Scope 3 Emissions: Indirect Emissions Yet Significant Impact

Scope 3 emissions represent a significant issue for businesses of all types today. Making up as much as 65% to 95% of the average organisation’s carbon impact (PWC), this category of emissions presents an additional problem in that it occurs due to the activities of the company that lie outside its own direct control. Finding effective strategies that enable businesses to mitigate those Scope 3 emissions couldn’t be more important, but Elite Asia has now developed ESG solutions that can support organisations and help them move forward by implementing strategies that will reduce their negative impact on the environment.

Understanding the Hidden Carbon Footprint That Affects Your Business

Scope 3 emissions represent one of the biggest challenges for businesses today. These indirect emissions make up between 65% and 95% of most companies’ total carbon footprint. Unlike direct emissions from company operations, Scope 3 emissions happen outside your direct control but within your value chain. This makes them harder to measure and manage, yet they offer the greatest opportunity for carbon reduction.

With new UK regulations making climate reporting mandatory, businesses need effective strategies to tackle these emissions. Understanding and managing Scope 3 emissions isn’t just about meeting regulations—it’s about future-proofing your business and gaining competitive advantages in an increasingly eco-conscious market.

What Are Scope 3 Emissions?

The Greenhouse Gas Protocol divides business emissions into three categories:

• Scope 1 emissions are direct emissions from sources you own or control, such as company vehicles and manufacturing processes.
• Scope 2 emissions are indirect emissions from purchased energy like electricity for your offices and facilities.
• Scope 3 emissions include all other indirect emissions across your entire value chain—both upstream and downstream activities. These represent the largest portion of most businesses’ carbon footprint.

The 15 Categories of Scope 3 Emissions

The Greenhouse Gas Protocol defines 15 specific categories of Scope 3 emissions, divided into upstream and downstream activities:

1. Upstream Categories (Before Your Operations)

1. Purchased goods and services – Emissions from producing everything you buy
2. Capital goods – Emissions from manufacturing equipment and infrastructure
3. Fuel and energy-related activities – Emissions from producing the fuels and energy you purchase
4. Upstream transportation and distribution – Moving goods to your facilities
5. Waste generated in operations – Treating and disposing of your operational waste
6. Business travel – Employee travel in third-party vehicles
7. Employee commuting – Daily travel between home and work
8. Upstream leased assets – Operating assets you lease from others

2. Downstream Categories (After Your Operations)

9. Downstream transportation and distribution – Moving your products to customers
10. Processing of sold products – Further processing by other companies
11. Use of sold products – How customers use your products
12. End-of-life treatment – Disposing of your products when finished
13. Downstream leased assets – Assets you own but lease to others
14. Franchises – Operations of your franchise locations
15. Investments – Emissions from companies you invest in

Not every category applies to every business. Companies should focus on the most relevant and significant categories for their operations.

How to Measure Scope 3 Emissions

Calculating Scope 3 emissions can seem overwhelming, but there are proven methods to make it manageable:

Three Main Calculation Methods

• Spend-Based Method: Uses your spending data to estimate emissions. If you spend £100,000 on raw materials, you multiply this by industry emission factors to estimate the carbon footprint. This method is quick and works when detailed data isn’t available.
• Activity-Based Method: Uses specific activity data like kilometres travelled or kilograms of materials purchased. This provides more accurate results because it’s based on actual activities rather than financial estimates.
• Supplier-Specific Method: Collects actual emissions data directly from your suppliers. This is the most accurate method but requires strong supplier relationships and collaboration.
• Hybrid Method: Combines all three approaches, using the best available data for each category. Many companies find this the most practical approach.

Effective Strategies for Reducing Scope 3 Emissions

Successfully reducing Scope 3 emissions requires a strategic approach across multiple areas:

1. Supplier Engagement and Collaboration

Working closely with your suppliers is crucial for Scope 3 reduction. Leading companies focus on their top suppliers that represent 80% of their emissions or spending. Effective supplier engagement includes:

• Providing training and tools to help suppliers measure their emissions
• Setting joint reduction targets with key suppliers
• Integrating sustainability criteria into procurement decisions
• Offering incentives for suppliers who reduce their emissions
• Creating supplier scorecards to track progress

2. Sustainable Procurement Policies

Choose suppliers and products with lower carbon footprints. This involves:

• Prioritising suppliers with strong environmental credentials
• Selecting materials and products with fewer emissions
• Working with suppliers who use renewable energy
• Considering the full lifecycle impact of purchases

3. Transportation and Logistics Optimisation

Improve how goods move through your supply chain:

• Optimise delivery routes to reduce fuel consumption
• Choose lower-carbon transport methods where possible
• Consolidate shipments to improve efficiency
• Work with logistics partners on emission reduction

4. Product and Service Design

Design sustainability into your offerings from the start:

• Choose low-impact materials and components
• Design products for durability and recyclability
• Optimise production processes for energy efficiency
• Consider the full product lifecycle impact

5. Business Travel and Commuting Policies

Reduce emissions from employee travel:

• Promote remote working to cut commuting emissions
• Encourage public transport and carpooling
• Choose virtual meetings over business travel where possible
• Offset necessary travel emissions

6. Circular Economy Principles

Apply circular economy thinking to reduce waste and emissions:

• Use recyclable and recycled materials
• Design products for reuse and recycling
• Partner with suppliers on waste reduction
• Implement take-back programmes for your products

The Business Benefits of Reducing Scope 3 Emissions

Addressing Scope 3 emissions offers significant business advantages beyond environmental benefits:

1. Financial Returns and Cost Savings

Companies can save an average of 5.5% of operating costs through sustainable supply chain management. Optimising your supply chain for emissions often reveals inefficiencies that lead to cost savings.

2. Enhanced Brand Reputation and Customer Loyalty

Customers increasingly choose businesses that demonstrate genuine environmental commitment. Companies leading on sustainability gain competitive advantages, especially in markets where environmental performance matters to customers.

3. Improved Risk Management

Understanding your value chain emissions helps identify supply chain risks and build resilience. Suppliers facing regulatory pressure or carbon taxes may pass costs to you—early action protects against these risks.

4. Investor Attraction and Access to Capital

Sustainable companies attract more investment interest. ESG-focused investors increasingly consider Scope 3 emissions when making investment decisions, as these often represent 75% of a company’s total emissions.

5. Regulatory Compliance and Future-Proofing

With UK and EU regulations increasingly requiring Scope 3 reporting, early action ensures compliance and avoids future penalties. Companies that act now will be better positioned as regulations tighten.

UK Regulatory Landscape for Scope 3 Reporting

The UK regulatory environment for Scope 3 reporting is evolving rapidly:

1. Current Requirements

• Government Procurement: Companies bidding for government contracts over £5 million must report five categories of Scope 3 emissions
• SECR Framework: Currently focuses mainly on Scope 1 and 2, but may expand to include more Scope 3 categories

2. Future Developments

• ISSB Standards: The UK is considering adopting international standards that require full Scope 3 reporting
• EU CSRD: UK companies with significant EU operations may need to comply with EU requirements for Scope 3 disclosure starting in 2025
• Enhanced SECR: The government is reviewing whether to add mandatory Scope 3 reporting to existing UK requirements

Overcoming Common Challenges

Many businesses struggle with Scope 3 emissions due to several common challenges:

1. Data Collection Difficulties

Challenge: Getting reliable data from suppliers across complex supply chains.
Solution: Start with your largest suppliers and use digital platforms to streamline data collection.

2. Resource Constraints

Challenge: Limited time and budget for comprehensive measurement.
Solution: Use hybrid calculation methods and focus on your highest-impact categories first.

3. Supplier Reluctance

Challenge: Suppliers may be unwilling to share emissions data.
Solution: Provide support, training, and incentives to encourage participation.

4. Data Quality Issues

Challenge: Inconsistent or unreliable emissions data from various sources.
Solution: Start with estimates and improve data quality over time through supplier engagement.

Technology Solutions for Scope 3 Management

Modern technology platforms can simplify Scope 3 emissions management:

Key Features to Look For

• Automated data collection from multiple sources
• Integration with procurement and financial systems
• Supplier collaboration tools and surveys
• Real-time emissions tracking and reporting
• Scenario modelling for reduction planning
• Compliance reporting for various frameworks

Leading platforms combine AI-driven calculations with supplier engagement tools to provide comprehensive Scope 3 management.

Getting Started with Scope 3 Emissions

For businesses beginning their Scope 3 journey, follow these practical steps:

1. Assess Your Current Position

• Map your value chain and identify relevant emission categories
• Conduct a preliminary assessment using spend-based calculations
• Identify your highest-impact suppliers and emission sources

2. Set Clear Goals

• Establish baseline measurements for your priority categories
• Set realistic but ambitious reduction targets
• Align your goals with business objectives and regulatory requirements

3. Engage Key Stakeholders

• Build cross-functional teams including procurement, sustainability, and finance
• Secure leadership support for your Scope 3 programme
• Begin supplier engagement with your most important partners

4. Choose Your Approach

• Select appropriate calculation methods for each category
• Decide whether to use technology platforms or manual processes
• Plan how to improve data quality over time

5. Monitor and Improve

• Track progress against your targets regularly
• Expand your programme to cover more suppliers and categories
• Continuously improve data accuracy and reduction strategies

The Path Forward

Scope 3 emissions represent both the biggest challenge and the greatest opportunity for business climate action. While these indirect emissions are harder to control than direct emissions, they offer the most significant potential for carbon reduction and business benefits.

Companies that act now to understand and reduce their Scope 3 emissions will gain competitive advantages through cost savings, improved risk management, and enhanced reputation. With regulatory requirements increasing and stakeholder expectations rising, addressing Scope 3 emissions is becoming essential for business success.

The key is to start with what you can measure and control, then expand your efforts over time. By engaging suppliers, optimising operations, and leveraging technology solutions, businesses can turn their Scope 3 challenge into a strategic advantage.

Success requires commitment from leadership, collaboration across teams, and ongoing engagement with suppliers and partners. But for companies willing to invest in comprehensive Scope 3 management, the rewards—both environmental and financial—are substantial.

The time to act on Scope 3 emissions is now. The businesses that lead in this area will be best positioned for success in the low-carbon economy of the future.

ESG Solution is the answer for businesses that are looking for a better way to develop effective strategies to minimise their Scope 3 emissions. We are dedicated to helping businesses be not only profitable but also environmentally and socially responsible and will assist you at every step of the way as you navigate through today’s complex business environment while making the most positive impact.

For any enquiries or quotations pertaining to ESG Solutions, get in touch with our ESG solutions department below: