions. 

Scope 3 Emissions For CSRD: Why It Matters 

According to CDP calculations [1], around 75% of a company’s total emissions can be attributed to Scope 3 emissions. Other reports indicate that the world’s eight key sectors (Food, Construction, Fashion, Fast-Moving Consumer Goods, Electronics, Automotive, Professional Services and Freight) [2] are responsible for 50% of global greenhouse gas emissions. These findings also present that indirect emissions (Scope 3) from heavy energy-consuming sectors are escalating at a quicker pace compared to their direct emissions (Scope 1 and 2) [3]. 

In the face of rising global demands for compulsory reporting on climate issues, businesses are under greater strain to confront and disclose their Scope 3 emissions. This pressure is not solely regulatory; there is also a growing expectation from investors, consumers, and other stakeholders for businesses to demonstrate their commitment to sustainability. 

Pressures From Stakeholders 

• Investors: Investors are increasingly prioritizing environmental, social, and governance (ESG) criteria in their investment decisions. They are pushing companies to enhance transparency and accountability through comprehensive reporting on Scope 3 emissions. Failure to address these emissions can lead to reduced investment attractiveness and potential divestment. 
• Regulatory Bodies: Governments and international organizations are tightening regulations around carbon emissions, particularly Scope 3 emissions. The introduction of frameworks like the CSRD in Europe forces companies to disclose their extended carbon footprint, ensuring compliance and avoiding penalties. 
• Suppliers: Suppliers are integral to a company’s value chain and heavily influence its overall carbon footprint. There is increasing pressure on suppliers to adopt sustainable practices and provide transparent data on their emissions. Companies are now rigorously assessing their suppliers’ sustainability credentials and collaborating to minimize upstream emissions. 
• Customers: In 2022, a shift towards greener buying habits became evident worldwide. Specifically, over a third of customers reported a slight alteration in their shopping behavior, while nearly 30% stated a substantial increase in their purchase of eco-friendly products compared to five years ago [4]. Thus, consumer awareness regarding environmental impacts has risen substantially. Customers are demanding greener products and are willing to support companies committed to sustainability. 
• Non-Governmental Organizations (NGOs): Activist groups and NGOs are actively campaigning for lower carbon footprints across industries. They play a watchdog role, scrutinizing companies’ environmental claims and performance, and pushing for more stringent Scope 3 emissions monitoring and reductions, often through public awareness campaigns and direct engagement. 

Understanding these stakeholder pressures highlights the multifaceted challenges companies face regarding Scope 3 emissions. 

The Connection Between Scope 3 Emissions And CSRD 

The initial CSRD guidelines, implemented by the ESRS on July 31, 2023 focus on the substantial effects businesses have on individuals, nature, and their operations within the value chain. It highlights environmental issues including energy efficiency, carbon emissions, and the related dependencies. In addition, it underscores social factors such as job conditions, human rights, and equal opportunities within the value chain. 

The updated regulations, set for implementation on June 30, 2024, seek to enhance the reporting process by focusing on the depth and range of reporting, and highlighting the importance of Scope 3 emissions in determining social and environmental effects. 

By requiring companies to measure and report on Scope 3 emissions, the CSRD aims to provide a more comprehensive and accurate picture of a company’s environmental footprint. This, in turn, empowers investors, regulators, and other stakeholders with the information needed to make better-informed decisions regarding sustainability. Moreover, it encourages companies to take proactive measures to mitigate their entire value chain’s emissions, fostering innovation and collaboration across industries to reduce global carbon footprints. Thus, the connection between Scope 3 emissions and the CSRD is pivotal in driving holistic and transparent sustainability practices, ultimately contributing to global environmental goals. 

Align Supply Chains With CSRD 

In light of these stringent regulations and increasing stakeholder pressures, companies need effective tools to manage and report their Scope 3 emissions. This is where our solution comes into play.  

AERA by Seneca ESG offers a robust platform designed to help businesses navigate the complexities of ESG reporting, particularly focusing on Scope 3 emissions. With AERA, companies can seamlessly integrate data across their entire value chain, providing transparency and accuracy in their sustainability disclosures. This tool not only assists in complying with the CSRD guidelines but also empowers companies to make informed decisions that drive sustainable practices and reduce their environmental impact. 

Discover how AERA can streamline your ESG reporting and enhance your sustainability efforts. Learn more about AERA here and take the first step towards a greener future. 

References: 

[1] https://cdn.cdp.net/cdp-production/cms/guidance_docs/pdfs/000/003/504/original/CDP-technical-note-scope-3-relevance-by-sector.pdf?1649687608 

[2] https://www3.weforum.org/docs/WEF_Net_Zero_Challenge_The_Supply_Chain_Opportunity_2021.pdf 

[3] https://iopscience.iop.org/article/10.1088/1748-9326/aae19a 

[4] https://www.statista.com/statistics/1377869/global-shift-to-buying-sustainable-products/