Challenges when calculating scope 3 emissions
Today it is widely accepted that scope 3 greenhouse gas (GHG) emissions are a critical component of overall emissions in the financial services industry. Scope 3 emissions consist of all indirect emissions that occur in the value chain of a company.
A growing body of research shows that scope 3 emissions can account for many times the impact of a company’s scope 1 and 2 emissions. As an example, for a car manufacturer, scope 1 and 2 will typically contribute ~5% to the total emissions. Scope 3, mainly emissions linked to material use and tailpipe emissions in the use phase, would be ~95%. This difference is even more pronounced in financial institutions, where almost all emissions stem from the value chain.
It is therefore no surprise that several industry and investor initiatives are calling for the disclosure of scope 3 emissions. This was a key point e.g. in the updated recommendations from the Task Force on Climate-related Financial Disclosures (TCFD, October 2021).
While scope 3 emissions are increasingly understood as an important risk indicator, it is also worth acknowledging that there are challenges involved in determining scope 3 emissions. The following challenges were highlighted in TCFD’s updated guidance on metrics, targets, and transition plans.
Data challenges
Organizations struggle to collect relevant and sufficiently granular primary data and to manage the amount of data needed to calculate scope 3 emissions.
Using secondary data or industry-average emissions factors also presents issues, such as how to account for uncertainties around data collection or quality and an uneven distribution of emissions within an industry.
Methodology challenges
There are also methodological challenges involved in capturing scope 3 emissions. These include estimating emissions for suppliers that do not calculate their own emissions, defining an appropriate calculation approach for each scope 3 category whilst recognizing that double counting may occur when emissions are aggregated across multiple organizations.
Even when an appropriate methodology is determined, there may be sources of uncertainty regarding whether a value accurately represents the activity in the value chain, whether variation in calculated emissions are due to methodological choices, and whether there are any limitations as a result of the modeling approaches used to reflect the real world.
Boundary challenges
Defining clear value chain boundaries when calculating scope 3 emissions can also be challenging. While in principle the fifteen scope 3 categories are designed to be mutually exclusive, there can be overlap in reporting boundaries due to an organization’s involvement at multiple points in the life cycle of products. This can result in double counting of emissions.
Organizational challenges
The calculation of scope 3 emissions requires personnel, resources, expertise, and data management and quality processes. Aligning all of these can be a challenging task for organizations, requiring good management and leadership support.
Summary
Due to the increased focus on scope 3 emissions, more and more financial institutions have begun reporting their scope 3 emissions. That’s good news from a climate perspective, because in order to define meaningful reduction targets, one must first understand the emission sources.
For banks and asset managers, scope 3 “financed emissions” are by far the largest component of their total GHG emissions. For insurance companies, financed emissions are also important due to their significant investment portfolios, but scope 3 “claims carbon” is equally important.
Claims carbon arises in the settlement of insurance claims, e.g. when damaged property is being repaired. According to our estimate, repairs of insured cars and properties alone add up to 1% of global GHG emissions.
Claims Carbon Institute provides a modern SaaS solution, which allows insurers to identify, calculate, and analyze their claims carbon emissions. This is a crucial first step required for setting science based targets and implementing meaningful climate actions in the supply chain.
Featured image credit: Scott Graham @ Unsplash