Implementing effective strategies for gathering Scope 3 data

The growing focus on sustainability and the imperative to tackle climate change — not surprisingly — have resulted in heightened compliance pressure and led to more stringent reporting requirements. This has pushed companies to monitor not only their direct emissions (called Scope 1) and their indirect emissions (Scope 2) of greenhouse gases (GHG) but also to monitor all indirect emissions, not included in Scope 2, that occur throughout the supply chain and among third-party vendors (Scope 3) used by the reporting company.

Indeed, research shows that emissions in a company’s supply chain are 11-times higher than the emissions directly produced by the company and account for more than 70% of the total emissions.

Regulators from the European Union to California are requiring the collection of Scope 3 data, and public companies are expecting suppliers to provide their emissions data. In fact, 90% of the FTSE 100 have said will only work with suppliers that share their environmental, social & governance (ESG) credentials with the company, according to research from OneStream, a provider of corporate performance software.

Collecting comparable and quality data, however, is a complex and challenging process for many companies. This issue often arises due to several factors, including determining which part of the company owns the data that must be collected from multiple sources within a supply chain. This difficulty is notably pronounced within the consumer goods sector in which there’s often limited visibility into the activities of third-party entities engaged in the production process.

Another complicating factor is understanding how robust the data is and how to make it audit-grade in order to comply with regulatory requirements, says Hein Scholten, Senior Director of ESG Strategy at OneStream Software.

Spend-based approach vs. activity-based approach

Nonetheless, businesses are striving to address data gaps to better track their Scope 3 emissions by adopting spend-based initiatives that guide companies to estimate their carbon footprint based on the economic value of goods they produce. This approach involves collecting financial data typically of higher market value and total expenditure because it has the most significant financial impact on the organization. These data sets are then used in carbon accounting to estimate total GHG emissions.

While the applicability of a spend-based approach is recognized as a best practice by policymakers and investors, there is a significant challenge to benchmarking Scope 3 data using this method. The calculated figures are often based on assumptions and estimates to fill data gaps and don’t account for unforeseen events such as supply chain disruptions that can impact emissions in ways that were not accounted for in the initial calculations. The spend-based approach might not align with the actual emissions that occur in real-world practices and therefore do not serve as preventive measures to reduce emissions over the long-term.

The activity-based approach, on the other hand, instead measures the amount of emissions associated with a specific activity, such as production volumes, waste disposal, and electricity usage. This quantitative approach gives a more accurate understanding of the relative magnitudes of various Scope 3 activities because it takes into consideration both high and low market value products.

This is very important because low-cost products are often associated with higher risks and larger GHG emissions due to the use of lower quality of raw materials to cut costs, less efficient technologies that consume more energy, and the final product being by nature more disposable, for example.

The challenge, however, is that activity data must be provided by suppliers, particularly sub-tier suppliers that mostly handle production in the supply chain but do not directly engage with the reporting company. Sub-contractors are often smaller in size with limited capital to invest in advanced tracking systems or to hire dedicated personnel to manage data, more so when handling products containing chemical ingredients. This hinders their ability to effectively manage data for GHG emissions purposes.

A recent Thomson Reuters report, The 2023 State of Corporate ESG, found that businesses now more than ever are providing training and guidance tools to suppliers, while integrating solutions and stringent audit and validation processes. One executive from a cosmetic retail brand noted: “We’ve invested in an outsourcing agency that is helping us navigate the universe of what really sustainability means… for every single product that we make, we’re auditing every single thing down to the chemical level, basing them and preparing dossiers on each item… we’re also building a database… as new ingredient gets added into a product… it’ll flag us, it’ll communicate with us.”

Implementing an automated system within a data management platform to flag potentially adverse impacts and notify relevant teams helps identify where the most salient risks might be hidden.

Scope 3 as a means to progress

While it is true that not all suppliers can readily provide GHG data, the path to progress is effective communication. Encouraging suppliers to develop their own GHG inventories and championing the vision of global net-zero emissions by 2050 will foster trust and fruitful collaboration across borders. Inclusion grounded in shared goals holds the key to enhancing more supply chain visibility and transparency making data collection more accessible in the long term.

The pursuit of effective Scope 3 emissions associated with a company’s activities outside of its direct control or ownership is not just a compliance requirement, it’s a strategic imperative for businesses as they progress to achieve a global net-zero emissions 2050 agenda. As companies collaborate, communicate, and prioritize their data collection efforts — actively seeking progress, not perfection — they will pave the way for environmental stewardship for future generations.