Join Sean Daley, Sphera’s North American director of sustainability consulting, and Rachel Popa, one of Sphera’s content marketing managers, for a conversation on Scope 3 greenhouse gas (GHG) emissions and decarbonizing the supply chain.
The following transcript was edited for style, length and clarity.
Welcome to the SpheraNOW ESG Podcast, a program focused on safety, sustainability and productivity topics. I’m Rachel Popa, one of Sphera’s content marketing managers. Today, we’re joined by Sean Daley, Sphera’s North American director of sustainability consulting. Thank you for joining us on the podcast, Sean.
Hey, Rachel. Thanks. Happy to be here.
In this episode, we’re discussing Scope 3 GHG emissions and decarbonizing your supply chain. Tackling Scope 3 emissions continues to be a daunting task for organizations due to lack of quality data and the challenges associated with collecting the necessary data from ever-growing supply chains. But as pressure grows from regulators, investors, stakeholders and the public to disclose GHG emissions data, the time to get a handle on Scope 3 emissions is now. Sean, can you talk us through the three GHG emissions categories?
Let’s start with Scope 1 GHG emissions, which are typically considered what we call direct emissions, meaning that they happen within the four walls of your organization. You have control over those. Scope 1 emissions are associated with the consumption of fuel. If you have company-owned vehicles like trucks or cars, Scope 1 emissions would include fuel used for those, as well as things like equipment that you might use in your organization that run on fuel—think natural gas boilers or kilns, propane for forklifts and things like that. The third piece of that are emissions associated with processes like wastewater treatment or fugitive emissions associated with things like the refrigerants used in heating and air conditioning systems. That’s Scope 1. It’s the direct emissions that are under your control within the four walls of your organization.
Scope 2 GHG emissions are associated with purchased energy. This is typically in the form of electricity or district steam, in some markets. These are considered indirect emissions, given that the emissions are associated with the generation of that energy. That’s Scope 2 indirect emissions.
Scope 3 is where it starts getting a little tricky. Scope 3 emissions are broken up into 15 different categories and represent the emissions in your supply chain. Scope 3 emissions have traditionally been a lot more difficult to quantify, but they also represent the largest category of GHG emissions for most companies.
Why are Scope 3 emissions more difficult for companies to calculate?
The difficulty really lies in acquiring the data. Scope 1 and 2 GHG emissions are the most commonly measured and reported GHG emissions categories and many companies have been reporting on these for years. A lot of organizations at this point are pros at measuring and reporting Scope 1 and 2 emissions.
I’ve been in the sustainability space for about 15 years now. When I first entered the space, no one was quantifying Scope 3 emissions. It was extremely rare to find someone quantifying their Scope 3 emissions. Sustainability practitioners, myself included, said, “Nope, it’s totally impossible for us to get accurate data. We’re not even going to bother. We’re just sticking with Scope 1 and 2. We’re just kicking that can down the road.” Thanks to data and tools, we can start to close some of those blind spots.
Great. Thank you for that background. Why is now the time to really get a handle on Scope 3 emissions?
There’s industry and public pressure to disclose more and more data around a company’s GHG emissions. The public wants to know that the companies that they purchase from or invest in are not only aware of their environmental impact, but that they are actively doing something about it or are at least keeping tabs on it. For the consumer, it informs their spending decisions.
There are all sorts of data out there that show people are willing to spend more money on companies they view as being more sustainable, greener or proactive about climate-related issues. For the consumer, it’s about spending decisions and faith.
It’s also driven by access to capital. If you are a company and you have investors or you’re seeking large loans, lenders and investors view GHG emissions as an area of risk. If you are a company and you are quantifying your emissions and have a reduction plan in place, they view that as risk management. GHG emissions represent a potential risk to their return on investment.
If they’re going to lend you money and you don’t have a good handle on this, they’re going to see that as a threat to their return. Companies that understand their Scope 3 emissions and, even better, have a decarbonization plan in place, tend to be viewed as less risky of an investment versus competitors that aren’t addressing that issue.
Between public pressure, regulatory pressure and the investor-access-to-capital angle, that’s what’s really driving the focus and momentum for more and more companies to report on their Scope 3 GHG emissions.
Can you describe what blind spots companies may have when it comes to Scope 3 emissions in the supply chain?
It turns out that there are quite a few blind spots out there. Historically, there have been two primary strategies for quantifying or calculating your Scope 3 GHG emissions. The first approach requires surveying all your suppliers and members of your value chain to understand what their Scope 1 and 2 emissions are, which informs your Scope 3 emissions. Your Scope 3 emissions, to a large degree for some of the categories, is comprised of your suppliers’ Scope 1 and 2 emissions.
As I mentioned before, this is a very, very time-consuming process, as most companies have hundreds or thousands of suppliers that they work with on an annual basis. Even if you get a response from them and data is available, the overall quality is going to vary significantly across the board, and the blind spots end up being incomplete or include low-quality data. You’ve got these blind spots in that you just have the potential for all sorts of poor data quality, missing data, gaps, et cetera. That doesn’t really give companies a very good line of sight into what’s actually going on.
To help companies that cannot get access to this type of primary data from their suppliers, the World Resources Institute developed an economic input-output model, which lets companies estimate their emissions based on the amount of dollars they spend across a given Scope 3 category. This is a relatively easy way to estimate emissions because all you need to understand is how much money you spend in that category.
For example, “Category One” for Scope 3 GHG emissions includes purchased goods and services. If you’ve got a sharp procurement department, they can run a report and say, “this is how much money we spent across all of our vendors in the previous year.” You could basically land on a number using this World Resource Institute calculator.
That number is not that accurate. It’s like you’re sticking your finger in the wind to figure out which way it might be blowing. It could be close, or it could be way off, just because it’s going to be using broad estimates.
If you’re only using dollars spent to calculate your emissions, then the only lever you have at your disposal to reduce emissions that you calculate using that approach is to spend less money on that category, which for most growth-motivated companies is not necessarily an option.
If you make products with steel and you plan on making more steel products as you’re going to grow, you can’t just stop buying steel or buy less steel. That’s not the way that it works. You don’t have many options at your disposal to make any kind of real improvements if you’re just using a spend calculator. Again, that’s another way that this is a blind spot. You’re using data that represents broad estimates. You don’t really have a lot of insight into how to make improvements.
If these two methods lead to these emissions blind spots in the supply chain and in emissions reporting, how do you close those gaps?
There are a couple ways that you can go about doing that. You can leverage life cycle assessment data to fill in those gaps. Life cycle assessment is an evaluation that helps quantify the environmental impact of a product or process and can quantify the impact of that product or process stage by stage.
These stages include raw material extraction, getting the primary inputs to make that product and all the stages through to its end of life. And having that line of sight in each of those stages is key to understanding where the most emissions might be generated.
It takes a science- and research-backed approach to ensure the emissions data is specific to a company’s products and helps companies to not only understand what their overall emissions are but also helps identify hotspots. Could they be in transportation? Could they be in production? Could they exist in the use of the product?
Using this information allows you to understand what you’re purchasing and what kind of products and raw materials you’re bringing in. One of the categories for Scope 3 is “Product Use,” which includes understanding the impact associated with product use. You can see in all these different stages what is in your supply chain and then also what the impacts of your products are.
It gives you a lot more granularity in terms of what the impact is on a stage-by-stage basis as well as broader things. When you use an estimate, it might have a broader number than if you’re using life cycle assessment data.
Sounds like an interesting process for sure. Can you give an example of how life cycle assessment data can help support supply chain decarbonization?
Let’s say you buy steel widgets as part of your production input, but you don’t have a clear line of sight on the emissions impact associated with that specific widget. What you’d be able to do is use life cycle assessment data to understand that impact on a very granular level. You’d get not only the final impact but the stage-by-stage impact, as we mentioned before.
You can use life cycle assessment data to understand that impact. For example, there are tens of thousands of emissions factors and emissions data sets out there that represent all manner of raw materials, finished products, energy generation, waste processing and recycling. Leveraging those data sets not only helps you find the overall impact of that widget, but further, it helps you understand what phase of the production of that widget represents the greatest area of impact.
You’ve gone over a few different approaches here so far. Could you explain some other approaches you’ve seen to use life cycle assessments for decarbonization?
The first way that it’s traditionally been used is to understand the impact—the GHG impact or the climate impact—of the products you make. If you’re thinking about decarbonization for your organization, part of it is to understand the inputs and outputs that go into your production process. That includes what kind of energy and fuel are used to make the products.
And the second thing is to understand its use. If you have an electronic device, and there’s something else that has some sort of emissions associated with the use of that product, it quantifies that as well. You have two different ways—the use phase and the production phase—where life cycle assessment data informs or identifies opportunities for you to make improvements.
You can make adjustments that would facilitate the product needing less energy to make or less raw materials to make that product. And then on the use side, you can build in efficiencies to make the product more efficient or less energy-intensive to use, resulting in less emissions as well. That’s just focused on the product side. It also helps you understand the impact of the products you purchase.
Similarly, if you’re purchasing raw materials like steel or fiber pulp or plastic resins, there’s life cycle assessment data out there that will help you understand the overall impact of those raw materials and the products you’re purchasing.
A lot of us work in certain business services organizations. It’s knowledge capital. In that case, emissions come from equipment like laptops and cell phones. There’s life cycle assessment data out there for that as well. Understanding the impact of the products you purchase can help you make informed choices on what you’re purchasing and what’s going to have the least amount of impact.
And then the final part is understanding the impact of both upstream and downstream transportation. That’s the impact of getting materials and raw goods to your organization and how you then transport that to the next point of sale or the next point in the supply chain. Those are the three areas that you can use life cycle assessment to make some decisions to help you reduce your overall impact.
This is a complex process. Could you give some advice to companies that are starting on this journey that want to leverage life cycle assessment data?
First, get to know Scope 3 GHG emissions. Scope 1 and 2 are a little bit easier to digest, and a lot of folks are already up to speed on it, but Scope 3 gets tricky, so spend some time with it.
Read through the Greenhouse Gas Protocol’s guidance documents on the subject. They’ll give you a good feel for what’s involved, including the different categories and some examples. Then you can leverage that in your journey.
Secondly, identify which Scope 3 emissions categories are likely material to your business. That’s where you’ll need to focus. If you are a business services organization, you’re not making a product. The impact of product use is not going to be a material topic, so don’t worry about it. Step two is understanding what’s material to your business.
And then, finally, get help. It’s a daunting task. Get friendly with your suppliers. Talk with peers about what they’re doing and what they’ve been successful with. Do some benchmarking. And then if you need additional support, get that help. Tracking down life cycle assessment data in the wild, so to speak, can be a time-consuming activity. If you need to bring in partners with better tools or available data, that’ll make the process of identifying the correct data to use a lot easier in most cases. Don’t be afraid to ask for help, should it get to that.
Can companies quantify Scope 3 emissions even if they don’t have quality data?
The Greenhouse Gas Protocol allows for and understands that there’s going to be imperfect or unavailable data out there. Proxies and estimations are valid approaches as long as they have some rigor behind them. We talked about using economic input-output models. We talked about using estimations and things like that. That’s all fine and well to get you started.
The economic input-output model that uses spend-based data is a place to get started and gives you some guidance. But in either case, you can only do so much with these types of estimates. That’s why you could also employ a hybrid approach, where you’re using one of these estimation methods and supplementing it with life cycle assessment data for the areas where it’s available and it makes sense to use it. That gives you stronger numbers to at least give you a more accurate representation of what your estimated Scope 3 emissions will be, versus strictly relying on estimation tools.
Great. I think you’ve given us a great overview of this process that I think our audience will find very helpful. Do you have any final thoughts before we close out the podcast?
Now more than ever, there are internal pressures on organizations to be as transparent as possible in their GHG emissions reporting. Stakeholders clearly see GHG emissions tied to risk and reputation. There’s more and more scrutiny that companies are coming under, related to this topic. Scope 3 emissions can be the elephant in the room, given that it typically represents the vast majority of a company’s overall GHG emissions—anywhere from 60% to 99% of emissions. Scope 3 typically represents the bulk of a company’s emissions. It can be a big, scary number to deal with and maybe not something that everybody’s excited about publishing.
The difficulty of getting accurate data makes it even tougher. More and more companies will be compelled to both measure and report these emissions in accurate, transparent and scientifically sound ways. That’s what investors, regulators and the public want. And that’s where a life cycle assessment can really contribute to a company’s efforts, by providing sound data that enables them to identify strategic areas for reduction efforts and providing that catalyst to make real, impactful changes and decarbonize.
Well, great. Thanks again, Sean, for joining us today on the SpheraNOW ESG Podcast.