What are Scopes 1, 2 and 3 and how are they relevant to Procurement?
What are Scopes 1, 2 & 3 and How Are They Relevant to Procurement?
With COP26 wrapping up next week, carbon emissions are as high as they’ve ever been on the international agenda. Inaction will lead to severe hunger levels, mass migration as a result of floods, the collapse of financial markets, along with many other socio-economic disasters, according to experts. In the current era of sustainability, political leaders and businesses are re-examining their missions and purposes in the context of sustainability.
Environmental impact must be reduced by businesses. This can be accomplished mostly by reducing their carbon footprint, and to perform this, carbon emissions must be monitored. We’ve compiled oboloo’s guides to scopes 1, 2 & 3 below, which many businesses are following on their journey to carbon neutrality.
Carbon Emissions Reduction is a Business Necessity
Carbon footprints have become increasingly critical to businesses, as shown by major companies. Amazon has committed to net-zero carbon emissions across the business by 2040. Certain industries are also working together to establish targets towards becoming net zero such as the tech industry via groups such as Tech Zero.
What are Scopes 1, 2 & 3?
Greenhouse gas emissions are classified according to three different categories based on the GHG Protocol corporate standard. Scope 3 is voluntary and the most challenging to monitor, whereas scopes 1 and 2 are mandatory reporting requirements. A company that successfully reports all three scopes will gain a competitive advantage over the competition.
Scope 1: Direct Emissions
Those emissions in Scope 1 come from company-owned and controlled resources. The number of emissions released into the atmosphere as a direct consequence of a company’s activities. Scope 1 is divided into three categories:
Mobile combustion – refers to all vehicles owned or controlled by a company that burn fuel (e.g. cars, vans, lorries). Some of the organization’s fleets might be subject to Scope 2 emissions if they’re considered electric vehicles.
Fugitive emissions – Any leaks usually via machinery that generate greenhouse gases (e.g. refrigeration and air conditioning units).
Process emissions – Any emissions as a result of a production process or on-site manufacturing such as CO2 produced from factories.
Scope 2: Owned Indirect Emissions
Indirect emissions from purchased energy are considered scope 2. The total amount of greenhouse gases released into the atmosphere as a result of the consumption of electricity, steam, heat, and cooling.
Electricity will be the only source of scope 2 emissions for most organisations. Energy actually falls into both scopes 2 & 3 however the difference between the two is whether the energy is consumed for the companies own use (Scope 2) or it is energy not being directly used by the company such as during the distribution/transportation stage of delivering goods (Scope 3).
Scope 3: Not Owned Indirect Emissions
Scope 2 includes only the direct emissions generated by the reporting company and not the indirect emissions caused by upstream and downstream processes. Indirect emissions are ones resulting from the company’s operations. The GHG protocol divides scope 3 emissions into 15 categories split between ‘Upstream Activities‘ and ‘Downstream Activities‘:
Upstream Activities
Purchased goods and services – Describes the upstream emissions resulting from the production of goods and services the company purchased in the same year.
Capital goods – Products that have a long life span and are used by the company to manufacture a product, provide a service, or store, sell, and deliver merchandise. Buildings, vehicles, and machinery are examples of capital goods.
Fuel and energy-related activities – The company should include emissions from production of fuels and energy purchased and consumed in the reporting year that are not included in scope 1 and scope 2.
Transportation and distribution – In the value chain, they are found either upstream (suppliers) or downstream (customers). Transportation by land, sea, and air is included, as well as warehousing by third parties.
Waste generated in operations – Includes waste that is sent to landfills and wastewater treatment facilities.
Business travel – Transportation of employees for business-related activities during the reporting year in vehicles not owned or operated by the reporting company (e.g., air travel, rail transportation, underground and light rail travel, taxis, buses, and corporate mileage using private vehicles).
Employee commuting – as a result of employees travelling to and from work. This has of course been greatly reduced during the COVID-19 pandemic.
Upstream leased assets – Reporting of lease operations of assets leased by the reporting company (lessee) in the reporting year, which were not included in scope 1 and scope 2.
Downstream activities
Downstream transportation and distribution –Transporting and distributing products to end consumers sold by the company during the reporting year (if not paid for by the company), including retail and storage (in facilities not owned or controlled by the company).
Processing of sold products – Processing of intermediate products sold in the reporting year by downstream companies (e.g., manufacturers).
Use of sold products – Although product usage varies considerably, it measures the emissions from the usage of the product. For example, the use of a battery within an electric car will take many years to equal the emissions it took to actually create that battery.
End of life treatment of sold products – It is reported similarly to “waste generated during operations” for products sold to consumers. It is difficult for companies to predict how their products will be disposed of, since the decision usually rests with the consumer however this should be assessed if possible. In order to achieve this, firms should design recyclable products that limit landfill waste.
Downstream leased assets – These assets correspond to assets leased by the reporting organisation (upstream) and assets leased to other organizations (downstream).
Franchises – Business that sells or distributes another company’s products or services in a particular area under a license. Emissions from franchisees (companies that pay a fee to a franchisor for operating its franchises) should be included. Franchisees may also report emissions included in scope 1 & 2.
Investments – Usually incorporated into the reporting process of larger companies, but smaller companies can still do so. GHG investments fall into 4 categories: equity investments, debt investments, project finance, managed investments & client services.
Scopes 1, 2 & 3 Within Procurement
Procurement departments are starting to focus more on the values that are important to them when selecting suppliers within RFP and RFI processes as well as ensuring that selected suppliers are also focusing on sustainability.
Public sector procurement teams are leading the way on this, one example being in the UK where any supplier with an estimated spend of over £5M will need show how they’re committing to achieving Net Zero by 2050.
Private companies are also being in similar requirements when selecting new suppliers not only to ensure that their entire supply chain is more sustainable, but also as they to will potentially be assessed on the supplier’s that they use when bidding for new business.
If you would like to find out more of how you can measure your supplies sustainability when carrying out procurement activities, please get in touch via out contact page or start your 30 day free trial of oboloo now.
Additional Resources
These external articles contain useful points to consider:
- Green House Gases Protocol
- Carbon Management Transformation
- COP26
- Tech Companies Going Net Zero
- oboloo’s Sustainability Pledge
