In brief: The GHG Protocol’s new Corporate Value Chain (Scope 3) Accounting and Reporting Standard

Posted on 29 February 2012

The GHG Protocol's new Corporate Value Chain (Scope 3) Accounting and Reporting Standard was published in October 2011 and helps companies focus their efforts to reduce scope 3 emissions- where before scope 3 emissions were referred to as 'everything else (after scopes 1 & 2)', we now have 15 clearly defined categories.

Read what our experts have to say about the new Scope 3 standard:

How many categories are there in the new GHG Protocol Scope 3 standard and how are these categories useful?

Dexter Galvin, Carbon Disclosure Project:
There are fifteen categories in the new scope 3 protocol. These fifteen categories enable companies to target their emissions accounting and reduction activities to fifteen clearly defined activities from upstream distribution and transportation to the emissions associated with the use and disposal of the products. This will ensure that businesses can now include scope 3 emissions into emissions reduction targets and they will have clear visibility on the level of ambition inherent in those targets.

Lara Greden & Sonny Masero, CA Technologies:
There are fifteen categories in the new GHG Protocol Scope 3 standard. One grouping of categories focuses on the goods and services a company or its employees consume in the process of doing business. These categories help a company identify the greatest areas of impact from the full course of business operations and include employee engagement activities:

  • Purchased goods and services,
  • Capital goods,
  • Fuel and energy related activities,
  •  Transportation and distribution,
  •  Waste generated in operations,
  •  Business travel,
  • Employee commuting, and
  • Leased assets.

The other grouping focuses on the lifecycle of producing goods and services, and is related to the GHG standard for Product Lifecycle Accounting and Reporting. These categories help a company focus on the areas of impact related to their specific products, but don’t require taking the assessment to the unit level of a product:

  • Transportation and distribution,
  • Processing of sold products,
  • Use of sold products,
  • End of life treatment of sold products,
  • Leased assets,
  • Franchises, and
  • Investments.

Which scope 3 category has received the most attention from companies in recent years?

Johannes Partl, PE International:
Purchased goods and services. This is where generally most of the impacts occur in the upstream value chain. This applies to almost all industries and is particularly dominant for those who 'assemble' rather than produce (often in e.g. electronics etc).

Alistair Blackmore, Credit360:
Traditionally the scope 3 category to receive the most attention from reporting organizations is that of Business Travel (category 6). The reasons for this are threefold;

  • High level of direct control – The emissions from business travel are amongst the most controllable by the reporting organization. This is because organizations are able to dictate travel policy by introducing schemes such as reduced air-travel or encouraging video-conferencing.
  • Ease of data collection – The emissions from business travel are also amongst the easiest to collect and calculate emissions. The primary data required can be collected from in-house departments who have access to reports including distances required for these calculations. In many cases, this will not require reporting organizations to contact suppliers or customers in the same way that other categories do.
  • Opportunity of employee engagement – The emissions from business travel are controllable by direct employee actions through their travel choices, so they are often a good opportunity for internal employee engagement.

The calculation of business travel has, for many organizations, been a very good introduction to the calculation of scope 3 foot printing, however in many organizations (especially non-service organizations) the emissions from Business travel may be much smaller than other categories, therefore collecting data on other scope 3 categories may present greater emission reduction opportunities.

Dexter Galvin, Carbon Disclosure Project:
Reducing emissions associated with business travel has been a target for many companies in recent years. This can be one of the easiest categories for a company to calculate, especially if business travel is consolidated into a single supplier. This has received a lot of focus in recent years because companies reduced the levels of business travel during the recent recession. Another key focus for companies has been the reduction of emissions in the supply chain. This is a huge area of opportunity for most corporations because between 40 - 60% of an average manufacturer's emissions lie beneath the surface in the supply chain.

Which of the 15 categories is the easiest for a company to calculate?

Lara Greden & Sonny Masero, CA Technologies:
The ease of calculations largely depends on two factors: the availability of source data and the data management system for handling the data and producing the calculations, reports, and KPIs (Key Performance Indicators). This cost of data management should be compared with the material impact of different categories. This form of cost benefit analysis will ensure that a limited budget for managing scope 3 emissions can be invested in the highest impact areas first, in a similar way in which a MAC (Marginal Abatement Cost) curve is used to evaluate the best investments to reduce CO2 emissions.

Any company starting on down the road for Scope 3 reporting should evaluate what categories are in scope in the first year and should be aware that there will be an expectation to broaden into other categories in future years as well as improving overall data quality.

Upon identifying the Scope 3 emissions that you will report, and explaining why any excluded categories are not part of your inventory, the calculation process proceeds with boundary setting, determination of base year, and identification of source data, including activity data and emissions factors.

For example, a Global 1000 company we work with made sustainability an integrated part of its business strategy from the start, including in how it worked with franchisees. The company provides benchmarks of performance to its franchises and owned locations, and at the same time, is able to calculate the Scope 1, 2, and 3 emissions from operations of each location. The company executes this strategy by educating management staff at each facility and sending out automated assessment questionnaires that ask site staff to provide information on energy, water, waste, implementation of environmental management standards, energy and water conservation projects, preventive maintenance projects, employee training, LEED certification and more.

The corporate sustainability and innovation management team uses the platform to assess the collected data and present an overall benchmark score back to each facility manager. The individual reports place the benchmarks in the context of how they compare to other similar facilities and they include recommendations on how to improve the score. All of this is automated through the use of technology, thereby achieving the company’s strategic approach to implement lean, efficient business practices for collecting data, assessing operations, and selecting projects with greatest alignment to corporate objectives.

Johannes Partl, PE International:
Fuel and energy related activities because it only requires emission factors, no additional information to the one already required to calculate Scopes 1 and 2.

Which category of scope 3 holds the most opportunity for emissions reduction for the average manufacturer?

Dexter Galvin, Carbon Disclosure Project:
As mentioned previously the supply chain is a huge area of opportunity for corporations as between 40-60% of an average manufacturer's emissions lie in the supply chain. For retailers, emissions can represent up to 90-95%. Using the lens of climate change, many businesses have identified areas for innovation and improvement. Examples include simple energy efficiency gains to joint R&D (Research and Development) innovation projects and product development.

Lara Greden & Sonny Masero, CA Technologies:
For many manufacturing companies the ‘in-use’ categories will present significant opportunities for the reduction of scope 3 emissions. A high profile example is the series of recent campaigns to get consumers to wash their clothes at lower temperatures and to use plastic bag refills of detergents rather than buying a new box or bottle each time. Another example is the light-weighting of glass bottles for wine and beer distribution and sale to reduce the amount of material used and to reduce the weight required for transportation.

The manufacturing sector is so diverse there is no such thing as an ‘average manufacturer’. Even within a specific vertical, like Food & Beverage manufacturing, ask any company and they will tell you why their operations are different from their closest competitor. In each sub-sector of a market vertical, such as alcoholic beverages, there are similarities in the raw materials, for instance for beer most competitors would use water, wheat, barley, glucose, yeast, glass, aluminum and plastics. But even in this vertical the use case will differ if the alcohol is drunk at home or in a bar. The company’s business model and ownership of the supply chain will also differ meaning that leased and capital goods may not be comparable.

Alistair Blackmore, Credit360:
One of the largest impacts that we are seeing when calculating the Scope 3 footprint of our manufacturing clients is in upstream transportation & distribution. This can account for up to 37% of total scope 1, 2 & 3 footprint. One revelation from this is that, per air freight is 70 times more intense than sea freight. This means that prior planning and preparation ensuring that deliveries can be slow-steamed from manufacturing locations to distribution centre can have an exponential impact on carbon reduction. One advantage of foot-printing purchased goods and services, as opposed to the use phase, is that a company can exert far more pressure up the value chain than down it. A second advantage is that the total emissions are often likely to be higher, in part because there are multiple tiers of suppliers. If accurate footprints for the suppliers can be measured, then great pressure can be brought to bear both on the processes within a given supplier, and by moving between suppliers.

Does a company that wants to disclose their scope 3 have to also disclose their scope 1 and 2 emissions to adhere to the standard?

Rachel Hughes, ADAS:
Yes, the GHG Protocol Scope 3 Standard is a supplement to the existing standard and as such should be used in conjunction with the GHG Protocol Corporate Accounting and Reporting Standard (2004). Companies should make and apply decisions consistently across standards, for example, by adopting an equity share approach across both standards. A company reporting emissions under the GHG Protocol Corporate Accounting and Reporting Standard is required to fully report their Scope 1 and 2 emissions while Scope 3 emissions are optional. However, reporting emissions under the GHG Protocol Corporate Accounting and Reporting Standard, and GHG Protocol Scope 3 Standard, means that a company is required to report their Scope 1 and 2 emissions and Scope 3 emissions by 15 categories, with minimum boundary requirements for each of the 15 categories in Scope 3.

Are companies asked to disclose data for all categories to adhere to the new standard?

Alistair Blackmore, Credit360:
In the GHG Corporate Value Chain (Scope 3) Standard, it states that ‘companies shall report... a list of Scope 3 categories and activities included in the inventory’. Essentially, companies must consider all categories, but they may exclude certain categories if they feel that the emissions in those categories are likely to be negligible, if the data is particularly difficult to obtain, or if there is little potential for reducing emissions. This last may be the case where the company has very little influence (e.g., a tier 3 supplier). If the company does choose to exclude certain categories, they must disclose which areas they have excluded, and justify why they have done so. The standard does state that ‘companies should not exclude any activity that is expected to contribute significantly to the company’s total scope 3 emissions’, however this is a recommendation rather than a requirement.

Rachel Hughes, ADAS:
No. Firstly not all of the 15 Scope 3 categories are applicable for every company, for example, financial investments may not be relevant for small restaurant owners. Secondly, for some companies, activity data may not be available for a certain category, or the value mapping may show that emissions from a specified category are insignificant compared with the company’s other emissions. The GHG Protocol Scope 3 Standard states that such exclusions should be disclosed and justified by category to ensure transparency by the reporting company. The major benefit of the new Scope 3 categorization is that the standard provides clear guidance on data to be included within each of the Scope 3 categories. The standard also specifies the minimum data requirements to be included with optional additional reporting by category also clearly specified. This clear guidance means that the progress of each company in reporting their Scope 3 emissions to the GHG Protocol Scope 3 Standard can clearly be measured by companies and stakeholders.

What boundaries are defined by the GHG Protocol standard and do these boundaries apply to the new scope 3 standard?

Alistair Blackmore, Credit360:
When looking at the similarities and differences between the boundaries of the GHG Protocol Organizational Standard and the GHG Protocol Scope 3 standard it is important to differentiate between the emission scope boundaries and the organizational boundaries. The emission scope boundaries refer to which GHG emission areas are covered by the different standards. The emission scope boundaries for the GHG Protocol Corporate Standard addresses scope 1 and 2 (direct) emissions of the organization, whereas the scope 3 standard looks at the indirect emissions of the value chain (both up and downstream), as illustrated by the following diagram (click to enlarge):

Click to enlarge

(Source: Corporate Value Chain (Scope 3) Accounting and Reporting Standard)

There is some overlap between the scope 1, 2 and 3 emissions across different organizations, which creates inherent double-counting of emissions within the system, as the scope 1 and 2 emissions of an organization will be classed as the scope 3 emissions of their customers/suppliers. There should, however, never be double counting within the scope 1 and 2 categories between organizations. Whereas the emission scope boundaries are very different between the standards the organizational boundaries should remain the same. Defining the organizational boundary allows a reporting company to understand which operations are included within the boundary of the emissions inventory. There are 3 consolidation approaches:

  • Equity Share – Accounting for all GHG emissions from operations according to its share in equity in the organization.
  • Financial Control – Accounting for 100% of the GHG emissions over which it has financial control
  • Operational Control – Accounting for 100% of the emissions over which it has operational control. Emissions from entities which are owned, but not operated, are not included. The consolidation approach should be consistent when defining boundaries in both the GHG Protocol Organizational Standard and the Scope 3 Standard.

Is assurance required to adhere to the new product level standard?

Rachel Hughes, ADAS:
Yes, for the GHG Product Level Standard assurance is required to be made available to stakeholders by either first or third party assurance. First party assurance takes place by a person from within the reporting company but independent of GHG inventory. This type of assurance can assess the reliability of the inventory report and be a valuable learning process for the company before undergoing third party assurance. To ensure credibility, first party assurance should report on potential conflicts of interest as part of the assurance process. The other method of assurance is third party assurance. This type of assurance is required to be performed by an organization independent of the reporting company and offers a higher degree of objectivity and independence. Assurance by both first and third parties is recommended. First party assurance can be a learning process for the company reporting to the product level standard and third party assurance offers a higher degree of objectivity and independence for stakeholders.

Any other relevant commentary on this topic?

Alistair Blackmore, Credit360:
According to recent research by the Carbon Trust of senior managers of multinational companies, 50% of multinationals are set to select suppliers based on carbon performance in the future, 29% of suppliers are likely to lose their places if they do not perform adequately on carbon criteria and 58% of multinationals will in the future pay a premium to comparatively lower carbon suppliers. These figures suggests that the world’s leading companies are increasingly seeing Scope 3 as an way to reduce their environmental impact, differentiate their products from their competitors, improve the efficiency of their supply chain, and enhance their reputation amongst stakeholders. The research also showed that whilst corporate carbon reporting is at a mature stage amongst multinationals (93% of respondents are addressing their own direct carbon emissions), reporting of scope 3 emission remains a relatively a new concept, with 60% of respondents not addressing their supply chain emissions at all. This represents a huge opportunity as 42% of the same pool of respondents stated that they plan to start addressing supply chain emissions in the next 12 months. With the insights it was then possible for these companies to quantify both the barriers to and benefits of change, and ultimately act to reduce emissions where it is most relevant.

Rachel Hughes, ADAS:
Both the GHG Protocol Scope 3 Standard and the GHG Protocol Product Standard are commendable steps forward for Scope 3 accounting and harmonization of existing product standards respectively. Both standards have been extensively tested and provide worked examples and relevant case studies to aid reporting companies. The standards also provide answers on often-debated issues such as biogenic carbon. The new GHG Protocol Scope 3 Standard states that biogenic carbon should be reported separately to Scope 3 categories to avoid the possibility of double counting, whereas previously this was an issue without clear guidance and a variety of approaches were adopted.

The Greenhouse Gas Protocol is a partnership between the World Resources Institute and the World Business Council for Sustainable Development. Their mission is to develop internationally accepted GHG standards and tools, that are the foundation for sustainable climate strategies and more efficient, resilient and profitable organizations.


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