Scope 3 Emissions Research & Supply Chain Transparency

Companies have become proficient at calculating direct emissions (Scope 1) as well as those from purchased utilities (Scope 2). However, Scope 3 emissions, which include indirect emissions from a company’s value chain and suppliers, continue to be challenging due to the complex web of supplier relations and their extended business workstreams.1 Scope 3 emissions are estimated to be the largest scope category. The Carbon Disclosure Project (CDP) estimates that it accounts for on average 75% of a company’s overall emissions, and over 80% of companies report that quantifying their Scope 3 emissions is difficult.2 The graph below showcases the break of each category of scope emissions by sector. 

Green Button Project graph showing customer data

The CDP was established in 2000, asking companies to disclose their climate impact. They have since expanded to cover all planetary boundaries. Today they are one of the largest organizations that help track carbon footprinting for companies and are one of the four recommended reporting companies for the European Union’s new regulation. The CDP rates companies based on the information that is provided and establishes a metric of comparison for them to evaluate with a year-over-year view of how they have changed.

Green Button Project graph showing customer data
The Problem & Impact
European Commission: Corporate Sustainability Reporting estimates that over 50,000 companies4 will have to comply with the Corporate Sustainability Reporting Directive (CSRD) reporting requirements starting in 2025, for 2024 emissions using a phased approach based on the company size with the last phase rolling out in 2029, this includes both European Union (EU) and non-EU entities. Penalties for companies failing to comply with the regulations change from one country to the next, but in France the penalties range from fines up to €75,000 with the additional threat of five years imprisonment for the chief business leader if they fail to provide any of the needed information to external auditors. If they fail to have their report audited at all but provide all of the information then they can expect a penalty of €30,000 with the additional threat of a two-year jail term. In the US, while the Securities and Exchange Commission (SEC) has rolled back the scope 3 emissions at this time, it is expected to come back to vote once more clear outlines have been put in place. California has taken a step further and passed into law in October 2023 the Climate Corporate Data Accountability Act–California SB 253 that mandates Scope 3 reporting for both public and private companies operating in the state with more than $1 billion in annual revenue, with reporting starting in 2027. This includes any company that has a location-based in California, has any financial transactions for profit, or is paying any payroll, sales, or property tax in the state. This affects both companies that are US-based as well as international. Of the top 10 most profitable companies in the world, nine of them are subject to this new California law. While there are currently about 1,000 companies that are based in CA that are generating revenue of over $1B, PwC estimates that this will affect over 10,000 companies.5 The penalty for not complying with California SB 253 is issued by the California Air Resources Board, penalties will be based on the amount of revenue the company made in the year, not to exceed $500,000 per reporting year.
The Paradox of Carbon Spend-Based Method

To address the complexity of Scope 3 emissions reporting in corporate supply chains, the Greenhouse Gas Protocol has deemed the spend-based method for calculating the carbon footprint a compliant option, when direct emissions data from suppliers are not available. The spend-based method estimates emissions by utilizing economic value data of purchased goods or services multiplied by industry-average emission factors related to their monetary value. As explained in the chart below, if a company accounts for 10% of a supplier’s total sales, it is assigned 10% of that supplier’s emissions. The problem is when companies start to make more sustainable choices and incur a higher cost for those investments, their CO2 emissions reflect an increase due to the cost of the product going up.

Green Button Project diagram

The margin of error is drastic, which disincentivizes companies to make more sustainable choices at the expense of investing, and with the current methodology, it makes lowering Scope 3 emissions and meeting their climate expectations an unachievable goal. In the graph below you can see the margin of error that the current spend-based model is creating.

Green Button Project diagram
There are more detailed reporting approaches but they are very hard to track all of the information, and there are issues in sharing that information publicly due to company privacy and disclosure concerns. Life cycle emissions data is the most accurate method for Scope 3 emissions tracking but the complexity that goes into that method is extensive. Getting real tracking is currently very labor-intensive and nearly impossible. For these reasons, the spend-based method is the most readily accessible to all companies, but it is not the most accurate.
Green Button Project diagram
Each sector also has very different needs to tackle Scope 3 emissions. Scope 1 and 2 for the transportation sector is actually Scope 3 for all of their customers. This means that each business sector needs its unique way of tracking its Scope 3 emissions and sharing that information in a way that does not breach any private concerns with its customers.
The Goal

By establishing a collaborative community of companies and suppliers, focusing on methodological and algorithmic aspects, we aim to enhance accuracy and privacy, and define strategies in Scope 3 emissions reporting and reduction strategies, conducting studies with the CSCMP (with its over 9,000 members) and the CDP (over 23,000 companies) to provide recommendation for the following research questions:

  • Phase 1: How to effectively and accurately identify and adjust outliers to properly reflect the carbon intensity factor on Scope 3 emissions without risking privacy concerns? What are the strategies for rectifying estimation errors and enhancing the reliability of supply chain estimations?
  • Phase 2: How to simplify the challenges for scope 3 emissions and improve the real tracking process leveraging new machine learning technology?

As part of the Phase 2 research questions, we will evaluate each business sector to simplify its own method of tracking Scope 3 emissions and develop a way to share that information with their customers in a way that does not violate any of their privacy concerns. We will develop a global standardization so that if a corporation shares its Scope 3 emissions with the EU, California, or any future entity that implements regulations, it is the same required data that is being requested and it is shared in a way that is simple and easy for the company to do.

Green Button Project diagram
The responses to these questions will provide input to CDP systems to expand their capabilities for their customers, as well as the tens of thousands of other companies that need to start tracking Scope 3 emissions in the coming years. Proceeding the research, we will write a report based on the findings that will be accessible on the State of Supply Chain Management website.

** This is an active project. Last update as of August 28, 2024.