The importance of indirect emissions - scope 3: measure, set objectives and report

25 October 2024

Circular Economy, tecnologia, Focus On

In order to reduce the environmental impact of business processes it is necessary to measure the emissions generated along the entire supply chain by addressing the challenges they present to reap the advantages on the path towards decarbonisation, as described in the new report "Indirect Emissions Scope 3 - Measurement, target setting and reporting" created by Intesa Sanpaolo Innovation Center in collaboration with the Department of Business Sciences of the Bologna Business School

Global warming is one of the most intensely debated topics of recent decades, since it is a phenomenon that concerns everyone in their daily lives with consequences that are more and more visible and tangible, affecting all ecosystems.Per ridurre l’impatto ambientale dei processi aziendali è necessario misurare le emissioni generate lungo tutta la supply chain affrontando le sfide che presentano per coglierne i vantaggi nel percorso verso la decarbonizzazione, come descritto nel nuovo report “Le Emissioni indirette Scope 3 - Misurazione, target setting e rendicontazione” realizzato da Intesa Sanpaolo Innovation Center in collaborazione con il Dipartimento di Scienze Aziendali della Bologna Business School.

Why it is essential to reduce indirect emissions from companies

We know that to actually reduce emissions and fight global warming by containing the temperature increase to within 1.5°C above pre-industrial levels as established with the Paris Agreement in 2015, thus avoiding fatal consequences, it’s necessary a change that involves the whole society at an economic level, as well as political, technician and of governance. A change that clearly must be radical to achieve another ambitious EU objective, namely achieving climate neutrality (net-zero) by 2050 as defined in the Green Deal launched by the European Commission.

If compared to direct climate-changing gas emissions from companies (Scope 1 and 2) is now there greater awareness, the measurement and the reporting from the emissions Of Scope 3 it's a theme of growing importance for all companies - including SMEs -, as it represents a crucial step towards a sustainable and responsible management of the environmental impact of company processes.

The classification of Scope 1, Scope 2 and Scope 3 emissions: origin, meanings and differences

This classification of emissions in Scope 1, 2 and 3 originates from Greenhouse Gas Protocol Initiative, i.e. a partnership between businesses, non-governmental organizations, governments and other relevant actors, in collaboration with the World Resource Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), founded in 1998 and based in Geneva. The GHG protocol provides the most used greenhouse gas accounting standards, and is designed to help businesses build an inventory of emissions. There first classification was between direct and indirect emissions; afterwards the emissions were categorized in Scope 1, Scope 2 e Scope 3.

After determining its organizational boundaries, the company must identify the emissions associated with its activities: emissions Scope 1 they are those produced by internal company activities and over which the company has control such as industrial production processes and energy production, but also the emissions of fleet vehicles; emissions Scope 2 include indirect greenhouse gas emissions arising from energy purchased the acquired, such as electricity, steam, heat or cooling, generated off-site and consumed by the business; Scope 3 emissions, finally, are the result of activities originating from assets not owned or controlled by the organization that prepares the financial statements, but that the organization indirectly impacts along its value chain.

What are Scope 3 indirect emissions, how are they generated and why is it difficult to measure and report them

A transition that implies inevitably a new and broader awareness of the negative impacts generated throughout the supply chain, as Scope 3 emissions are indirect ones generated along the entire value chain, that includes activities such as the purchase of goods and services, travel for business trips, the use and end of life cycle of products, as well as external transport in its entirety.

The Scope 3 indirect emissions, too often overlooked, actually in most cases represent the largest "part" of the carbon footprint overall of companies. For example, emissions Scope 3 accounts for almost 90% of overall carbon dioxide emissions for a manufacturing company.

However, despite their relevance and the need to reduce them drastically in an increasingly rapidly shrinking time window, the Scope 3 indirect emissions measurement process is particularly difficult and presents several critical issues, mainly due to the complexity and numerousness of the sources and counterparts involved.

The objectives of the Report “Decarbonizzazione di imprese ed ecosistemi industriali. Stato dell’arte e sviluppi futuri”

From this perspective, the Report “Scope 3 indirect emissions - Measurement, target setting and reporting” created within a collaboration between Intesa Sanpaolo Innovation Center in the field of activities related to Climate Change and decarbonisation and the Department of Business Sciences of the Bologna Business School - whose first result was the Report "Decarbonization of businesses and industrial ecosystems. State of the art and future developments” -, aims to delve deeper into some of these challenges and analyzes the state of the art in measurement and reporting processes from the Scope 3 emissions.

What are the main challenges companies face regarding Scope 3 emissions

Among them challenges main issues that companies (especially small and medium-sized ones) have to face, he reports if focus in particular on five withholdings priorities:

- The data availability and reliability, as obtaining accurate and complete data from numerous sources throughout the value chain is particularly difficult. In fact, many Scope 3 emissions come from external suppliers, customers and even from the use that consumers make of the products, evidently making it difficult to collect precise and timely data.

- The scope of company activity, because determining which emissions to include and where to draw the computational boundaries is a significant challenge. Indeed, Scope 3 emissions cover a wide range of upstream and downstream activities, making it particularly complex to define a coherent framework for measuring them.

- The stakeholder involvement to collect data and ensure transparency along the supply chain requires considerable efforts. The cooperation and the collaboration between suppliers, clients and business partners, from this perspective are fundamentals, but on the other hand not always easy to obtain.

- The data quality and standardization, i.e. two factors that discount the variability in the quality of the data and the lack of standardized methodologies for calculating Scope 3 emissions, with the risk of hindering the comparability of the results.

- The technological limitations that may hinder accurate measurement. For example, data collection tools or software may fail to sufficiently capture or integrate data from different sources.

The strategic benefits for SMEs generated by measuring Scope 3 emissions

However, beyond the critical issues and challenges, for SMEs the measurement of emissions Of Scope 3 entails also numerous strategic advantages including:

- Anticipate future legal obligations reducing the risk of fines or compliance issues with the timely reporting requirements required of companies by a growing number of governments and regulatory bodies.

- Increase reputation and competitiveness, proving transparency and commitment in the reduction of emissions along the entire value chain. Consumers, business partners and investors are therefore increasingly sensitive to environmental issues, so choosing sustainable suppliers becomes a key criterion for many realities. Accurate reporting of emissions can also improve the company image and generate new business opportunities.

- Increase efficiency and reduce costs, as measuring Scope 3 emissions allows companies to identify inefficiencies along their supply chain or operational processes. Optimizing these areas can lead to significant cost reductions, both in terms of resource consumption and energy expenditure, improving long-term profitability.

- Facilitate access to new markets, because many large multinational companies ask their suppliers to provide information about their emissions - including Scope 3 data -, and the SMEs that adopt these practices can qualify to become partners of these large companies, paving the way for new market opportunities.

The importance of Scope 3 emissions for projecting companies towards a shared decarbonisation path

In such a complex and challenging context, it is fundamental that the businesses acquire the skills necessary to transform your business and align it with decarbonization objectives. The first step to doing so undoubtedly implies understanding the impact in terms of emissions.

The analyses and the reporting from the Scope 3 emissions also outline an overall picture of the position within an entire supply chain, with repercussions upstream and downstream of the company itself. It's one essential awareness to create a new development paradigm that involves all the actors towards a shared decarbonization path, also central to the competitiveness of the European Union as explained in the report entitled "The future of European competitiveness”, presented last September 9th to the European Commission by former ECB President Mario Draghi.