Why we need to get better at measuring Scope 3 emissions
With mandatory emissions reporting becoming more widespread, businesses can’t comply if they don’t measure Scope 3 emissions.
In Brief
- Greenhouse Gas (GHG) Protocol recommends organisations measure three categories of emissions: Scope 1, Scope 2 and Scope 3.
- It will soon be a legal requirement for many businesses in Australia and New Zealand to report emissions. Scope 3 emissions are important because studies have shown they comprise 65–95% of an organisation’s GHG emissions.
- Scope 3 emissions can be harder to measure because they sit in the company’s value chain, and businesses will need to work with their suppliers and customers to identify and quantify them.
As we face more frequent weather extremes and climate disruption, measuring greenhouse gas (GHG) emissions are becoming increasingly important to businesses and to the planet. GHGs have seven key gases, including carbon dioxide, methane and nitrous oxide, and are often expressed according to their planet-heating potential as carbon dioxide equivalents (CO2e).
For reporting purposes, by international agreement (the Greenhouse Gas Protocol), organisations should measure three categories of GHG emissions: Scope 1 emissions, which are emitted directly by the business; Scope 2 emissions, which are the indirect emissions from heating, cooling and purchased electricity and steam; and Scope 3 emissions, which are indirect emissions produced by the business’s value chain, including those from suppliers, distributors and the use of products sold (see diagram). GHG emission measurements can be assessed for an organisation, a product, event or a community.
Figure 1:Overview of GHG Protocol scopes and emissions across the value chain. Source: Greenhouse Gas Protocol. Click image to enlarge.
Why measure Scope 3 emissions?
Emissions reporting will soon be a legal requirement for many businesses locally and globally. Rules are already in place for about 200 large entities in New Zealand, a result of legislation and of standards produced by the External Reporting Board. The requirement includes reporting Scope 3 emissions (ending on or after 27 October 2024), with independent assurance.
In Australia, climate-related disclosures will be mandated for a much wider range of entities. These will align with the international climate-related disclosure standard, IFRS S2, which requires GHG emissions reporting, including Scope 3 emissions.
Aside from regulation, Scope 3 emissions are important because they’re significant – studies have shown they comprise 65–95% of an organisation’s GHG emissions. By measuring them, an organisation can start to manage them, which is vital to the future of businesses, communities and the planet.
Increasingly, information about Scope 3 emissions is important to investors, suppliers, banks, customers and to the business itself. The information enhances understanding of emission impacts, highlights inefficiencies, and provides opportunities to save energy and costs, which could result in making better strategic decisions.
Scope 3 emissions can be harder to measure because they sit in the company’s value chain, with suppliers and customers. Consequently, accountants and other business leaders may need help from these external stakeholders to measure Scope 3 emissions accurately.
A job for CAs
Chartered accountants are well-placed to measure and report on Scope 3 emissions, including through the use of current reporting frameworks.
Karen McWilliams FCA, CA ANZ’s sustainability and business reform leader, says: “CAs have a critical role to play to support the generation of decision-useful GHG emissions information for their businesses, organisations and clients.”
She says support from CA ANZ includes the recently published carbon accounting FAQs and a soon-to-be-launched climate reporting micro-course.
Useful qualities that accountants already have include skills in data collation and reporting, and a familiarity with decision-making around materiality. But CAs won’t be doing this alone. Just as important will be collaboration with others, in multi-disciplinary teams within their own organisations, and in their value chain and networks.
GHG emissions reporting case study: Sanford
Sanford is New Zealand’s oldest and largest seafood company. It is also a leading sustainability reporter. In the Australasian Reporting Awards (ARA) it won both the Sustainability Report of the Year and the Resources and Production Sector Reporting Award, in both 2022 and 2023.
The company was an early reporter of its GHG emissions, including Scope 3 impacts.
“It was a voluntary decision. We wanted to understand our own value chain and identify any hotspots, says Sanford’s CFO Paul Alston CA. “The intention was also to work collaboratively with customers and suppliers. We have had feedback from multiple organisations interested and liking what we have done. Some consultants said they used our reporting as guidance for other organisations on how to get started.
“To get better, measuring and reporting needs to be constant and part of the regular internal management reporting, alongside traditional financial reporting.”
“Making a start is the first step and improvements can come from there. To get better, measuring and reporting needs to be constant and part of the regular internal management reporting, alongside traditional financial reporting.
“It is important to get the right balance and not spend too much time collecting data. Get started and it will evolve.”
Five steps to better Scope 3 emissions measurement
Guidance on measuring Scope 3 emissions is already available. SMEs need to focus on measuring and reducing their Scope 1 and 2 emissions first, but also get better with how to manage Scope 3 emissions. Here are five steps to help get on track:
1. Study and understand your value chain. Determine which Scope 3 emissions are most material, based on their size and industry practice, and prioritise those. Set realistic boundaries and disclose them.
2. Identify suitable partners within your organisation, industry or supply chain, and collaborate. Work together to build trust with sustainability personnel and others, perhaps including community groups.
3. Find credible, efficient ways to collect and calculate essential information. A key part of the process is the use of emission factors (EFs) to convert physical quantities, such as litres of fuel used or tonnes of waste, into CO2e. These EFs need to be from a credible source, which should be disclosed. (Activity-based calculations using physical quantities are considered more credible and useful than spend-based calculations, which give estimates of CO2e based on payments made and rely heavily on averages.)
4. Produce a GHG emissions report and get independent assurance. Even if assurance is not required now, plan to report on the basis that this could be needed in future.
5. Start making GHG emission reductions. Set targets and make plans to achieve them. Don’t just measure and report emissions – manage emissions to reduce them!
To get this right will take time and effort, but the cost of not acting now may be higher. Make a start and aim to get better over time. Starting early is the vital step.
