The rising interest in tracking Scope 4 emissions
Climate-conscious companies reporting on Scopes 1-3 emissions are now realizing that such reporting is not sufficient without the inclusion of Scope 4 emissions.
Businesses are actively pursuing to decrease their greenhouse gas (GHG) emissions in the journey toward achieving net-zero emissions. A well-established method for this is to evaluate their emissions through the lens of Scopes 1-3 emissions.
What are the Scopes 1, 2, and 3 carbon emissions?
The scopes classify the different types of emissions, originating from a company's operations along with their value chains.
It addresses emissions coming from a company's direct ownership or control. This includes operating machinery for product manufacturing, driving non-electric vehicles, and providing heat to buildings and energy to computers.
Figure 1 shows the estimated worldwide Scope 1 GHG emissions of the top ten companies by market capitalization in 2022. Samsung holds the top position, totalling around 5.97 million metric tons of carbon dioxide equivalent (MTCO2e).
It contains indirect emissions resulting from the energy purchased by a company. The energy consumed by utilities in the processes of transmission and distribution losses is categorized under Scope 3. In 2022, TSMC stood out as the firm with the highest scope 2 GHG emissions, i.e. around 9.54 million MTCO2e (Figure 2).
It includes emissions that do not originate from the company's direct operations but from other companies indirectly linked throughout its value chain. This means emissions generated by customers using the company's products and from the suppliers involved in the production of items. Figure 3 shows the estimated worldwide Scope 3 GHG emissions from leading tech companies in 2022.
Adding Scope 4 to Scope 1-3 emissions
In recent years, Scope 4 has gained popularity. The WRI defines it as avoided emissions, occurring outside a product’s life cycle as a result of using that product. For example, low-temperature detergents, fuel-saving tires, energy-efficient ball bearings, and teleconferencing services.
While reporting standards for Scope 1-3 emissions are well-established under the GHG Protocol and the PCAF, there is currently no universally recognized standard for reporting Scope 4. This forces companies to rely on industry averages, making the emissions reporting challenging and raising concerns about the possibility of greenwashing.
What are the challenges of the Scopes?
According to Deloitte UK, Scope 3 emissions are always the big one, consisting of over 70% of a business's carbon footprint. While companies can readily measure their Scope 1 and 2 emissions and have control over them, Scope 3 emissions are influenced by decisions made beyond the company's direct control. As it involves suppliers or customers, the assessment becomes a huge challenge for the companies to carry out.
Concerning "in-use" scenarios by the customers, the assessment includes the emissions arising from the utilization of sold products. Similarly, in the category of "end-of-life treatment", companies face the challenge of evaluating the disposal methods for their products. Figure 3 shows the emissions from the life cycle of one Mercedes-Benz car in 2022. The use phase contributed the highest emissions of about 30.7 tonnes.
Tiffany Kulasekare, a senior consultant at a sustainability-focused software company, Rio ESG warns of greenwashing. When companies prioritize avoided emissions, it may not present the full environmental impact.
However, there is an opportunity too. Companies may find it advantageous to discuss avoided emissions for several reasons. It helps them to present their positive environmental impact narrative, and enhance their standing with consumers, suppliers and employees. Reporting on avoided emissions can help companies make decisions aligning with their sustainability objectives.
What can businesses do to reduce their Scopes 1-4 emissions?
Reducing Scope 1 and 2 should be the priority. Businesses aiming to offset their Scope 2 emissions can achieve this through actions like switching to renewable energy.
Along with it, transparency and accountability throughout the value chain can help the business meet its decarbonization goal. A notable example of a company committed to decarbonizing its value chain is Schneider Electric.
Through its Zero Carbon Project, the company aims to achieve a 50% reduction in emissions from its suppliers' operations by 2025. As part of this initiative, it has provided decarbonization training to 1,000 companies.
Some companies are still reluctant to disclose their emissions, which impacts other companies along their value chain. Figure 5 is the evaluation of 954 companies from the Russel 1000 index in 2022. According to the JUST report, about 43% of the companies did not disclose Scope 1+2 emissions, with even fewer addressing reporting on Scope 3 emissions.
Growing in popularity, Scope 4 is gaining traction. Some companies have already started thinking about it in their reporting practices. For instance, Aveva, an FTSE 100 company, has outlined in its 2022 annual report to establish a baseline for Scope 4 by 2025.
As Scope 4 reporting becomes more standardized, companies will need to allocate additional resources to accurately report these emissions. But the challenges will remain there for a while.
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