The Challenges of Scope 3 Reporting
Scope 3 reporting as it is described in GHG Protocol is the company relationship with its ecosystem: suppliers, investors, banks, employees, customers, etc. In spite that the experts consider that the implicit emissions are 5 times more that the explicit emissions measured by the Scope 1 & 2 the reporting is still optional. However, some of industries (e.g., banking) took the decision to implement the scope 3 reporting. In US under the SEC authority related to climate change, many companies would be required to disclose their Scope 3 emissionson a mandatory basis for the first time, as early as for fiscal year 2024. After the decision,SEC has received a flood of public comments, both supporting and opposing various elements of the proposal. The main criticism of the Scope 3 requirements includes difficulties with data collection and measurement, calculation methodologies, timing of compliance deadlines, liability concerns, and materiality standards.
Companies are now preparing to deal with these challenges and are closely following the progress of the proposal. All other indirect emissions from activities of the organization, occurring from sources that they do not own or control. Sometimes these are referred to a supply chain emissions because everything in your supply chain –organizations, people, activities, information, and resources –count. On the other hand,75% of the CEOs of Fortune 500 are confusing about Scope 3 reporting methodology.
Some other experts’ opinions: …
But ESG in its current form is more a buzzword than a solution. Each of its three domains presents different measurement opportunities and challenges, a fact not adequately addressed by existing disclosure standards. Consequently, few ESG reports engage meaningfully with the moral trade-offs within the three domains and with the company’s profits. Companies also selectively present metrics that portray themselves in a favorable light, resulting in the widespread perception that ESG reporting is awash in greenwash. Not surprisingly, auditors of these reports often resort to double negatives: “We found no evidence of misreporting in the company’s ESG report” — and the reports themselves have had little impact on either corporate actions or external stakeholders. Robert Kaplan & Karthic Rammana (Harvard Business Review)
…Scope 3 emissions are the fatal flaw in GHG reporting. The protocol’s creators included them to encourage companies to exert influence over emissions that they don’t control directly. For example, they could buy from or sell to companies with lower Scope 1 emissions and collaborate with their suppliers and customers to reduce GHG emissions along their value chains. But the difficulty of tracking emissions from multiple suppliers and customers across multitier value chains makes it virtually impossible for a company to reliably estimate its Scope 3 numbers. Robert Kaplan & Karthic Rammana (Harvard Business Review)
GHG accounting enables financial institutions to disclose these emissions at a fixed point in time and in line with financial accounting periods. Measuring financed emissions allows financial institutions to make transparent climate disclosures on their GHG emissions exposure, identify climate-related transition risks and opportunities and set the baseline emissions for target setting in alignment with the Paris Agreement. Until now, there has not been a globally accepted standard for the measurement and disclosure of financed emissions. The absence of harmonized methodologies and reporting rules has led to the poor uptake of the accounting of financed emissions and inconsistent disclosures across financial institutions. PCAF. Partnership for carbon Accounting Financials
Beside the method proposed by GHG Protocol, in the context, some (famous) authors and practitioners have issued new methodologies for calculation of Scope 3 emissions. I would mention two of them:The “value” (emission/e-liabilities) added calculation methodFootprint vs handprint method proposed for banks. We, at EnterteqSoftware, consider that the main challenge of the Scope 3 GHG reporting is the understanding the sustainability in a larger context of the ecosystem. It is difficult to mentally connect the organization from the sustainability point of view to the entire context in which the firm is doing business. The problem appears since the strategic management approach for sustainability is missing.
EnterTeq Software (enterteq.eu) is approaching the entire GHG Protocol reporting as being rooted only in a strategic management context.