Driving Change: Innovative Strategies for Scope 3 Emissions

Did you know that up to 90% of a large company’s greenhouse gas emissions come from its value chain? Working on a project about Scope 3 emissions, I uncovered many unexpected insights. Our client, a venture capital firm focused on early-stage cleantech startups, wanted to understand how businesses can measure and reduce these significant emissions. This blog post shares the insights we gained from our analysis, including the impact of policies, identification of high-emission processes (hotspots), and systemic challenges. Additionally, I'll explain how we identified attractive investable areas for venture capitalists and share what I learned about engaging stakeholders and project management through this project.

1. How do policies affect the reduction of Scope 3 emissions?

Scope 3 emissions are highly sensitive to government policies. Companies and investors should closely monitor government trends to identify opportunities based on evolving regulations. Recently, regulations on Scope 3 disclosure have expanded in regions like Singapore and California. However, regulatory progress has been uneven. For instance, the U.S. Securities and Exchange Commission failed to introduce Scope 3 disclosure rules due to industry opposition, citing challenges like data accuracy and the burden of requesting international supplier information.

In addition to mandatory disclosure regulations, carbon pricing policies are gaining attraction. Carbon pricing includes taxes and emissions trading systems (ETS), which regulate industry emissions and allow carbon allowances to be traded. Both mechanisms create financial incentives to reduce emissions. While these policies do not directly target Scope 3, they encourage companies to produce low-emission products, thereby influencing Scope 3 emissions indirectly.

To maximize opportunities, businesses and investors must track the introduction of these regulations and pricing schemes globally, ensuring they are well-positioned to adapt and innovate.

2. Where are the hotspots?

Our team analyzed the value chains of home & personal care, fashion, electronics, and food industries to identify emission hotspots, selecting five representative companies from each sector across the U.S., Europe, and Asia. Surprisingly, some leading companies did not disclose their Scope 3 breakdowns or even total values and disclosed data often showed inconsistencies, raising accuracy concerns.

Our analysis revealed that emissions are notably high in material procurement and user application. For example, in home & personal care products, procurement, and consumer usage each accounted for about 40% of total Scope 1–3 emissions. Key contributors included chemical processing for materials and energy-intensive consumer behaviors, such as using hot water to wash hair with shampoo.

While many manufacturers are trying to address the materials sector to enhance factories’ efficiency, user-related emissions often receive less attention because addressing users' actions is difficult for companies. These overlooked areas represent opportunities for companies and investors to drive meaningful emission reductions.

3. What root cause does system analysis reveal?

One major barrier to reducing Scope 3 emissions is the difficulty of accurate measurement. Stakeholders often hesitate to share information, citing trade secrets, lack of expertise, or insufficient financial resources. Even larger suppliers with the capacity to invest may avoid data sharing due to the perceived high costs and lack of buyer support to offset these costs.

Interestingly, many consumers, particularly in Western countries, are willing to pay a higher price, or green premium, for low-emission products. However, without accurate product-level emission data, consumers cannot identify such products and pay a green premium. Without any green premium, manufacturers are unable to justify higher payments to suppliers for accurate measurements, which in turn limits their emission reduction efforts. Thus, this negative cycle continues unless new measurement methods are invented.

Breaking this cycle could create a positive feedback loop. Accurate measurement and transparent labeling could enable consumers to support low-emission products, allowing manufacturers to pay suppliers for emission reduction efforts. This would encourage ongoing investment in accurate measurements and systemic improvements.

4. Recommendation to Investors

Based on the above analysis, technologies to accurately measure GHG emissions and businesses that display GHG emissions for each product based on such measurements have the potential to quickly advance the reduction of Scope 3 emissions. At first glance, measurement and labeling may seem to be a lower priority because they do not directly reduce Scope 3 emissions. By contrast, investors and companies would do well to invest in measurement and related labeling among the industry-specific or cross-industry sectors mentioned above in “2. Where are the hotspots?”.

5. Better Analysis

By reading a lot of literature on Scope 3 and interviewing professors in related fields and startups, our team was able to get different perspectives and ideas. However, I could not have arrived at the important insights by simply using the ideas as they were. With these ideas in mind, we should formulate a hypothesis of the systemic issues by identifying the stakeholders involved in Scope 3 and analyzing their motivations for their actions. We were then able to improve that hypothesis by discussing it with other experts. The lesson learned from this analysis process was that it is important not to rely solely on literature or the opinions of experts but to use one's own mind to analyze the structure of the problem, formulate a root cause hypothesis, and then discuss it with others to test the hypothesis. Iterating this process will finally lead to better analysis.

6. Effective Execution of the Project

Through this project, I not only acquired the latest knowledge on Scope 3 but also gained the ability to do quantitative and qualitative value chain analysis. Since we usually have certain biases, this ability is useful to free us from biased conclusion. Making inter-company and inter-industry comparisons based on the facts of published data enables us to arrive at facts that I had not assumed, for example, that emissions from consumer use is quite high. In other words, I thought it was important to analyze the data from multiple perspectives based on facts not to miss anything important due to prejudice.

7. Constructive discussion

When analyzing, I didn’t just focus on numbers and facts. By talking with people from different backgrounds, I gained new frameworks and insights that I hadn’t considered before. This was true for discussions with experts like professors and startups, as well as team members with diverse experiences.

To effectively discuss with people different from myself, I first needed to build trust by actively listening and ensuring we shared a common goal: understanding the core issues through idea exchanges and critical perspectives. Making counterparts easily understand the discussion contents and feel comfortable expressing their opinions is critical to constructive discussions. If the discussion involved students without background knowledge, avoiding jargon and providing clear context was essential. Conversely, with specialists, using technical terms and focusing on specific issues was more effective. Balancing discussions with non-specialists, who provide new perspectives, and specialists, who offer solutions, is crucial for comprehensive understanding.

8. Takeaways

This project provided expertise in Scope 3 emissions and broader skills in analysis, stakeholder engagement, and project execution. By integrating factual analysis with collaborative problem-solving, we developed actionable insights that can drive meaningful change in reducing Scope 3 emissions. The specific key takeaways are following.

• Scope 3 Emissions: Up to 90% of a large company's GHG emissions come from its value chain.
• Policy Impact: Government policies significantly influence Scope 3 emissions. Monitoring regulations can reveal opportunities for investors and companies.
• Emission Hotspots: Material procurement and consumer usage often produce high emissions, which can be addressed and lead to major reductions.
• Measurement Challenges: Data sharing issues and costs hinder accurate measurements. Better measurements can drive reductions in Scope 3 emissions.
• Investment Opportunities: Investing in GHG measurement and labeling technologies can rapidly reduce Scope 3 emissions.
• Holistic Analysis: Combining literature reviews and expert insights with critical analysis uncovers systemic issues.
• Quantitative Insights: Analyzing value chains helps identify unexpected emissions and avoid biases.

Constructive Discussions: Engaging with diverse stakeholders and balancing specialist and non-specialist input leads to better solutions.