For businesses and individuals, navigating the world of sustainability can be incredibly frustrating. There are a lot of misconceptions about ESG and the related reporting. The many processes, policies, recommendations are constantly changing, and even seemingly simple questions have numerous edge cases. It's normal even for professionals in the space to get confused.

If that's you, you're not alone! ESG is not just a rapidly evolving field, it's rapidly growing too. Most ESG professionals are relatively new to the field and often find themselves confused over basic concepts. It can sometimes be difficult to find explanations that delve in to the the many nuances we encounter and it's easy to misunderstand a concept without realizing it.

So let's look at one of these ESG basics today with hopefully a bit more detail than the typical surface-level explanations.

When measuring your environmental impact, all ESG frameworks request that you report on your “Scope 1, 2 and 3 Greenhouse Gas emissions” but what exactly belongs in each of these scopes anyway?

Scope 1 Emissions: Your Direct Impact

Scope 1 emissions are the greenhouse gas emissions that come directly from sources owned or controlled by your organization. Think of it as emissions that happen within your business or due to your immediate operations. For instance, if you have anything that combusts a fuel, such as a furnace, boiler, vehicle or gasoline powered equipment they're belching out CO₂ that's part of your Scope 1. Measuring and reporting Scope 1 emissions is usually straightforward since you can generally access the data needed to calculate these emissions.

How do you measure it? Do we need to put sensors on every tailpipe and chimney?

You could directly measure your emissions, but that's difficult. Fortunately you don't need to measure emissions directly. Combustion is a predictable chemical reaction; we know that all fuels will emit greenhouse gases in consistent ratios to the quantity of fuel burned. As long as you know the amount of the fuel used and the chemical composition of that fuel, you can very accurately calculate the amount of GHGs that were released during combustion. It's so consistent in fact, that measuring the quantity of fuel combusted is typically more accurate than attempting to measure the emissions directly.

Is combustion the only source of Scope 1 Emissions?

No not at all. Combustion is just the most common source of Scope 1 emissions for most organizations.

In some cases greenhouse gases are directly used for some business process and released into the atmosphere along the way. Welding often uses carbon dioxide as a shield gas, and many fire suppression systems use CO₂ directly to smother fires of oxygen.

In many cases these direct releases of greenhouse gases are unintentional, such as when a natural gas pipeline leaks methane, or a malfunctioning refrigerator or air conditioner leaks its refrigerant (most refrigerants are potent greenhouse gases). There's also several organic processes that can release greenhouse gases, this is commonly seen in agriculture and waste processing industries.

What if emissions are coming from some equipment we control but don't own or vice-versa?

This is a surprisingly tricky question, worthy of an entire blog article on its own, but the answer is that it depends on your system boundaries. When preparing an emissions inventory, you need to define what is and isn't part of the system your measuring. In the case of corporate boundaries, corporations are given the choice to use one of three consolidation approaches to determine what should and should not be included in your inventory.

For most businesses we recommend the Operational Control approach, which means that if you're the one operating the equipment, or using the boiler or furnace, you include its emissions regardless of who actually owns it. There's still a lot of nuance here, but in general the Operational Control approach basically says that if your organization has the most direct control over the emissions, they're part of your Scope 1 emissions.

Scope 2 Emissions: Your Energy Impact

Scope 2 emissions are usually the easiest of the three scopes to calculate.

Scope 2 emissions are emissions that occurred while generating the energy you purchased. For most businesses, your only scope 2 emissions are from the electricity you’ve purchased, but this scope includes purchased energy in any form such as heat, steam, or chilled water as well.

Your company may have purchased 200 MWh of electricity last year. Your purchase and use of that electricity didn’t result in emissions by itself, but if the power generators in your area burned coal or natural gas to do it, there were significant Carbon Dioxide emissions generating that power.

What if we generate our own electricity?

Energy emissions are only scope 2 if you're purchasing the energy. If you're operating the generator yourself, the emissions from the generator are scope 1 emissions, but you should not assign any scope 2 emissions to the electricity it generates.

What if we're selling the electricity?

Whether you use electricity you generate or sell it, doesn't change your inventory. If you generated electricity, any fuel combusted during generation is still part of your Scope 1, even if you're not the one using the electricity.

Doesn't that mean that we're double counting the emissions of whoever generated the energy?

YES! It’s helpful to note that any Scope 2 emission for your business is a double counting of a Scope 1 emission from an energy generator. Usually in financial accounting, we think of double counting as a mistake, but when it comes to emissions accounting, this double counting better reflects the shared responsibility to reduce emissions. Scope 2 emissions can be reduced by both the consumer, by implementing strategies that reduce electricity consumption, and by the power generation companies, by switching to low emission technologies including solar, wind, hydroelectric. Even nuclear power has the major benefit of not producing any significant greenhouse gas emissions.

Scope 3 Emissions: Indirect Emissions

But now we’ve arrived at Scope 3 emissions. This is by far the most difficult both to define and to calculate.

Scope 3 emissions go way beyond your immediate operations and extend throughout your entire value chain. We're talking about all the emissions that result from your company's upstream and downstream activities, like sourcing raw materials, manufacturing, distribution, product usage, and even waste disposal. It's a whole web of interconnected emissions that go far beyond your direct control.

One way to think of it is, if your company didn’t exist, (and magically no other business filled the gap), what emissions wouldn’t have occurred? This is an extensive number of sources when you think about it: every product or service you purchased for your business almost certainly had some emissions involved in their creation. It includes the emissions from the products your suppliers, and their suppliers, needed to purchase as well. It includes methane emissions from the decomposition of waste your company generated. It includes emissions from the personal vehicles your employees use to commute to and from work each day, or the business-related airline travel of your staff. It even includes emissions from the use or disposal of the products you sell and emissions from other businesses you’ve invested in.

Like scope 2, scope 3 is a double-counting of someone else's scope 1 emissions. In fact, scope 3 isn't just a double-counting, it might be triple counting or more. Consider when Company A ships their product to Company B. Not only does the shipping company itself has direct emissions from the trucks they operate, those scope 1 emissions are double-counted as part of Company A's downstream scope 3 emissions, and then counted a third time in Company B's upstream scope 3 emissions. This multiple counting helps us more accurately reflect the reality that all three companies can make choices to reduce these emissions.

To make it a bit easier, there are 15 categories of Scope 3 emissions, which we won't list now, but it does give us a consistent list of things to consider in our inventory of scope 3 emissions.

How does anyone accurately calculate all of their Scope 3 emissions?

In short, you don't. In almost all cases, it's not realistic or even possible to accurately calculate all of your Scope 3 emissions. Even just estimating your Scope 3 emissions can be a massive challenge requiring insights and information from vendors, suppliers, and employees that you probably don't have and can't easily get without software tools like Nectivio. But just because you can't come up with a single accurate measure of your entire scope 3 emissions, doesn't mean it isn't valuable to still calculate emissions to whatever extent is practical and possible in your situation.

Which leads us to three of the most common misunderstandings about Scope 3 emissions:

1. The calculation of Scope 3 emissions is not prescriptive

Every company is permitted broad freedom to decide what to include in their Scope 3 and how they will measure it based on their specific business goals. Every one of the 15 scope 3 categories has optional components that a company may or may not choose to include in their scope 3 report, and for each of the 15 categories there are multiple recognized methodologies for calculating the emissions, which can range in accuracy from "slightly better than guessing" to "close to exact".

2. Scope 3 emissions are not intended to be comparable between businesses

Because every company makes different choices on what to include in their Scope 3 emissions and how to calculate it, you can't meaningfully compare the scope 3 totals from one company to another. Sometimes you can't even compare scope 3 emissions for the same company from one year to the next unless you've taken specific precautions to ensure you've used the exact same methods and approaches each year.

You need to understand the details to start to make meaningful comparisons.

3. Scope 3 emissions are not additive