Solar panels, electric vehicles, passive building design—there are many tried-and-true ways that companies can cut carbon out of their operations. But what can they do to decarbonize their entire value chains?
This question is a mounting concern for many companies. Key economic stakeholders ranging from customers and suppliers to regulators and investors are shifting their attention to greenhouse gases (GHGs) at the supply chain level. Increasingly, they’re demanding that businesses disclose not only the emissions they generate within their walls, but also those that are produced through value chain activities. The result is that companies of all sizes—including small and medium-sized enterprises (SMEs)—are now looking at what it will take to calculate what are known as Scope 3 emissions, a move that the U.S. Environmental Protection Agency calls the “next frontier in GHG management.”
GHG Protocol scopes
The most widely trusted framework for measuring and managing GHG emissions worldwide was developed by the GHG Protocol. The organization’s three-scope system is considered to be the gold standard, providing clear definitions and methods for calculating emissions at different points in a business’s operations and value chain.
Too much for SMEs?
Measuring Scope 3 emissions can be a heavier lift for SMEs; they often lack the budgets and internal expertise that larger firms can dedicate to carbon accounting. Nonetheless, SMEs that calculate their supply-chain emissions can benefit just as much as bigger companies. By putting numbers to their emissions and setting a baseline from which to measure progress, smaller firms can uncover new opportunities for managing future risks through cross-sector collaboration and knowledge-sharing. Additionally, companies that tackle this tougher emissions scope often uncover new ways to increase their efficiency, save money, and become more competitive in the marketplace.
SMEs that are on the fence about whether to measure Scope 3 emissions should consider the following four points.
1. Over 90 percent of a company’s emissions may fall under Scope 3—along with most opportunities to decarbonize.
Surprisingly, the bulk of a company’s GHG emissions are generated by assets they neither own nor control. The Carbon Disclosure Project estimates that, for most firms, supply chain emissions are 11.4 times higher than those generated by onsite operations. On average, about 75 percent of a company’s GHG emissions fall under Scope 3.
Scope 3 emissions are an important target of national and state-level climate change policies aiming to decarbonize the U.S. economy. Carbon accounting at the supply chain level is considered by authorities like the U.S. Environmental Protection Agency (EPA) to be an important strategy in limiting global warming to the Paris Agreement target of 1.5°C. New York’s Climate Leadership and Community Protection Act, signed into law in 2019, aims to reduce economy-wide emissions in the Empire State by 40 percent by 2030 and then by 85 percent by 2050 (compared to 1990 levels). The scale of GHG reductions required by existing and future policies will not be possible without transformations that are based on a uniform, standardized approach across entire supply chains.
2. One company’s Scope 3 emissions are another’s Scope 1 or 2 emissions.
The U.S. Securities and Exchange Commission proposed new rule changes in 2022 that would require companies to disclose information about “climate-related risks.” Among the details of the proposal is a requirement to disclose Scope 3 emissions.
If enacted, the SEC proposal would lead larger companies in the economy to apply pressure up and down their supply chains to provide emissions data that they cannot access otherwise. Such a move (which is hotly contested) would trigger a ripple effect that would no doubt touch many SMEs, given that they account for nine out of every ten businesses.
Yet, even without regulatory pressure, corporations that want to measure Scope 3 emissions will need to work with SMEs to source essential data. Already, major companies like Patagonia Inc. and Cisco Systems Inc. have published commitments to clean up their value chains by setting targets to reduce Scope 3 emissions.
Value chains tie together many SMEs, each providing a product, like raw materials for manufacturing parts, or a service, such as the transportation of goods or dedicated database hosting. Couple this reality with the fact that SMEs make up more than 90 percent of businesses worldwide and account for more than 50 percent of employment and it’s easy to see how one large corporation’s Scope 3 assessment will involve scores of SMEs.
As the need for data transparency grows, so will the opportunity for collaboration. The sharing of data and other information across the supply chain will be critical, since much of it will not fall under any one company’s control. While this may raise concerns over privacy, it could also create a fertile environment for businesses to work together in new ways to drive both profitability and sustainability.
3. Scope 3 is about managing future risks.
Many companies that decide to calculate their Scope 3 emissions do so with an eye on managing future risks to their business. The people who are typically involved in a GHG emissions assessment speak to this fact: legal compliance specialists, enterprise risk analysts, sustainability experts, and C-suite decision-makers.
Firms increasingly approach climate change with a risk management lens because of the real and potential impacts it may have on their ability to operate in the coming decades. For example, greater incidences of drought could threaten agricultural supplies in some regions or more extreme weather events could render common transport routes unreliable. A Scope 3 assessment offers a path for identifying “hot spots” like these in supply chains, allowing companies to offset potential disruptions or unexpected costs through strategic planning.
By focusing on long-term risk avoidance rather than only a short-term return on investment, businesses that determine and disclose their Scope 3 emissions make their sustainability plans more transparent to their stakeholders. Such transparency is the best response to the growing pressure from customers, suppliers, and investors most companies are experiencing because it shows not only a commitment to decarbonizing, but sets the stage for the level of collaboration—as outlined above—needed across value chains to decarbonize.
4. A Scope 3 assessment is designed to fit your company.
One of the most thorough methodologies for measuring the environmental impact of a product, service, or industrial process is a life cycle assessment (LCA). It can be used for not only calculating GHG emissions, but also a range of other factors, such as material recoverability and water use. However, depending on the design and boundaries of the study, a typical LCA can be expensive, especially for SMEs. LCAs are also highly specific, usually focusing on a single product, service, or industrial process.
A Scope 3 assessment, in contrast to an LCA, is broader and less cost-intensive. An LCA considers multiple environmental impacts, but a Scope 3 assessment is concerned solely with GHGs. While quantifying only emissions may seem simpler, it can be difficult at Scope 3 because a firm needs to track back to activities or assets they do not control. Assessors can untangle some of this complexity using the GHG Protocol’s framework and the EPA’s Emissions Factors Database; both are publicly available and easily accessible to individuals without LCA expertise.
The GHG Protocol publishes a technical guide for measuring Scope 3 emissions in corporate value chains. It includes 15 categories that correspond to activities up and down a company’s value chain. Each category is given strict boundaries to make it easy to understand exactly what needs to be measured, and what data needs to be collected.
Importantly, the GHG Protocol assessment is designed to be tailored to a business’s unique circumstances. Is it a manufacturer? Is it a service-based company? In practice, any one company will use a mix of the 15 categories. Each category requires the analysis to follow one or more of four pathways: supplier-specific, hybrid, average-data, or spend-based.
The purpose of the EPA’s database, which is regularly updated, is to ease an assessment through the use of aggregated, generalized factors for common processes and products. For example, it can be used to find the GHGs emitted per mile by a passenger car made between 2007 and 2020 running on diesel, or to determine how much carbon is emitted when a short ton of corrugated containers is landfilled.
The shape of a single Scope 3 assessment is unique to the company performing it. As has been shown above, there is substantial leeway for selecting the right measures and tools to make sure that it results in information that is both useful and actionable. It is also worth noting that, as the demand for Scope 3 assessments increases, more resources will become available to businesses.
How might a Scope 3 assessment look in practice?
A company that offers payroll, human resources, and employee benefits services outsourcing decides to perform a Scope 3 assessment to align with its customers’ sustainability commitments. A team is created that includes compliance, risk enterprise, and sustainability experts, as well as C-suite decision-makers. They decide to work with specialists from the New York State Pollution Prevention Institute (NYSP2I).
After working closely with the team, the NYSP2I specialists design a spend-based assessment, which is often optimal for a services-driven company. They then consider what data is available and, from there, set out what categories from the GHG Protocol framework can be applied. They choose three categories: “Employee Commuting” (Category 6), “Business Travel” (Category 7), and “Leased Assets” (Category 8).
The specialists calculate total emissions for each category and discover that about 90 percent of the company’s emissions fall under the Scope 3 range. What's more, over 60 percent of that amount is driven by Category 6—employees commuting to and from work.
With these numbers in hand, the company is better able to see what’s at play in their organization in light of Scope 3 emissions. What can they control? What can’t they control? This conversation allows the teams to use the data to evaluate different trade-offs based on varying scenarios.
The NYSP2I and company teams then work together to set appropriate targets. They consider these in light of the overall goal of achieving net-zero emissions by 2050 alongside economic trends like technological innovation and diminishing returns. Through this work, they set a series of short-term, mid-term, and long-term targets for reducing emissions across Scopes 1, 2, and 3.
Next, the assessment enters a benchmarking phase, where the NYSP2I team researches what companies with a similar size and focus are doing in terms of carbon disclosure and action. This baseline informs the development of best practices that can be implemented to reduce Scope 3 emissions according to the targets set earlier. For this example, given the weight of employee commuting, the specialists recommend implementing a work-from-home program and installing charging stations for electric vehicles.
Ready for a Scope 3 assessment?
Based at Rochester Institute of Technology’s Golisano Institute for Sustainability, NYSP2I’s Supply Chain Sustainability program is available to any manufacturer, distributor, retailer, or other company registered in New York State looking to decarbonize its value chain. Funding from New York State is available for each project, and may cover a portion of the total costs associated with a Scope 3 assessment.
About the authors
Golisano Institute for Sustainability
Rochester Institute of Technology
Golisano Institute for Sustainability (GIS) is a global leader in sustainability education and research. Drawing upon the skills of more than 100 full-time engineers, technicians, research faculty, and sponsored students, it operates six dynamic research centers and over 84,000 square feet of industrial infrastructure for sustainability modeling, testing, and prototyping. Graduate-level degree programs are also offered that convey the institute's knowledge to the next generation of industry professionals.
