Unveiling Complexity: The Challenge of Measuring and Managing Scope 3 Emissions

As we move past the midpoint of our project on scope 3 emissions, my understanding of emissions reporting, sustainability, the diverse set of stakeholders and contextual factors in the climate disclosure space, and the role of the private sector has deepened considerably. The interim presentation to our client was a key milestone, not only because it gave us an opportunity to present our findings but also because it highlighted the gaps in data and strategy that companies face when tackling scope 3 emissions. Reflecting on this stage of the project, it’s clear that while the potential for systemic change through in setting remains promising, the path forward is anything but straightforward.

Our project continues to focus on addressing the complexities of scope 3 emissions—those indirect emissions that often account for up to 75% (sometimes more depending on the industry) of a company’s total carbon footprint. From sourcing raw materials to transportation and product use, scope 3 emissions span the entire value chain, making them notoriously difficult to track and manage. As our research has progressed, I’ve come to realize that understanding scope 3 emissions is as much about data transparency and supply chain collaboration as it is about environmental strategy.

Interim Presentation - Updates, Reflection and Insights

The main objective of the project is to understand the measurement, management, and reduction of scope 3 emissions and research the investment thesis of climate technologies rooted in insetting and regenerative economy. So far, as a team, we have spent much of our time gathering context and building a deeper understanding on the following topics, 

- history of scope 3

- what success for scope 3 is

- the link between data and action

- drivers of scope 3 measurement and management

To do this we have relied on desk research and conducted interviews, which served as truth-grounding exercises to our desk research, with investors, actors that facilitate carbon disclosures (such as the Carbon Disclosure Project a.k.a CDP), climate and environmental law experts, and supply chain experts in circular and regenerative economy. 

One of the key takeaways from our interim presentation was the recurring challenge of data collection, quality and lack of standardization. On the standardization side, work is already underway by the Greenhouse Gas (GHG) Protocol (they provide comprehensive global standardized frameworks for measuring and managing greenhouse gas emissions) on improving standardization of scope 3 reporting. On the data collection side, many companies struggle to gather accurate data from their suppliers, especially those with global, multi-tiered supply chains. Without this data, it becomes incredibly difficult to measure emissions effectively, let alone manage or reduce them. The number of companies reporting on scope 3 emissions is a little above 50% of the total number of companies that are reporting on emissions (scope 1 and 2), which is not too low suggesting that some capacities have been built. But it also not too high considering the relative proportions of scope 3 emissions to that of 1 and 2. 

But the number of disclosures in 2023 (23,202 companies) is ~2.5 times the number of disclosures in 2020 (9,526 companies). While the number 23,202 by itself doesn’t tell us much, the bigger story attached to that number is that their combines market capitalization amounts to a staggering $67 trillion! While I couldn’t find the market capitalization of companies that are disclosing on scope 3 specifically, this has implications on data accuracy. 

As the number of companies disclosing emissions increase, we get greater visibility into supply chain emissions and a better understanding of the real volume of scope 3 emissions. The CDP had estimated scope 3 emissions to be 11 times that of operational emissions (ie. scope 1 and 2 emissions). But their most recent report finds that scope 3 emissions are 26 times that of operational emissions (this change could be because of having more data leading to improved data estimation models but could also be partly because of a reduction in scope 1 and 2 emissions making scope 3 look larger in comparison). With the advent of a stricter regulatory landscape, the uptick in disclosures is expected to multiply. 

An interesting argument/idea that showed up in my research is that companies are now ready for scope 3 reporting. The intuition is that the scope 1 and 2 disclosures of companies in your upstream and downstream supply chain, are your scope 3 emissions. And if those companies are now reporting, your scope 3 estimations are now feasible. Larger and more resource rich companies of course, are generally better equipped to spend money on reporting and management of scope 1, 2 or 3. These are essentially your publicly traded large market cap companies. But until very recently, privately owned companies were generally not required to disclose emissions, even by the European Union (EU) regulation standards (the leader on regulatory policies surrounding emissions). Which means that this has always been a blind spot. But that’s changing. 

Under the most recent regulation by the EU called the Corporate Sustainability Reporting Directive (CSRD) that came into effect in January 2023, if you operate in the EU or UK and have 250+ employees or significant revenue and balance sheet, you likely need to start reporting advanced disclosures by 2023. 

Why is this important? 

The blind spots are going to get filled in, generating an improved understanding of overall emissions. What this also means is that, due to the global nature of supply chains, mandated scope 3 reporting in developed nations, gives us a glimpse into emissions in other countries around the world as well. It makes me both excited and hopeful since this gives us a headstart before having to wait for the regulatory landscape in the developing world to catch up. It also prompts me to meditate on the principle of Common But Differentiated Responsibilities and Respective Capabilities (CBDR-RC), a resolution reached during the Paris Agreement in 2015, and how it needs to play out for us to still collectively meet our climate targets. 

My second key takeaway (something that may be better categorized as an evolving question that plagues my thoughts), stems from an increasing understanding of the space prompting me to question the current Theories of Change (ToC) around the use of financial investments to affect real-world sustainable, ESG, or climate outcomes. One standard ToC for example, is that enhanced transparency through disclosures allows investors to make informed decisions, encouraging companies to improve their ESG performance to attract investment. The idea is that reporting leads to reduction and that the market will reward the companies prudent on ESG by making capital more accessible and rising consumer demand. However according to a recent talk I attended by an industry expert, this is not always the case. With the proliferation of artificial intelligence (AI) and the need for rapid adoption in order to remain competitive in the market, companies might see an increase in carbon emissions due to this energy-intensive technology. Hence changing market pressures need to be monitored and strategic solutions need to be adopted in order for this ToC to hold true. 

Client Feedback and Next Steps

Our client’s feedback pointed us towards identifying specific tools and strategies for change in supply chain emissions, which makes sense and is something we are working on. While we develop that we will also be moving onto the next phase of our project which is also the most challenging phase — supply chain analysis and researching the business case for climate-tech that follows circular and regenerative principles. 

That said, the feedback from our client reaffirmed my belief that there is growing recognition of the need for systemic change. As more companies face pressure from regulators, investors, and consumers to address their environmental impact, I’m hopeful that we will see a broader adoption of circular and regenerative principles in the years to come. Overall, this project has been an incredible learning experience, expanding my understanding of the intricacies of scope 3 emissions and the role of corporate strategy in driving environmental stewardship.