Carbon footprint disclosures are becoming increasingly necessary as regulatory measures and market concerns push for transparent emissions accounting. The scope of reporting will soon be expanded to include supply-chain emissions (Scope 3), which typically constitute the bulk of an organisation’s footprint but can be challenging to reliably report. Our five-step guide distils the essential ingredients for consistent carbon disclosures.
Reliable carbon footprint reporting is a critical first step towards decarbonisation, and a key ingredient in setting meaningful reduction targets informed by an organisation’s main emission sources and net footprint. Aside from increasing regulatory pressure, the growing risk of climate change is driving companies to take accountability for their emissions ─ both to join global efforts against an encroaching climate disaster and to satisfy market participants, who recognise that an organisation’s long-term profitability and resilience are closely interwoven with its environmental liability.
Scope 1, 2, and 3 emissions
The Greenhouse Gas (GHG) Protocol for corporations distinguishes three scopes for classifying the emissions generated by an organisation and its activities. The emissions directly produced by on-site operations or by activities under the financial and/or operational control of the reporting company are classified as Scope 1 emissions. These can include space heating, air-conditioning leaks, or fuel combustion by fleet vehicles. Scope 2 emissions include indirect emissions due to purchased energy, such as purchased electricity, steam, and cooling. Although Scope 2 emissions occur at the facility where they are generated, they are accounted for by the reporting company as they result from its energy use. All other indirect emissions, which find their origin up or down the supply-chain of the reporting company, are classified as Scope 3 emissions.
The importance of Scope 3 disclosures
Thus far, most companies have focused on reporting their Scope 1 and 2 emissions, but the inclusion of Scope 3 emissions is becoming increasingly common as companies and financial market participants are incentivised to take responsibility for their total carbon footprint ─ even the portions of their emissions over which they do not have direct control or ownership. This is part of a larger paradigm shift, in which environmental accountability for companies and financial institutions is prioritized, and their adherence to policy changes aimed at reducing emissions, both on-site and along their supply-chain, is closely monitored by consumers, employees, stakeholders, and investors.
The inclusion of Scope 3 emissions ─ which typically dominate an organisation’s total footprint ─ allows for a more accurate assessment of a company’s climate impact. While reporting on these emissions is voluntary for the time being, regulatory infrastructure, such as the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulations (SFDR), will mandate Scope 3 accounting for large companies, SMEs, and financial market participants in the coming years.
Streamlining carbon reporting: our five-step process
Disclosing reliable and comparable carbon emissions relies on standardizing the collection, analysis, and reporting of carbon footprint data. This is particularly pertinent in assessing the emissions associated with each of the fifteen scope 3 categories, partly due to ambiguity in identifying the material emissions sources, and gathering accurate and relevant data. However, many organisations are in the dark regarding carbon assessments due to the breadth of available reporting options.
To this end, the Carbon & Climate practice has created a distilled five-step guide to streamline carbon accounting for companies, in adherence with the standardized accounting framework provided by the GHG protocol:
- Lay the foundation: Determine whether the company’s emissions will be reported according to its equity share or control share over the generated emissions; set the organisational boundaries; identify the reporting year and base year for target setting.
- Identify and categorise the emission sources: Assess the relevance and materiality of each emission source, and group them within the emission scopes.
- Collect material data: Collect activity data for each of the identified material sources; activity data can take the form of so-called consumption data (e.g., litres of fuel, kilowatt-hours of electricity) or spend data (e.g., amount of money spent).
- Select appropriate emission factors: Use current and geographically relevant emissions factors, and account for the global warming potential (GWP) of various GHGs to make their climate impact directly comparable to carbon dioxide. For Scope 3 reporting, supplier-specific emission factors result in the most accurate estimates of the carbon footprint.
- Calculate carbon footprint: Report the consolidated emissions as the product of the activity data and its associated emission factor.
This process forms the backbone of our in-house carbon tool, which is embedded within our proprietary data platform, ESG Advantage. This tool automates and streamlines the carbon accounting process for clients, making it easy to readily calculate an organisation’s total carbon footprint and identify key levers for reducing emissions.
For more detail on our five-step approach to carbon accounting, please refer to our in-depth article on carbon footprint reporting: See the Carbon footprint whitepaper here.