Success on Scope 3 Emissions Will be a Long and Winding Road

Scope 3 emissions are messy. That is my primary takeaway after the first week working with a client as part of our Sustainable Investing Research Project course. The client, a leading venture capital firm focused on climate solutions and building a more circular economy, has tasked us with analyzing the current landscape around scope 3 emissions. 

For those unfamiliar with the term, scope 3 refers to greenhouse gas emissions that are not directly produced by a company or organization. Instead, these emissions are indirectly tied to them through the company’s supply chain. For example, scope 3 emissions could refer to the emissions associated with the production of a company’s input materials, or emissions from the use and disposal of their product. Because these emissions are outside the direct control of the organization, they are often difficult to track, measure, and reduce. 

After my group and I clarified the objectives and priorities of the client in our initial meeting, we revised our Gantt chart and began the research portion of our work schedule. In this initial phase of the project, we are focused on information gathering. That means identifying a list of academics, reporters, auditors, and stakeholders within the private sector who we can interview. 

It also means defining one of the overarching questions the client posed in our initial call: when it comes to scope 3 emissions, what does success look like? Here are my initial takeaways after logging some hours of desk research dedicated to the question. 

Transparency and Visibility:

Any version of success on scope 3 must include transparency and visibility into supply chains. Whether that visibility comes from more advanced emissions measurement software, increased regulation, or a combination of both, it is essential that companies can understand the emissions footprint of their suppliers. This would allow companies to make informed decisions about which suppliers to choose and gain a fuller picture of their own product’s impact. 

Standardization:

Standardization goes hand in hand with transparency and visibility. If organizations and suppliers along the supply chain begin adopting a slew of different reporting practices and standards, companies will lack the clarity they need to make informed decisions. Any meaningful success on scope 3 will need to involve standardization in tracking and reporting across industries. 

Today, some reporting frameworks and standards exist, such as the Greenhouse Gas (GHG) Protocol or Science-Based Targets initiative (SBTi). Building out these or other metrics so that they are universal, and emissions data is reliable and comparable, will be crucial. 

Regulation:

It is unlikely the private sector alone will have the capacity and motivation to solve the messy problems around scope 3. Success will almost certainly require some form of government regulation and standards. The European Union and states like California have begun to institute emissions reporting requirements in certain sectors. 

In Europe, the Corporate Sustainability Reporting Directive (CSRD) will impact around 50,000 large companies (over 250 employees and €40 million turnover). Consumer-facing industries such as manufacturing, energy, food & beverages, and retail are particularly affected, given their significant scope 3 emissions.

In 2023, California passed the Climate Corporate Data Accountability Act, which requires all companies making over $1 billion in revenue to disclose their scope 3 emissions. The law requires scope 1 and 2 reporting by 2025, while scope 3 reporting will be required by 2027. 

Conclusion:

Defining success in scope 3 is unquestionably challenging. For companies, it is an added burden to track and report emissions with very little guidance. While a cottage industry of GHG emissions tracking and documenting has begun to develop, it seems likely that there will be tremendous growth in the industry as more and more markets begin requiring scope 3 reporting. 

Legislation in Europe and California will likely serve as a catalyst for increased investment in the emissions measurement tech space, and hopefully, a well-thought-out effort on the part of regulators to standardize reporting practices to ensure transparency and visibility across sectors.