Reporting emissions can be daunting for SMEs, with concepts like the 3 scopes seeming complex.
But by demystifying key ideas around scope 1, 2, and 3 emissions, companies can unlock efficiency and opportunities in sustainability.
This article provides a roadmap to master emissions accounting, emphasizing accurate data collection across scopes to communicate achievements.
The Climate Imperative for SMEs
Small and medium enterprises (SMEs) face increasing pressure from stakeholders to measure, report on, and reduce their greenhouse gas (GHG) emissions. This introductory section will outline the business case for SME climate action and provide context on emissions measurement terminology.
Sustainability as a Business Opportunity
Sustainability presents a major business opportunity for SMEs to reduce costs, mitigate risks, enhance their brand, and future-proof their operations. Key drivers include:
- Cost Savings: Implementing energy efficiency measures and transitioning to renewable energy can significantly cut an SME's operating expenses. Sustainability also opens up new funding sources and insurance savings.
- Risk Mitigation: Proactively managing climate impacts protects SMEs from disruption to their business model and supply chain. It also reduces the risk of litigation or penalties for non-compliance with evolving regulations.
- Reputation and Competitiveness: An SME's sustainability achievements and climate commitments are increasingly important selling points for investors, partners, customers and talent acquisition. First movers can gain a competitive edge.
- Future-Proofing: Making an SME's operations sustainable now eases their transition to a net-zero emissions economy, avoiding a costly last-minute shift. It also makes them resilient to market changes.
Demystifying Key Emissions Concepts
To effectively tackle their carbon footprint, it's vital for SMEs to understand essential emissions measurement terminology:
- Carbon Footprint: The total greenhouse gas emissions caused directly and indirectly by an organization's activities. This includes Scope 1, 2 and 3 emissions across the value chain.
- Scope 1 Emissions: Direct emissions from sources owned or controlled by the company, like fleet vehicles and on-site furnaces.
- Scope 2 Emissions: Indirect emissions from purchased electricity, heating and cooling consumed by the company.
- Scope 3 Emissions: All other indirect emissions in the company's value chain, from raw materials to product disposal. These make up the majority of an SME's carbon footprint.
Accurately tracking Scope 1, 2 and 3 emissions as per the globally recognized Greenhouse Gas Protocol allows SMEs to identify hotspots, engage stakeholders and make strategic reductions. The 3 scopes provide a vital emissions accounting framework.
What is the difference between scope 1 2 and 3?
The Greenhouse Gas (GHG) Protocol classifies a company's greenhouse gas emissions into three categories, known as scope 1, scope 2, and scope 3 emissions. Understanding the differences between the three scopes is key to accurately measuring and reporting your business' carbon footprint.
Scope 1 Emissions
Scope 1 includes all direct emissions from sources that are owned or controlled by the company. This includes:
- Emissions from fuel combustion in boilers, furnaces, and vehicles
- Fugitive emissions from refrigeration systems and air conditioning units
- Physical or chemical processing at manufacturing sites
Examples of scope 1 activities include fuel usage from fleet vehicles, onsite natural gas consumption for heating, and methane leakage from landfills or pipes.
Scope 2 Emissions
Scope 2 accounts for indirect emissions from the generation of purchased energy consumed by the company. This primarily includes:
- Purchased electricity used in buildings and operations
- Purchased heating & cooling steam used in operations
As scope 2 emissions physically result from external energy suppliers, companies have less control over reduction strategies. However, they can switch to renewable energy sources or improve energy efficiency.
Scope 3 Emissions
Scope 3 covers all other indirect emissions occurring from sources that the company does not own or control. This is the most complex area to measure, covering activities like:
- Extraction & production in supply chains
- Transportation & distribution
- Waste disposal
- Product use and end-of-life
- Employee commuting
While reporting scope 3 emissions is voluntary, they make up the majority of total emissions for many companies. Identifying your largest scope 3 activities using emissions calculators can unlock major reduction opportunities.
Accurately monitoring all 3 scopes using digital carbon accounting tools provides transparency into your organization's overall impact. This allows you to set emission baselines, identify hotspots ripe for reduction, engage stakeholders in your climate efforts, and track progress towards your carbon neutrality goals.
What are scope 3 emissions issues?
The data problem in Scope 3 emissions is one of the main challenges companies face when trying to measure and report on these indirect emissions. One of the main reasons for this is poor data quality. Companies must rely on data shared by their supply chain partners or third-party data (such as industry averages, statistics released by governments, or regulatory disclosures) to make estimations.
This makes calculating Scope 3 emissions more complex. Without accurate emissions data from suppliers and vendors, companies struggle to measure the true impact of their business operations. Relying on estimations also reduces confidence in reporting and makes it harder to set science-based targets.
However, by closely collaborating with partners and gradually improving data collection processes, businesses can unlock more efficiency in Scope 3 accounting over time.
What are absolute scope 3 emissions?
Scope 3 emissions refer to greenhouse gas emissions that are a consequence of an organization's activities, but occur from sources not owned or controlled by the organization. Some examples of scope 3 emission sources include extraction and production of purchased materials, transportation of purchased fuels, and use of sold products and services.
Unlike scope 1 and scope 2 emissions, scope 3 emissions are considered "indirect" emissions. However, they often represent the majority of an organization's carbon footprint. Accurately measuring scope 3 emissions is crucial for organizations aiming to reduce their overall climate impact.
Why measure absolute scope 3 emissions?
Understanding the scale of scope 3 emissions allows organizations to:
- Identify emission hotspots to focus reduction efforts
- Engage suppliers and partners to lower value chain emissions
- Benchmark performance over time as reduction activities are implemented
- Disclose complete and accurate emissions data to stakeholders
Measuring scope 3 in absolute terms (as total emissions in metric tons of CO2 equivalent) provides an unambiguous overview of emissions, supporting robust target setting, tracking, and reporting.
While measuring scope 3 can be complex, new tools help simplify the process - unlocking efficiency for organizations on the path to net-zero.
What is upstream vs downstream scope 3?
Upstream scope 3 emissions refer to indirect greenhouse gas emissions that occur in the supply chain leading up to your business's operations. This includes emissions from purchased goods and services, transportation and distribution, and waste generated in your supply chain.
Some examples of upstream scope 3 activities include:
- Raw material extraction and processing
- Manufacturing of products purchased by your company
- Transportation of goods to your facilities
- Disposal of waste from suppliers' operations
By understanding your upstream scope 3, you gain better visibility into your supply chain impacts. This allows you to collaborate with suppliers on emissions reductions.
Downstream scope 3 covers indirect emissions from the distribution, use, and disposal of your products and services.
Downstream activities producing scope 3 emissions may include:
- Transportation of sold products
- Processing or use of sold products
- End-of-life disposal of products
Getting a handle on downstream emissions sheds light on the lifecycle impacts after your products leave your facilities. This supports engagement with customers on sustainable solutions.
Accurately measuring both upstream and downstream scope 3 is key to managing your full value chain footprint. By leveraging automated tools to collect supplier and customer data, companies can unlock efficiency in capturing indirect emissions across their entire supply chain.
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Getting Started With Carbon Accounting
Reducing your company's carbon footprint can seem like a daunting task, but breaking down emissions reporting into Scopes 1, 2, and 3 provides a clear framework to get started. With some strategic planning around your organizational boundaries and data collection methods, SMEs can unlock efficiency in the accounting process.
Determining Organizational Boundaries for Scope Emissions
Defining your operational control and equity share is the first step to calculate Scope 1, 2 3 emissions across your value chain. Operation control refers to the activities you have authority over, while equity share encompasses the portion of emissions from joint ventures or investments. Outlining these upfront allows you to measure impacts most material to your business.
For example, you may have operational control over your headquarters, manufacturing plants, and fleet vehicles constituting Scope 1 emissions examples. Your equity share could cover emissions from a wind farm you have partially invested in or a joint packaging facility with a partner. Including these gives a comprehensive view.
Identifying Your Largest Emissions Sources
Once organizational boundaries are set, conduct an emissions hotspot analysis through historical data, industry benchmarks, and operational expertise. This reveals the activities generating the most Scope 1 emissions examples like fuel usage, Scope 2 emissions examples like purchased electricity, and Scope 3 emissions by industry like procurement.
Online Scope 3 emissions Calculator tools can model emissions across your value chain. Focus data collection on hotspots representing 80% of total emissions as these offer the largest reduction potential. Regularly review hotspots as reduction initiatives progress.
Collecting Primary Data Across Scopes 1, 2, 3
With hotspots identified, use meters, sensors, bills, receipts, timesheets, and other sources to gather granular, accurate emissions data. For Scope 1, track fuel, refrigerants, and other consumption. For Scope 2, compile electricity, steam, heating, and cooling usage.
Getting a handle on Scope 3 can be more challenging. Start with the largest Scope 3 category 1 emissions from purchased goods and services. Gather data like supplier emissions reports, average product footprints, and procurement spend allocation. Then move to other relevant Scope 3 carbon emissions areas like transportation and employee commuting. Surveys, mileage logs, and expenditures can provide insight.
Following these steps will unlock efficiency in the accounting process and allow SMEs to communicate achievements through credible 3 scopes of emissions reporting. Mastering carbon measurement sets the foundation for impactful reduction initiatives on the journey to net zero.
Scope 1 Emissions: Direct Control, Direct Responsibility
Scope 1 emissions refer to direct greenhouse gas (GHG) emissions that occur from sources owned or controlled by a company. These emissions result from activities like fuel combustion in boilers, furnaces and vehicles, as well as fugitive emissions from refrigeration and air conditioning equipment. For small and medium enterprises (SMEs), accurately tracking Scope 1 emissions is crucial, as it allows companies to take direct action through operational changes to reduce their carbon footprint.
Accounting for Fossil Fuel Combustion: Scope 1 Emissions Examples
A key category under Scope 1 involves fossil fuel combustion from on-site equipment like boilers, generators, furnaces, and stoves. Common examples include:
- Natural gas used to operate boilers for steam or hot water
- Diesel/gasoline for backup generators and fire pumps
- Propane/fuel oil combustion in furnaces and stoves
To calculate emissions, multiplying the fuel consumption (in energy units) by validated emissions factors from sources like the EPA provides reliable Scope 1 inventory estimates. Regular sub-metering and centralized tracking of fuel purchases facilitates this process.
Tracking Refrigerant Leaks
Another vital Scope 1 category covers fugitive emissions from refrigerants in air conditioners, refrigerators and chillers. Leaked refrigerants like HFCs and CFCs have very high global warming potentials.
Best practice dictates building an equipment inventory with nameplate data to facilitate leak detection and refrigerant recharge tracking. Annual leak inspections using predictive maintenance analytics can also improve monitoring.
Special Cases: Company Vehicles & Production Processes
For some SMEs, direct operations from owned vehicle fleets or manufacturing/chemical production processes constitute a major share of Scope 1 emissions.
In these cases, a tailored methodology based on activity data like vehicle mileage or units of product output helps quantify release volumes. This often needs custom emissions factors derived from stack testing or mass balance assessments.
Careful process documentation and data collection is key to minimizing uncertainties. Third-party verification can also validate inventory accuracy.
Accurately assessing Scope 1 emission sources requires concerted efforts in measurement and sub-metering. But it provides companies the control and responsibility to drive targeted reductions. The payoff? Tangible climate action.
Scope 2 Emissions: Indirect, But Within Your Sphere of Influence
Scope 2 emissions refer to indirect greenhouse gas emissions from the generation of purchased electricity, steam, heating and cooling consumed by an organization. For many small and medium-sized enterprises (SMEs), purchased electricity often represents one of the largest sources of emissions and the most feasible area to begin taking climate action. By accurately accounting for Scope 2 emissions and procuring renewable energy, SMEs can significantly reduce their carbon footprint.
Understanding Procured Electricity: Scope 2 Emissions Examples
To calculate Scope 2 emissions, SMEs must first determine their overall electricity consumption from utility bills or meter readings. This consumption data should then be multiplied by an emissions factor that reflects the carbon intensity of the regional electricity grid or energy provider. For example, if an SME consumes 300,000 kWh of electricity supplied from a region where the grid average emissions factor is 0.5 tCO2e/MWh, their Scope 2 emissions would equal 150 tCO2e (300 MWh x 0.5 tCO2e/MWh).
Sourcing accurate, supplier-specific emissions factors is essential for credible Scope 2 accounting. Global average grid factors can significantly misrepresent actual impacts. Through choosing renewable energy suppliers or installing onsite solar, SMEs can dramatically lower associated emissions.
Onsite Solar & Renewables: Own or Lease?
Procuring renewable electricity through physical power purchase agreements (PPAs) or leased onsite solar allows SMEs to directly reduce Scope 2 emissions. However, for leased solar panels located onsite, most emissions reductions are considered Scope 2 while only a small portion of avoided impacts can be claimed as Scope 1.
In contrast, offsite or community solar programs enable SMEs to procure clean energy while avoiding upfront investments. Virtual PPAs also provide emissions benefits without onsite projects. While such approaches may require purchasing renewable energy certificates, they offer flexibility for SMEs to quickly improve their sustainability performance.
Offsetting Unavoidable Scope 2 Impacts
For many SMEs, directly switching to renewable energy may not be currently feasible. In such cases, high-quality, verified carbon offsets can mitigate Scope 2 emissions that cannot yet be avoided. Offsets like renewable energy certificates or forestry projects should offer additionality and be certified through recognized standards like VCS or Gold Standard. Although less impactful than direct emissions cuts, quality offsets provide a pragmatic solution while SMEs work to transition toward renewable power sources.
Tackling Scope 3: Managing What You Don't Directly Control
Scope 3 emissions refer to indirect greenhouse gas emissions that occur in an organization's value chain. They can account for a significant portion of an organization's carbon footprint, with some estimates putting Scope 3 emissions at over 90% of total emissions. As such, measuring and managing Scope 3 emissions is essential for organizations aiming to reduce their overall climate impact.
However, Scope 3 emissions also pose unique challenges given organizations don't have direct operational control over these emissions sources. This section offers practical guidance for SMEs to effectively account for and engage partners to reduce Scope 3 emissions.
Prioritizing by Emissions Magnitude in Scope 3 Emissions by Industry
When initially tackling Scope 3, it's impractical for most SMEs to collect granular data across the entire value chain. To maximize efficiency, businesses should screen their operations using the Scope 3 Evaluator Tool or similar methodologies to reveal their biggest Scope 3 emissions hotspots.
Not all Scope 3 categories hold equal importance. An online retailer, for example, would prioritize emissions from transportation and distribution services, purchased goods related to inventory, and product end-of-life treatment. A professional services firm may focus more on emissions from business travel, employee commuting, and upstream leased assets based on their operational profile.
Once top categories are identified through screening, SMEs can concentrate efforts on collecting quality data from partners related to those key Scope 3 activities and calculating their magnitude. This ultimately helps reveal the most impactful areas to drive emissions reductions.
Utilizing the Scope 3 Emissions Calculator for Estimates
For Scope 3 categories deemed lower priority, manually gathering precise data across potentially thousands of suppliers can be infeasible. In these cases, emissions factors serve as useful tools for reasonable carbon footprint estimates.
The Scope 3 Evaluator Tool mentioned previously contains emissions factors sourced from databases like ecoinvent and Exiobase, allowing small businesses to model indirect emissions where supplier data isn't available. While less accurate than primary data, these scientifically-grounded factors based on industry and region still provide ballpark insights to inform reduction strategies.
SMEs can input basic activity data related to a Scope 3 category - for example, kWh of electricity consumed annually - and instantly derive Scope 3 estimates from embedded emissions factors. This method vastly simplifies the accounting task.
Engaging Suppliers for Better Data
Once SMEs complete initial screening and calculations, collecting granular supplier data for prioritized Scope 3 activities becomes essential for driving action through the value chain.
First, integrate sustainability-related questions into procurement processes - request emissions metrics in RFPs and quotations. Also clearly communicate ambitions, priorities, and reporting methodologies to suppliers.
Secondly, collaboratively develop corrective action plans with partners related to top Scope 3 emission sources. Offer expertise and resources from your own decarbonization journey to assist strategic suppliers in their sustainability transformations.
Lastly, implement Scope 3 emissions calculations into standard business processes like financial reporting. Consistently tracking progress year-over-year is key for demonstrating commitment to stakeholders and guiding strategic decisions.
Streamlining Carbon Management Through Technology
Technology has transformed how businesses operate, and sustainability is no exception. For resource-constrained SMEs, manual data collection and carbon accounting is error-prone and time consuming, hampering climate action efforts. Purpose-built software can help streamline the process through automation.
Integrating With Existing Systems
Seamlessly connecting carbon accounting solutions to existing platforms like ERP, accounting, logistics and procurement systems avoids duplicate data entry. This saves time while minimizing manual errors. Prioritizing integrations with commonly used SME software also speeds up implementation.
For example, automatically pulling mileage logs from transportation management systems lets you efficiently track related Scope 1 tailpipe emissions. Direct connections to vendor portals quantify Scope 3 supply chain impacts too. Such integration capabilities demonstrate the power of carbon accounting automation.
Leveraging Automation for Accurate Tracking
Automating data imports and centralized calculation engines provide consistent emissions data with limited staff effort. Machine learning further refines outputs over time. This facilitates accurate, high-quality tracking at scale.
Automation also enables real-time emissions updates. As new data enters the system - like utility bills or timesheets - carbon accounting is continuously recalibrated. This prevents misleading outdated reporting.
Streamlined data collection, automated computation and continuous recalibration unlocks efficiency. Accurately monitoring your footprint with minimal manual work becomes possible.
Turning Insights into Action
While tracking emissions is important, taking action based on insights is critical too. Modern solutions provide customizable dashboards to visualize footprint data from across Scopes 1, 2 and 3. Setting emissions reductions goals and tracking related KPIs keeps teams focused.
Collaborative platforms also allow cross-functional teams to identify "hot spots". Brainstorming challenges together and finding solutions unifies climate action efforts across the business.
This combination of insights, goals and collaboration creates a roadmap towards net zero emissions. Streamlined tracking through automation is just the start. Converting newfound visibility into strategic reductions takes climate action to the next level.
The Journey of a Thousand Miles: A Summary of Emissions Reporting Mastery
The path to effectively tracking, reporting on, and reducing carbon emissions may seem daunting to resource-constrained SMEs. However, the first step is often the most important. This concluding section reiterates the key benefits of climate action and celebrates the notion that a long journey begins with a single step.
Realizing the Return on Investment
Reinforce the tangible operational, financial, and reputational upsides SMEs stand to gain by mastering measurement of the 3 emissions scopes and managing their carbon footprint.
Measuring and reporting your Scope 1, 2, and 3 emissions provides tangible returns beyond sustainability credentials. By understanding your carbon footprint through tools like EcoHedge, SMEs can:
- Identify operational inefficiencies and cost savings from energy, waste reduction, etc.
- Attract investment and funding earmarked for low-carbon companies.
- Enhance brand reputation and employee retention.
- Get ahead of tightening regulations on carbon disclosure and environmental impact.
Unlocking these benefits requires accurate carbon accounting data - making investment in solutions like EcoHedge's automated reporting software an imperative.
Owning Your Seat at the Table
Underscore how accurate emissions data and communications empower SMEs to credibly engage stakeholders, respond to evolving regulations, unlock finance, and differentiate vs. the competition.
Once you understand your company's carbon profile, you can take strategic action while crafting a compelling sustainability story for key stakeholders:
- Customers: Meet buyer demand for low-carbon goods and services by showcasing your commitment to measuring and reducing your Scope 1 and 2 emissions.
- Investors: Attract capital by demonstrating sound management of your Scope 3 supply chain emissions.
- Regulators: Get ahead of tightening disclosure requirements by voluntarily reporting your total footprint across all 3 emissions scopes.
- Employees: Boost talent retention by sharing how your company is tracking and acting on emissions - allowing them to take pride in your climate leadership.
When it comes to sustainability, an accurate carbon profile allows you to own your seat at the table - putting your company in the driver's seat on climate action.
