Earlier this month, the Greenhouse Gas Protocol launched its Value Chain (Scope 3) Standard, establishing a common way for companies to define and measure their total greenhouse gas impacts, risks, and opportunities — including those that are beyond the company’s direct operating control but that may represent the most significant impacts on the price and stability of the company’s supplies, customer demand, reputation, and costs.
One of the most important sustainability standards of the decade, it is not a new concept: The idea of Scope 3 (as distinguished from “Scope 1” activities that a company owns or controls, and “Scope 2” electricity purchases) has been around since it was defined in the GHG Protocol’s Corporate Standard in 2001.
In place of a brief subsection, however, the document now runs more than 150 pages, complete with a suite of technical resources, from guidance on supplier engagement to a list of third-party databases on value chain GHG information.
Daunting as this sounds, much remains the same. The definition of Scope 3 has not changed, and the new volume is organized in a similar way as the Corporate Standard, beginning with instructions on defining business goals, then an explanation of the core framework — from accounting principles to boundary-setting to data collection, followed by guidance on optional activities such as providing assurance to reports and tracking emissions over time.
But there are also significant new developments, including some that seasoned practitioners have been expecting and others that may be surprising. What follows are my picks for the most important new features of the updated framework.
Fifteen Authoritative — and Useful — Categories
If Scope 3 has a soul, it is contained in its categories. These 15 categories — everything from capital goods to investments — characterize the greenhouse gas footprints of companies’ value chains, and they set the stage for how, in practice, companies will reduce them.
Previously, the GHG Protocol called these categories an “indicative list.” Now, each category is carefully described, with the minimum boundary explained, and rigorous calculation options that have been refined with input from hundreds of professionals across sectors. Each Scope 3 category is classified as either upstream or downstream. (For comparison, here are the old and new depictions.)
One way to keep track of these categories is to think of them in terms of the activities companies will focus on to manage them:
- Collaborative energy management: Seven categories represent areas where the path to GHG reduction most likely involves working with partners to reduce energy use together. These opportunities occur in the purchasing of goods and services, upstream leasing, downstream leasing, franchises, the processing of sold products, capital goods, and investments.
- Logistics: Four categories address the movement of people and goods (business travel, employee commuting, and both upstream and downstream transportation/distribution).
- Products and byproducts: With three categories, design and engineering would be put to use to address waste generated in operations, end-of-use treatment of products, and product use.
- Upstream energy: The final category looks into the supply chain of Scope 1 and 2 energy sources that companies are already reporting on.
A Simpler Conversation
The most revolutionary feature is the introduction of a new standard that significantly simplifies companies’ conversations with stakeholders. Now, investors, customers, and partners can ask whether a company does or does not conform to the Scope 3 standard, and, if not, when it will do so. This is a major advancement over the Corporate Standard, which had declared Scope 3 reporting optional and offered little instruction on how to do it. This development is poised to change the norms of GHG footprinting for a few reasons.
The most obvious is that it sets a common bar. Although the standard isn’t designed to allow straight comparisons of actual GHG data between companies in a given category, it creates a way for one to compare the depth of understanding, investment, and overall seriousness of companies on value chain GHG management. In turn, Scope 3 may spark new ways to score and index companies against one another.
This will also change things because the new standard is stringent enough to separate leaders from the pack by requiring, among other things, reporting on all 15 categories with transparent calculations. While more than half of Global 500 companies reported information about Scope 3 in their 2011 responses to the Carbon Disclosure Project, only 20 percent reported on more than two categories, and only 5 percent reported on more than five. There’s a big gap between that and the 15 categories Scope 3 requires. Watch for the 30 companies (PDF) that road-tested the standard to set the pace.
Finally, Scope 3 forces a more careful evaluation of GHG priorities. As leaders begin to demonstrate what’s possible, investors are likely to ask more questions. For example, if a company is not reporting on a category, is that because it’s not material, or because the company isn’t paying attention? It will therefore become more important for all companies to consider the merits of Scope 3 conformance, and establish KPIs that lead them in the right direction.
Gears and Levers for All
Another major accomplishment of the new standard is that it will help drive greater consistency — and hence comparability — in methodologies for calculation and allocation of GHG emissions.
The standard provides calculation guidance for each category. While specifics vary for each category, they follow the same pattern: The company obtains “activity data” (fuel bills or financial information) and multiplies that by a published emissions factor to produce a GHG inventory. Then, when relevant, the company applies another calculation to determine its allocated share. Within each category, there is typically a choice between at least two methods: One that relies on more internally accessible information to provide a rough estimate, and another that uses more site-specific measurements to produce a more precise reading.
Not every company will find the calculation options perfect for its needs, and the methods will undoubtedly improve in the future. But this is the first time there is agreement on such a grand scale about what basically works across industries. Companies now have clear rules for measuring value chain emissions, which should give them the confidence to broadly account and report on emissions in their value chains. At the same time, these new “gears and levers” point the way for tool-builders, from software providers to multi-company working groups, to more effectively account for emissions in a way that is understandable outside of expert or industry circles.
A Bonus Tool for Products
Scope 3 comes with an extension: the Product Standard. Developed in coordination with Scope 3, the Product Standard provides a framework for measuring products’ lifecycle GHG impacts. This is related to Scope 3 but quite different: While Scope 3 provides information that applies to the whole organization broadly, the Product Standard deeply examines information for individual products from the perspective of the end user.
The Product Standard thus provides a useful tool for taking further steps when inventories of the Scope 3 “product use” category reveal products that are particularly impactful — whether through the direct use of energy (through the use of energy or fuel) or from activities required to maintain them (the use of energy-drawing equipment to clean) or use them (from mixing with hot water).
While all types of companies should find the Product Standard useful, consumer products companies, whose customers (and investors) are interested in learning about lifecycle impacts, will be most interested. It is also applicable to those selling energy-using solutions, such as information and communications technology manufacturers, where demand for energy-efficient equipment is likely to grow as the cost of energy rises. Nonetheless, most large companies should be looking at the Product Standard, which synthesizes a huge amount of useful information, to at least understand the mechanics of how GHG flows through the lifecycles of their products.
Answers to Tough Questions
Anyone who has been working on value chain GHG management for any length of time knows that the area is rife with challenges. One of the best features of the Scope 3 standard is that it answers some of these.
Some difficult questions relate to managing data quality and uncertainty. As one manager once told me, with value chain GHG footprinting, it is often that the “error bars” exceed the “mean.” In plain English: It’s frequently not much better than a guess. The Scope 3 standard helps by breaking down the sources of uncertainty into specific types that will help clarify what is — and what is not — known, which can help companies understand where they need to be most careful.
Other questions relate to the treatment of avoided emissions from the use of sold products — that is, what can a company say about the emissions that were reduced from customers buying its high-efficiency electronic device. This is a hot topic in industries that produce energy-using appliances, information and communications technology services, and energy-management solutions, where companies have been looking for guidance on how to most accurately account for their current and planned work.
Last but not least, the new standard provides some welcome direction on what the accounting and reporting is all about: making actual investments in GHG reduction. The guide provides examples of actual initiatives, by category, from using raw materials that emit fewer emissions, to reducing the distance between supplier and customer, to shifting to lower-emitting fuel sources.
First posted at Greenbiz.