Defining Scope 1, 2, and 3 Emissions
Out of 1,651 public companies disclosing information aligned with TCFD, only 36% are tracking emissions-related data, according to TCFD’s most recent status update on its three-year analysis of these firms. This could be a big misstep, especially since certain asset managers, such as BlackRock and State Street, expect portfolio companies to report in alignment with TCFD and other ESG frameworks, including disclosing GHG emissions. What’s more, top U.S. financial regulators predict that the SEC will soon require publicly traded companies to report on greenhouse gas emissions by suppliers and partners.
If your company starts reporting on greenhouse gas (GHG) emissions, it could help you get ahead of (or keep up with) your peers.
Joining the group of firms that report emissions data is one way to score points with investors. In addition, reporting on GHG emissions will increase your companies’ ratings from MSCI, Sustainalytics, and ISS. These entities differ in what they look for and how they use the data; but they all reward companies that provide it:
- MSCI looks for GHG reduction targets and GHG intensity rates based on your company’s existing GHG emissions data.
- Sustainalytics uses carbon dioxide emissions or carbon intensity disclosures to determine the company’s exposure and management of environmental risk.
- Lastly, ISS looks at whether companies report GHG emissions data to the CDP and have disclosed total values for scope 1, 2, and 3 emissions.
Use the global standard to streamline reporting.
All ESG rating agencies and ESG frameworks use the Greenhouse Gas Protocol (GHG Protocol) as the de facto global standard for corporate inventory and reporting of emissions. The GHG Protocol requires companies to track and report direct scope 1 and indirect scope 2 emissions, and it encourages companies to track and report indirect scope 3 emissions.
So, what exactly are scope 1, 2, and 3 emissions? Here are some essential points about each category you should know.
- Scope 1 emissions come directly from the facilities and vehicles owned or financially or operationally controlled by the reporting company.
- Scope 1 emissions come from fuel-powered activities such as generated electricity, heat, and steam, physical or chemical processing, mobile combustion (from a company-owned fleet of vehicles), and fugitive emissions (from refrigeration, AC, or fire suppression systems).
- The data needed for scope 1 emissions include the type and amount of fuel used per year by the reporting company’s facilities and vehicles.
- Scope 1 emissions also come from activities that involve onsite generators, such as natural gas boilers and steam, diesel, and thermodynamic generators. Scope 1 emissions could include onsite fugitive emissions, such as emissions released from air conditioning units, heat pumps, and refrigerators.
- Scope 2 emissions come from indirect emissions from purchased electricity, heat, and steam.
- While separate entities generate scope 2 emissions, they are generally a result of fuel-powered activities that operate facilities owned and financially or operationally controlled by the reporting company.
- To calculate scope 2 emissions, the reporting company would have to collect yearly values for purchased electricity (in kWh) and purchased fuel usage for heating or steam.
- Scope 2 emissions often come from activities associated with electricity purchased from the grid or offsite renewable energy sources.
- All the indirect emissions excluded from scope 2 emissions are within scope 3.
- Data collection for scope 3 emissions is often challenging because these emissions belong to organizations that are outside of the reporting organization’s boundaries.
- Scope 3 emissions are another organization’s scope 1 and scope 2 emissions. In other words, if every company disclosed scope 1 and 2 emissions, no company would have to keep track of scope 3 emissions.
- The GHG Protocol recommends companies report on scope 3 emissions since most of an organization’s emissions will likely come from scope 3. However, scope 3 emissions are considered optional within the GHG Protocol’s framework. Therefore, if an organization has not yet disclosed any emissions, the focus for the base year should be on scope 1 and scope 2 emissions.
- The GHG Protocol organizes scope 3 emissions into 15 categories that describe activities associated with scope 3 emissions. Some of these categories include business travel, employee commuting, upstream leased assets, and investments.
Get ahead of the reporting game. While you can.
GHG emissions reporting isn’t mandatory. Yet. But with increasing investor pressure and new regulations on the way, you can expect the requirements to come soon. Taking a proactive approach and starting the process of collecting, tracking, and reporting emissions now can help distinguish your organization as a leader in this area, improve your ESG ratings, and help you better meet investor expectations. Plus, you’ll avoid having to scramble later when the new mandates do come online. For further reading, see our recent articles on TCFD reporting mandates and the forthcoming SEC climate risk disclosure rules. To learn how to develop GHG emissions commitments and disclosures, contact ESG Infinite today.