What emissions are my company responsible for?
The far-reaching impacts of corporate activity mean that companies influence a wide range of greenhouse gas (GHG) emitting activities across their value chain, many of which are not obviously related to a company’s primary business.
To help companies define the boundaries of the greenhouse gas emissions they are responsible for, the World Resources Institute Greenhouse Gas Protocol has defined three categories: Scope 1, Scope 2, and Scope 3. The GHG Protocol categorises emissions based on how directly they relate to a company’s activities. The Scopes also reflect how much control a company has over certain types of emissions.
Scope 1 covers direct emissions from sources owned or controlled by the company. This includes emissions from company-owned or operated facilities and vehicles.
Scope 2 covers emissions from the generation of electricity purchased by the company.
Scope 3 refers to all other indirect emissions within a company’s value chain.
Despite being less directly related to a company’s main activity, these emissions can make up a significant portion of a company’s impact on the climate. Scope 3 can be broadly grouped into two categories:
Upstream emissions from activities involved in the creation of a company’s services or goods. This includes emissions from employee travel and commuting to work, and emissions in the supply chain from the production of purchased goods and services the company uses or sells.
Downstream emissions occur from the distribution or use of a company’s goods including the disposal of products. If a product indirectly consumes energy during use, for example because it needs to be heated by another appliance, including these emissions in Scope 3 is optional.
To illustrate these different Scopes, here is an example for a fictional coffee manufacturer:
Understanding and tracking Scope emissions
Why are emissions categorised in this way?
The GHG Protocol is a well-recognised and accepted method of categorising and calculating emissions and reporting requirements often refer to these emission categories.
Calculating emissions based on the three categories presented in the GHG Protocol can help a company identify key sources of emissions and areas where the greatest emission reduction is possible.
Additionally, in the UK the Streamlined Energy and Carbon Reporting requirements are aligned with the GHG Protocol’s emissions categories.
Why should I ensure that my company tracks its Scope 1, 2 and 3 emissions?
The effective measurement of greenhouse gas emissions enables a company to understand the activities that are generating emissions, investigate the solutions that can eliminate or reduce them, and track their emissions reductions.
Climate change poses serious material financial risks to companies. In addition to risks from the physical effects of climate change, highly emissive practices expose a company to regulatory and reputational risks. Without measuring Scope 3 emissions, a company will not be able to understand and mitigate risks across its entire value chain.
Understanding the material risks caused by emissions within a company’s supply chain is essential to making informed decisions that promote the company’s success. A full picture of a company’s emissions profile therefore provides a better platform from which directors can fulfil their fiduciary duties.
Keeping track of Scope 1, 2 and 3 emissions will allow a company to determine where to focus effort to have the biggest impact – for some companies that might mean switching to low-carbon energy sources, for others it might require engagement with suppliers to reduce emissions.
Many voluntary and mandatory disclosure and reporting requirements require accurate assessments of Scope 1 and 2 emissions. The Task Force on Climate-related Financial Disclosures (TCFD) requires the disclosure of risks associated with Scope 1 and 2 emissions, and Scope 3 if appropriate. These sorts of requirements are expanding, so an accurate picture of Scope 3 emissions may become vital for compliance with a number of standards in the future.
What action can I take as a non-executive director?
Board members should first gain a clear understanding of the different categories of emissions to enable informed decision-making regarding emissions reduction strategies and investment. As well as the overall strategy of the company.
When discussing climate issues, non-executive directors (NEDs) can use this understanding to scrutinise their company’s progress toward climate goals and, if appropriate, press for emissions reductions in other areas to be part of these goals.
NEDs should ask whether, after accounting for greenhouse gas emissions in all Scopes, the company has used this information and undertaken risk assessments across its value chain.
After ensuring that their company has accurately accounted for emissions within Scopes 1 and 2, directors should advocate for and support action that reduces indirect emissions. This may mean working with suppliers to be less carbon intensive (upstream) or developing a strategy to address how consumers use and dispose of their products (downstream).