With greater attention on climate change and jurisdictions around the world evaluating mandatory ESG reporting, Scope 3 emissions have taken centre stage. What was a niche topic only a few years ago is now the focus of a debate over who is responsible for greenhouse gas emissions – the producer of a product or the end user? The regulatory proposals and varied approaches to Scope 3 disclosure on the table in both the United States and Canada create a level of uncertainty for issuers, making it more important than ever to get educated.

Carbon Accounting Basics

In the realm of climate change disclosure, there are three main categories of emissions: Scope 1 are directly emitted by a company or its operations; Scope 2 are indirect emissions that a company’s operations use, such as purchased grid electricity; and Scope 3 occur either in the production of a product (upstream) or its consumption (downstream) but are outside a company’s direct control.     

There are legitimate concerns around Scope 3 emissions, which is likely why we see less uptake for voluntary disclosure – only 47% of Canada’s largest companies, according to a recent study by PwC. There are also many misperceptions about Scope 3, which I attempt to break down below.

Myths of Scope 3

Myth 1: It is outside of our operational control.

While Scope 3 emissions are outside of a company’s operational control, this can’t be confused with not having any choice. Companies do have a choice in suppliers, which can address the upstream component. Supply chain management is well established and for many years, companies have been slowly increasing the attention paid to sustainability performance during supplier evaluations. Similarly for downstream emissions, companies can adjust their products to lower end-use emissions without actually being the final consumer. This myth is akin to avoiding accountability for the products put on the market despite many examples of producer responsibility.  

Myth 2: Scope 3 disclosure leads to double counting.

This belief follows the logic that one organization’s Scope 3 emissions may be captured by another entity’s Scope 1 or 2 emissions. An industrial user of fuel, for example, will report the associated emissions as Scope 1, but as the fuel is burned, the producer will also account for the emissions as Scope 3 – leading to double counting. While this is a fair concern, it is important to recognize the intention of the exercise. Reporting all emission scopes is not meant to create a global inventory that adds up to the total emissions going into the atmosphere. The purpose of such reporting is for investors, who know there will be double counting, to assess risk and opportunity in a company’s value chain. If most of your emissions are Scope 1, regulatory risk might be the main concern. On the flip side, if emissions are concentrated in Scope 3, investors need to consider end consumer behaviour, the ease of substitution for your product, and whether increasing production costs can be passed on to the consumer.   

Myth 3: The data is poor and insufficient.

I couldn’t agree more that the data is insufficient, which is why we need more companies reporting Scope 3. As investors get more detailed Scope 3 disclosures, we can start the process of iteration and improvement over time. As the data improves, investors will have access to better averages and benchmarks across different industries. The current model is heavily reliant on proxies and remains inferior to companies, which know their business model best, estimating Scope 3 based on established practices and credible sources that have been considering this for years. Any investor looking for Scope 3 reporting will appreciate that the disclosure is not perfect, but rather indicative of an overall trend. Placing more attention on this set of emissions will, at minimum, bring focus to how we begin decreasing absolute emissions. If Scope 3 continues to be dismissed, we will never reach net zero in the required timeline.

Myth 4: Smaller companies are not prepared.

Investors understand this lack of preparedness. However, to move forward, companies must recognize that they do not require perfect information from every supplier in their value chain, especially in the first few years of reporting. Similar to the myth on data quality and availability, all companies need to start somewhere, and there are a variety of tools and resources to assist with this exercise while building capacity for small and mid-sized enterprises.

Scope 3 emissions will continue to be debated as we await the final rules from the Securities and Exchange Commission (SEC) and the Canadian Securities Administrators (CSA). My advice is to not let perfection be the enemy of good in this context. We can acknowledge the concerns, recognize the limitations, and still move forward.

As usual, there are grains of truth in everything. The myths above are not utterly false, but rather an incomplete picture. Given that the International Sustainability Standards Board (ISSB) has included Scope 3 emissions in its global framework, it is prudent to start looking internally to determine the degree of readiness for such reporting. Companies may even uncover benefits in the process, as they learn more about their value chain.   

Jennifer Coulson is Vice President, ESG, Public Markets, at BCI.