Scope 3 Accounting - Potential Challenges for Companies
The calls for the regulation and wider disclosure of Scope 3 emissions has led to many questions regarding the ability of organizations to manage the challenges presented by calculating Scope 3 emissions. Scope 3 emissions, also known as value chain emissions, result from the activities from assets not owned or controlled by the reporting organization, but indirectly impacted by the organization's value chain.
Scope 3 emissions often account for more than 70% of an organization's carbon impact, making their inclusion in emissions reporting greatly important to establish reliable reporting. However, Scope 3 emissions are both difficult to ascertain and mitigate, posing a challenge for companies looking to become fully carbon neutral. So what exactly are the challenges?
Accounting challenges
There are several methods of calculating Scope 3 emissions, and it can be difficult for an organization to develop the capacity and processes necessary to undertake the calculation. Methodological challenges arise that may cause issues with the overall credibility of the results produced by the organization. Investors and potential regulators are looking for companies to produce carbon disclosures that are consistent, comparable and reliable. Companies will need to ensure that they do not minimize their impact, or in some cases, overestimate it through double counting.
Collecting and managing the relevant data can also be difficult. The extent of scope 3 emissions can result in a large amount of data needing to be collected and stored, and a company might struggle to establish mechanisms for data collection and quality check processes.
Companies are often presented with much uncertainty when it comes to calculating Scope 3 emissions. The 15 Scope 3 categories were intended to be mutually exclusive but, due to an organization’s involvement at multiple points in the life cycle of products, defining clear value chain boundaries can be challenging.
Supplier Challenges
One of the most difficult aspects for companies looking to calculate Scope 3 emissions is the cooperation and coordination with suppliers. Companies looking into their value chain to ascertain the full extent of their carbon impact will struggle if suppliers do not undertake their own emissions reporting, or if there are issues with their reporting.
Renewable Energy in the Supply Chain
Companies that have already implemented renewable energy into their productions could attempt to look for suppliers who also operate using renewable energy. However, this can be difficult as well, as there is little transparency and information available on how to transition to full renewable energy use. The ability to operate using renewable energy varies country by country, causing problems for large companies with multi-national operations looking to become fully carbon neutral.
Scope 3 emissions pose a unique challenge to both companies and regulators. Calculating this category of emissions can be time consuming, costly and confusing. However, including these emissions when calculating a company's overall carbon impact is paramount, in order to accurately assess progress towards carbon neutrality. By prioritizing data collection processes and upstream supplier reporting initiatives, data quality will improve over time and the task of calculating Scope 3 emissions will become less strenuous for the numerous companies who will soon be required to do so.
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Based in Seattle, RyeStrategy is a CDP-accredited, mission-oriented company specialized in carbon accounting, mitigation coaching, and climate disclosure solutions for organizations at any point in their sustainability journey. Learn how RyeStrategy helped Salesforce, Ideascale, and Wazoku achieve their sustainability goals.
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