What's the Deal with Scope 3?
With a heightened focus on sustainability within ESG conversations, one thing is certain, the dearth of high quality and accessible ESG data to shift supply chains into value chains is an area drawing increased attention. There is a specific facet of supply chains, however, that deserves extra attention, and it’s the category that makes up the majority of a company’s carbon footprint, that of Scope 3. So what’s the big deal?
Greenhouse gas emissions (GHG) are broken into three distinct categories called scopes. Scope 1 covers any direct emissions from a company like that of on-site fossil fuel combustion and fleet fuel consumption. Scope 2 includes any indirect emissions, for example any emissions that occur as a result of heat, steam or electricity purchases by a company. Lastly, the hardest emissions to measure is that of Scope 3; it involves basically any other emission that arises across an entire value chain. Think of how employees travel or commute to and from work, emissions due to transportation of finished products, emissions from a company’s leased assets or waste generated during operations. Scope 3 emissions can also be generated either upstream or downstream of your company and still be reportable. Anything that impacts emissions from a source not owned by the company but that directly affects the company’s activities is included in this broad-reaching bracket.
Right now, we are witnessing many global companies and industrial players pledge to cut carbon emissions as well as the Biden Administration doubling down on measures to advance climate change progress. But exactly how do these companies anticipate executing their intended paths toward reduction?
Currently, Scope 1 and 2 emissions must be quantified during reporting and disclosure as stipulated by the GHG Corporate Protocol, a corporate-level emissions inventory. But many Scope 3 emission categories are currently reported off of estimations yielding inaccurate reporting that does nothing to generate trust or real accountability.
There is a caveat though, this practice affords great future opportunity. Organizations that can reach into their value chain to understand their comprehensive sustainability impact, including Scope 3 emissions, can fast track a path to net zero by rooting out emission reduction opportunities not currently being leveraged. And it is possible with blockchain technology.
When companies use smart contracts in their supply chain, they create an immutable record of events and services derived from field operating data and sources of provable information. By collecting data and generating a “record of truth,” smart contracts determine if terms in a contractual relationship are satisfied before triggering payments. The resulting outputs from the smart contract form an immutable, auditable record in the form of a blockchain. This same application of blockchain can be deployed to capture evasive Scope 3 emissions data, enabling companies to understand impact based on facts, not guesswork.
To streamline supply chains, support carbon reduction targets and measure accurate GHG emissions, Scope 3 must move into a quantifiable realm no longer employing estimations.