How to Assess Scope 1, 2 and 3 Emissions Data and Risks in Your Supply Chain

Increasing regulatory requirements and customer and investor demands make supply chain sustainability reporting a must. Use these best practices to simplify emissions compliance.

By:

Scott Lang

VP, Product Marketing

August 15, 2024

In today’s business and regulatory environment, sustainability is no longer just a buzzword; it is a critical factor that shapes a company's reputation, operational efficiency, and long-term viability. Among the various aspects of sustainability, understanding and managing greenhouse gas (GHG) emissions has emerged as a key priority among investors and government regulators. For businesses, this involves not just focusing on direct emissions but also extending attention to indirect emissions throughout the supply chain. This is where scope 1, 2 and 3 emissions come into play.

This post examines scope 1, 2 and 3 emissions, explains why assessing supply chain sustainability is essential, reviews key regulatory requirements, and suggests best practices for establishing and maintaining sustainability compliance.

Understanding Scope 1, 2 and 3 Emissions

Before delving into the importance of assessing these emissions, it is essential to understand what each scope entails.

Scope 1 Emissions

These are direct GHG emissions from sources that are owned or controlled by the company. This includes emissions from fuel combustion in company-owned vehicles, as well as any other onsite activities.

Scope 2 Emissions

These are indirect GHG emissions associated with the consumption of purchased electricity, steam, heating, and cooling. While these emissions occur at the facility where the energy is generated, they are a consequence of the company's energy use.

Scope 3 Emissions

These encompass all other indirect emissions that occur in the value chain of the company. This includes emissions from both upstream and downstream activities, such as the production and transportation of purchased goods and services, waste disposal, and use of sold products.

The Importance of Assessing Scope 1, 2 and 3 Emissions

If environmental sustainability is central to your organization’s mission and values, then it will be important to assess supplier, vendor, and other third-party partner scope 1, 2 and 3 emissions data to ensure that they align with acceptable business practices. We examine a few of the reasons here.

Comprehensive Carbon Footprint

To gauge a company’s carbon footprint accurately, it is imperative to consider all three scopes of emissions. Scope 1 and 2 emissions are relatively easier to measure and manage as they are within the company’s direct control and are often subject to regular government-mandated reporting. However, scope 3 emissions often constitute the largest share of a company’s total GHG emissions and are usually outside the company's direct control.

By assessing all three scopes, companies can develop a comprehensive understanding of their total environmental impact. However, the challenge with assessing all three scopes revolves around data – namely, collecting and making sense of scope emissions data from multiple sources.

Risk Management

Assessing scope 1, 2 and 3 emissions helps companies identify and mitigate regulatory, physical, and reputational risks. For instance, ESG regulatory policies are increasingly targeting not just direct but also indirect emissions and companies that fail to address these may face penalties.

Many organizations face the challenge of addressing sustainability compliance requirements, including collecting data from multiple sources and presenting it in a common framework.

Stakeholder Expectations

Investors, customers, and other stakeholders are increasingly demanding transparency and accountability regarding a company’s environmental impact. Assessing and disclosing scope 1, 2 and 3 emissions demonstrate a company’s commitment to sustainability and can enhance its reputation, attract environmentally conscious consumers, and meet investor criteria for responsible investment.

To meet stakeholder expectations, organizations must be concerned with ensuring the reliability of sustainability reporting.

Operational Efficiency and Cost Savings

Understanding emissions across the supply chain can highlight inefficiencies and areas for improvement. For example, reducing energy consumption (scope 2) or optimizing logistics and transportation (scope 3) can lead to significant cost savings. By focusing on reducing emissions, companies often find innovative ways to improve processes and reduce waste, leading to overall operational efficiency.

Regulatory Compliance and Competitive Advantage

Companies that proactively measure and manage their emissions are better prepared to comply with increasingly stringent regulations. Additionally, being a leader in sustainability can provide a competitive advantage, differentiating the company from its peers and positioning it as a preferred partner for environmentally conscious consumers and businesses.

Align Your TPRM Program with Expanding ESG Regulations

Download this guide to review current and future ESG standards and legislation, and learn how to prepare your TPRM program for compliance.

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Scope 1, 2 and 3 Regulations and Supply Chain Reporting

Several global regulations and frameworks call for or encourage the reporting of scope 1, 2 and 3 emissions. These regulations aim to enhance transparency, accountability, and action on sustainability. Here are some of the key regulations and initiatives:

Greenhouse Gas Protocol (GHG Protocol)

While not a regulatory body, the GHG Protocol provides comprehensive global frameworks for measuring and managing greenhouse gas (GHG) emissions from private and public sector operations, value chains, and mitigation actions. It is widely used by businesses to report Scope 1, 2 and 3 emissions and is the basis for many regulations and reporting standards.

European Union (EU) Non-Financial Reporting Directive (NFRD) and Corporate Sustainability Reporting Directive (CSRD)

The NFRD requires large public-interest companies with more than 500 employees to disclose non-financial information, including environmental matters. The CSRD expands the scope to more companies and requires reporting in accordance with the EU’s sustainability standards, including detailed information on scope 1, 2 and 3 emissions.

United States Securities and Exchange Commission (SEC) Rule

The SEC proposed a rule in 2022 that would require publicly traded companies to disclose climate-related risks and GHG emissions data, including scope 1, 2, and potentially scope 3 emissions. The rule was adopted in March 2024 with the goal of enhancing transparency and standardization of climate-related disclosures in the U.S.

Task Force on Climate-related Financial Disclosures (TCFD)

The TCFD provides a framework for companies to disclose climate-related risks and opportunities. While not mandatory, it is endorsed by numerous governments and financial regulators. In fact, many countries and regions are incorporating TCFD recommendations into their regulatory frameworks, requiring or encouraging the disclosure of scope 1, 2 and 3 emissions.

Climate Disclosure Standards Board (CDSB)

The CDSB provides a framework for reporting environmental information with the same rigor as financial information. It aligns closely with the TCFD recommendations and emphasizes the importance of disclosing scope 1, 2 and 3 emissions. CDSB is widely used by companies globally to enhance their climate-related disclosures.

United Kingdom’s Streamlined Energy and Carbon Reporting (SECR)

The SECR requires large UK companies to report on their energy use and GHG emissions, including scope 1 and 2 emissions. Scope 3 reporting is encouraged but not mandatory. This regulation aims to increase transparency and help companies take steps to reduce their carbon footprint.

Australia’s National Greenhouse and Energy Reporting (NGER) Scheme

The NGER Scheme requires corporations to report their GHG emissions, energy production, and energy consumption. It is primarily focused on scope 1 and 2 emissions, but companies are encouraged to consider scope 3 emissions.

Global Reporting Initiative (GRI) Standards

The GRI provides comprehensive sustainability reporting standards, including guidelines for reporting on GHG emissions across scopes 1, 2 and 3. Companies worldwide have widely adopted the GRI to enhance transparency and accountability in sustainability reporting.

Five Best Practices for Assessing and Monitoring Supply Chain Scope 1, 2, and 3 Emissions

Companies that proactively measure, manage, and report their scope 1, 2 and 3 emissions are better positioned to navigate this complex regulatory environment and demonstrate their commitment to sustainability. Assessing and monitoring supply chain scope 1, 2 and 3 emissions can be a complex task, but following best practices can make the process more manageable and effective.

1. Establish a Clear Framework and Strategy

Clearly define the objectives of your emissions assessment and the boundaries of your continuous monitoring analysis. Determine which parts of your supply chain will be included. Utilize established frameworks such as the GHG Protocol to ensure consistency and accuracy in your emissions reporting.

To ensure a comprehensive approach, involve key internal departments such as procurement, operations, finance, and sustainability. Collaborate with suppliers and other external partners to gather necessary data and encourage transparency.

2. Pre-Screen Suppliers

Build comprehensive supplier profiles that compare and monitor supplier demographics, fourth-party technologies, ESG scores, information from the EPA Environmental Crimes Database, sustainability ratings, recent business and reputational insights, data breach history, and financial performance. Use results in line with RFx responses for a holistic view of supplier risk. Gaining pre-contract visibility into suppliers will mitigate risks once the relationship has begun in earnest.

3. Include Sustainability KPIs in Supplier Contracts

Centralize the onboarding, distribution, discussion, retention, and review of supplier contracts, and leverage workflow to automate the contract lifecycle, ensuring enforcement of ESG requirements. Develop key performance indicators (KPIs) to track progress towards your sustainability targets with suppliers.

4. Perform Comprehensive and Continuous Sustainability Assessments

Conduct an initial baseline assessment to understand your current emissions profile. Implement a system for continuous ESG monitoring and regular updates to capture changes over time. Conduct periodic audits to verify data accuracy and integrity.

Leverage a dedicated ESG risk assessment in line with your third-party risk management program that examines risks from the most common ESG domains, including community, CSR strategy, emissions, human rights, innovation, management, product responsibility, resource use, shareholders, and workforce. Take actionable steps to reduce risk by recommending remediations and guidance that align with your organization’s chosen framework.

5. Review Scope 1, 2 and 3 Emissions Reporting

Seek analyst-validated scope 1, 2 and 3 data for supplier's direct and indirect emissions. Compare supplier data over time and against industry averages. For areas where direct data is not available, use reliable estimation methods, and industry benchmarks to approximate emissions. Use this data to validate the effectiveness of a supply chain partner’s sustainability controls and practices as reported in the best practice above.

By following these best practices, companies can effectively assess and monitor their scope 1, 2 and 3 emissions, leading to improved sustainability performance, enhanced stakeholder trust, and reduced environmental impact.

How Prevalent Helps Simplify Scope 1, 2 and 3 Supply Chain Emissions Reporting

By comprehensively understanding and managing scope 1, 2 and 3 emissions, companies can mitigate supply chain and reputational risks, meet stakeholder expectations, improve operational efficiency, and gain a competitive edge.

The Prevalent Third-Party Risk Management Platform centralizes ESG and sustainability monitoring data and correlates it with the results of questionnaire-based ESG risk assessments to standardize and simplify ESG supplier compliance reporting. The Prevalent TPRM Platform features:

Globally-sourced, standards-based data from a recognized leader in ESG and sustainability reporting.
Advanced sustainability ratings and scores, including Scope emissions and EVIC.
Analyst-curated negative news and controversies to deliver visibility into potential reputational concerns.
A comprehensive library of global sustainability questionnaires with built-in remediation guidance to benchmark reporting.
A centralized risk register of assessment results and sustainability data for investigation, triage, and task and event management.

With the Prevalent TPRM Platform, procurement, and supply chain teams improve supply chain visibility and consistency and save time by providing one-stop access to thousands of ESG scores, intelligence, and controversies fully aligned with other enterprise risks.

For more on how Prevalent can help align supply chain ESG and sustainability goals with your broader third-party risk management program, request a demonstration today.

Tags: Compliance ESG