Scope 3 emissions, Explained

The article demystifies the complexities of scope 3 emissions reporting, offering key tips to stay ahead of regulatory changes and satisfy stakeholder demands.

In 2010, the U.S. Environmental Protection Agency (EPA) mandated annual greenhouse gas emissions (GHG) reporting for organizations emitting over 25,000 metric tons of GHGs per year, and those in specific industries like vehicle manufacturing and industrial gas. This system has tracked and helped reduce roughly 85% of the nation’s direct emissions. However, these required scope 1 emissions only measure what each company emits directly, and don’t take entire supply chains into consideration. 

Until recently, reporting scope 3 emissions – which include indirect sources that organizations contribute to – has been optional. But this might be changing, as the SEC recently proposed significant changes that would require scope 3 reporting for all publicly traded companies.

Today, we’ll discuss scope 3 GHG emissions, why CPG companies should care, and outline actionable tips to simplify and streamline data for reporting – both for your own reporting and for retailer partners.

By exercising best practices for scope 3 emissions reporting, CPG organizations can meet growing retailer expectations and gain full-range visibility into their supply chain to identify areas for sustainability and continued improvement.

Today, we’ll discuss scope 3 GHG emissions, why CPG companies should care, and outline actionable tips to simplify and streamline data for reporting – both for your own reporting and for retailer partners.

What are scope 3 emissions?

First, let’s start with scope 1 emissions. Scope 1 emissions are considered the easiest to track as they are the direct result of a company’s activities such as fuel burned in fleets, machinery, or energy used to heat and power company buildings. 

Scope 3, however, includes indirect emissions from an organization’s business activities, and sources they do not own or control. 

Scope 3 emissions include 15 sectors across two main categories, upstream and downstream. Here, we’ll provide an overview of each. 

Upstream categories in scope 3

Upstream emissions are related to the production of your goods and services.

1: Purchased goods and services

Category 1 emissions are the “cradle to gate” emissions encompassing the lifecycle of the product’s materials up until its sale to the reporting company. 
Example: A tea company uses tea leaves as an ingredient in their product. In this case, its Scope 3 emissions result from growing and harvesting tea leaves.

2: Capital goods

These are the emissions released from making the capital goods that were used or acquired such as equipment, machinery, buildings, and vehicles.
Example: The tea company purchases a new truck and factory. Scope 3 emissions would result from making, manufacturing, and building this equipment.

3: Fuel and energy

Emissions from the production of purchased fuel or energy. This differs from Scope 1 emissions, which are direct emissions from the combustion of fuels owned and controlled by the company, and scope 2 emissions, which are emissions from electricity.
Example: Propane and electricity are used to run the tea factory. Upstream emissions of the production of this purchased fuel must be counted.

4: Upstream transport and distribution

Emissions from inbound and outbound transportation and distribution, if paid for by the reporting company – including warehousing by a third party. It is important to note that if the reporting company owns its own trucks, emissions are reported under scope 1.

5: Waste from operations

Emissions from waste disposal by a third party. However, if the organization has its own waste facilities, such waste is covered under scope 1.

6: Business travel

Emissions from third-party vehicles used by employees in the scope of business travel.

7: Employee commuting

Emissions arising from employees commuting to and from work, assuming they are not using a company-owned vehicle. 

8: Upstream leased assets

Emissions resulting from any leased assets, such as machinery or vehicles.

The #1 source of scope 3 emissions is upstream purchased goods and services – which accounts for all emissions generated by a company’s suppliers.

Consider this: for retailers, emissions from every product on their shelves count toward their scope 3.

Downstream categories in scope 3

The downstream category includes indirect emissions from using or disposing of your company’s goods or services. 

9: Downstream transportation and distribution

Emissions resulting from third-party transportation of the reporting company’s goods after the point-of-sale.
Example: A food distributor’s trucks transport the tea company’s sold products from a distribution center to a retailer. 

10: Processing of sold goods

Emissions resulting from products processed and/or sold by third parties. 
Example: The tea company sells bulk tea made into other tea products. Emissions resulting from the processing of the tea into the secondary product are counted under scope 3. 

11: Use of sold products

Emissions occur throughout the product or service’s life cycle due to end-users utilizing the final product.
We can then sub-categorize into indirect and direct use. 
Indirect use describes products that indirectly use or require energy to use or store the product. This is optional to report, but if it is significant enough, companies usually choose to do so. For food retailers, it could make a big difference in their scope 3 footprint if they decided not to include indirect use of all their products. 
Example: cooking and refrigeration of a food product.

12: End-of-life treatment

Emissions from waste disposal and treatment of products after use. 
Example: The tea company considers how all of its packaging will be processed at waste treatment facilities. 

13: Downstream leased assets

Emissions from assets owned by the reporting organization but leased to outside users. 

14: Franchises

Operational emissions from franchises. 

15: Investments

Emissions from the reporting company’s investments over a year that are not already included in scope 1 or 2. Category 15 mainly applies to financial institutions and investors. 
Example: The tea company has a 56% share in a tea plantation. They use the operational control method, accounting for 56% of the tea plantation’s emissions for category 15 reporting.

Why should grocery retailers and CPGs care?

Greenhouse gas emissions reporting is an opportunity for companies to be part of a climate solution. In tracking and reporting emissions outside their direct control, companies can identify areas for improvement and take action. 

It’s also true that investors and consumers care increasingly about what companies are doing to mitigate climate impact. To meet these demands, B Lab, the designating non-profit organization for Benefit Corporations (B Corps) is currently evolving its certification requirements to include more comprehensive emissions reporting – signaling the continued importance of transparency in corporate sustainability efforts.

Regardless of benefits for customer perception, the regulatory landscape concerning scope 3 emissions reporting is becoming increasingly unavoidable.  European regulations are leading the charge and driving much urgency for global companies, while in the United States, stringent regulations like the imminent SEC ruling will put us in the same lane. 

the regulatory landscape concerning scope 3 emissions reporting is becoming increasingly unavoidable.  European regulations are leading the charge and driving much urgency for global companies, while in the United States, stringent regulations like the imminent SEC ruling will put us in the same lane. 

Ahead of the ruling mandating scope 3 reporting for publicly traded companies, organizations are beginning to proactively make self-imposed climate commitments. They’re familiarizing themselves with their complex supply chains and setting up reporting protocols to get ahead of the curve and mitigate compliance risks.

Retail giants are leading the way with their net-zero initiatives. These retailers are prioritizing relationships with suppliers who report on scope 3 emissions.

CPGs are implicated in retailers’ new climate goals, and associated reporting. Target is leading much in the same way, committed to achieving a 30% absolute reduction in scope 3 supply chain emissions, covering all retail purchased goods. 

Reporting and tracking of scope 3

Tracking and reporting in scope 3 requires meticulous oversight as data must be aggregated from numerous sources. 

For starters, making better choices is essential in the journey to net zero. Not all ingredients are created equally; some have a greater level of waste or a more negative impact on the planet than others. HowGood is a research tool to inform CPGs about the products they buy and sell, helping them make more sustainable choices. HowGood’s data reveals environmental impact and provides sustainability data for over 30,000 ingredients from more than 600 data sources, encompassing labor rights, biodiversity, and more. 

Collecting and storing data where it can be easily accessed is the next step. Data is the bedrock of informed decision-making, and for that, it needs to be easily accessible and manageable. Companies can use cloud-based technology or a data lakehouse, for example, to centralize all their sustainability data. This allows for easy retrieval and analysis alongside other business metrics.

Not all ingredients are created equally; some have a greater level of waste or a more negative impact on the planet than others. HowGood is a research tool to inform CPGs about the products they buy and sell, helping them make more sustainable choices.

For better visibility of downstream scope 3 emissions, Crisp offers CPGs a transparent look at comprehensive inventory movement and sales information, with connections to over 40 retailers and distributors. The data can be viewed in native dashboards, or integrated into the cloud, or BI tools of your choice – where it can be stored and viewed with the rest of your emissions data. 

To see how Crisp can improve your company’s supply chain visibility, book a demo here.