One company’s Scope 3 emissions are another’s Scope 1. It’s tempting to throw up your hands and declare accounting for your company’s Scope 3 emissions an unreasonable, even impossible task. For instance: Scope 3 emissions include the emissions of your product — when the gasoline you produce is combusted in a car, say. But who is required to account for this Scope 3: the oil producer, the refiner, the pipeline company, or the carmaker?
Declaring Scope 3 confusing and impossible is, well, predictable and obvious (and in many ways true!). But instead of complaining, use this time of confusion to start developing your company’s Scope 3 strategy — getting well ahead of the competition. No one wants to ride this elephant, but everyone will eventually have to.
Both of these things are true:
- Accurately measuring, accounting for, and reducing Scope 3 emissions presents oil and gas companies with a nearly impossible tangle of challenges.
- Oil and gas company stakeholders — from investors to customers — expect a robust, transparent, and easy-to-understand Scope 3 plan.
The situation
At Adamantine, we — like our clients — are spending an inordinate amount of time unpacking the components, expectations, and pitfalls around Scope 3 accounting. And this isn’t the first time we’ve talked about Scope 3 in this space: In March, we anticipated the scrutiny coming to net-zero commitments after the NewClimate Institute and Carbon Market Watch released a headline-capturing report questioning the integrity of corporate climate commitments. That report shone a spotlight on the methane-emitting elephant in the room: Scope 3 emissions. (Scope 3 encompasses the indirect emissions both downstream and upstream of a company’s value chain.)
Now let’s cover the latest and what you can be doing today about Scope 3 expectations tomorrow:
- Accounting frameworks. There have been growing efforts to fully and accurately account for Scope 3 emissions. Start here: GHG Protocol is considered the most reputable source of global, standardized frameworks for accounting for and estimating emissions, including Scope 3. The Protocol’s Corporate Value Chain (Scope 3) Accounting and Reporting Standard provides businesses guidance for reporting, which it divides into 15 separate categories. EPA defers to the GHG Protocol in providing Scope 3 inventory guidance. The American Petroleum Institute (API) and Ipieca used the GHG Protocol’s standards to create an overview of Scope 3 estimation methodologies specific to the oil and gas value chain. Bedtime reading — yay!
- Investor engagement. Investors have communicated that managing Scope 3 emissions will be a key consideration in aligning their investments with a low-carbon world. In January, State Street said that companies should expect more Scope 3 scrutiny and that “while companies have been able to avoid full disclosure of Scope 3 emissions without consequences, that is changing.” Vanguard articulated that the Task Force on Climate-Related Financial Disclosures (TCFD) will be accepted as a “global standard.” (TCFD recommends that many organizations disclose Scope 3 in alignment with the GHG Protocol methodology.) And BlackRock stated that it is important for investors to be able to evaluate how companies assess their Scope 3 emissions and their reduction targets.
- Incoming regulation. In March, the Securities and Exchange Commission (SEC) proposed its long-awaited climate disclosure rule. In its current form, the rule would require public companies registered as “large accelerated” filers (an SEC filing designation) to disclose Scope 3 emissions for fiscal year 2024 and “accelerated” and “non-accelerated” filers to disclose for fiscal year 2025. Smaller reporting companies would be exempt from this disclosure requirement. The proposed rule, according to the SEC, was informed by both the GHG Protocol and TCFD. These draft SEC rules have sparked a healthy debate over the importance of and flexibility needed for Scope 3 reporting.
Collecting reliable Scope 3 data will be no easy task. It requires collecting enormous amounts of data and relying on information provided by value chain partners. Few companies currently have either the systems or the information required to account for their value chain emissions. Nevertheless, investors and other stakeholders continue to make clear they want companies to be thinking about Scope 3 and what their approach will be.
Seize the day
It’s time to ride the elephant! Take advantage of the uncertainty and confusion to get your company’s Scope 3 approach in order:
- First, check out the accounting frameworks. Start with the GHG Protocol and the Ipieca-API guidance to get oriented. If your stakeholders have identified other important frameworks, familiarize yourself with those as well.
- Determine your relevant business goals. There’s a lot of latitude in developing your Scope 3 boundary and approach. Consider your drivers (such as investor expectations) and resources (such as the sophistication of your supply chain partners). Then determine what you want to accomplish with your Scope 3 reporting. In other words, where do you see the opportunity to inform business decisions?
- Identify which Scope 3 emissions matter to your company. The GHG Protocol breaks down Scope 3 emissions into 15 different categories, such as business travel, purchased goods and services, and investments. You’ll determine the boundary of your Scope 3 assessment — both time and value chain extent — by asking, “What emissions matter to my stakeholders?”
- Talk to your investors. Investors and financial partners will be key drivers of company expectations on Scope 3 reporting. Find out what pressures they are under and how they will be thinking about Scope 3 over the next few years.
- Start the conversations with your suppliers and customers. Your ultimate success with Scope 3 will depend on the progress, expectations, and needs up and down the value chain. Recognizing this, you should know that the GHG Protocol provides corporate guidance on supplier engagement. Begin to ascertain the data available and shared needs going forward.
For those who haven’t started, developing a robust, credible, and transparent Scope 3 emissions report could take years. Take advantage of the current period of uncertainty to craft your company strategy, engage with key stakeholders who will drive expectations, and begin to build the infrastructure required to support the collection and management of data.
Adamantine helps our clients right-size their ESG reporting strategy. Reach out today to assess a mutual fit! Thanks to our Kelsey Grant for staying abreast of all things Scope 3! If you would like to recommend Both True to a colleague, they can subscribe here.
To riding the elephant,
Tisha
