Defining business goals
Before accounting for scope 3 emissions, companies should first determine the business goal(s) they want to achieve. Some of these goals include:
1) Identify and understand risks and opportunities associated with value chain emissions
Developing a scope 3 inventory enables companies understand the overall emissions profile of their upstream and downstream activities. This information helps them understand where potential emissions and associated risks and opportunities lie in the value chain.
A risk is any factor that could negatively impact a company’s finances, operations, or reputation. Examples of risks related to scope 3 emissions include:
Regulatory risk
Governments and regulatory bodies worldwide are increasingly focusing on GHG emissions as part of climate change mitigation efforts. Stricter reporting mandates such as the CSRD require companies to disclose their full carbon footprint. Companies that are not prepared could incur fines.
Additionally, as carbon pricing mechanisms such as carbon taxes and cap-and-trade systems expand, emissions could become subject to regulation or taxation. If a company’s supply chain is carbon heavy, they must have to pay extra fees, increasing costs.
Moreover, measuring and understanding these emissions allows companies to stay ahead of potential regulations, prepare for potential financial impacts and adjust their strategies accordingly to avoid last minute compliance challenges.
Supply chain costs and reliability risk
Companies that don’t manage their scope 3 emissions properly can face higher costs and supply chain instability. If suppliers operate in regions with carbon taxes or emission trading schemes, they’ll pass these costs onto companies, meaning higher prices for raw materials, transportation, and manufacturing.
Suppliers in climate vunerable areas e.g. areas prone to floods, droughts and wildfires are more likely to face production delays or shutdowns, leading to supply shortages. Additionally, suppliers that fail to meet emissions standards might get hit with import bans, tariffs, or contract losses, disrupting supply chains.
Product and technology risk
There currently are regulatory bans of high-emission products such as single-use plastics and inefficient supplies by some governments. Companies that don’t adapt might see their products become obsolete or illegal in some markets. Additionally, consumers are increasingly opting for eco-friendly low-carbon products. Brands that don’t innovate risk losing market share to competitors with greener alternatives.
Businesses relying on fossil-fuel-heavy technologies could face higher operational costs and regulatory restrictions. Companies that fail to adopt cleaner tech (e.g., electric fleets, carbon capture, renewable energy integration) could fall behind more sustainable competitors in efficiency and cost savings.
Litigation risk
Regulators are cracking down on vague or false sustainability claims. Companies that claim to be net-zero but don’t properly track their scope 3 emissions can be sued for misleading consumers and investors.
Some companies are being held legally responsible for their suppliers’ emissions and environmental damage. If suppliers violate climate related laws, companies that source from them could be sued or fined.
Reputation risk
Reputation risk is one of the biggest dangers for companies that ignore scope 3 emissions because public perception can make or break a brand.
If a company’s suppliers are linked to deforestation, child labor, pollution, or high carbon emissions, social media will drag them through the mud.
Additionally, companies that talk big on sustainability but don’t show real action also get called out. If scope 3 emissions aren’t measured or reduced, people see sustainability claims as performative PR stunts.
Moreover, Gen Zs and Millennials are hyper-aware of corporate sustainability and actively boycott brands with shady climate practices. Companies that fail to cut Scope 3 emissions lose customers to competitors with legit green initiatives.
Investors are also ditching high-carbon businesses for ESG-friendly stocks, meaning lower share prices and harder access to funding for these companies.
An opportunity is any factor that can create value, boost innovation, or give a company a competitive edge. Examples of opportunities related to scope 3 emissions include:
Efficiency and cost savings
Companies can help suppliers use less energy, water and materials, meaning lower costs for them and lower scope 3 emissions for the company. Companies can partner with suppliers on energy efficiency programs or invest in low-carbon materials which could become cheaper as demand grows.
Additionally, companies can optimize shipping routes, by switching to electric or biofuel-powered fleets , and consolidating shipments can cut fuel costs and scope 3 emissions. They can invest in green logistics partners or opt for train/ship transport as opposed to freight, lowering emissions and reducing costs in the long run.
Moreover, encouraging recycling, refurbishing, and product take-back programs reduces the need for raw materials, cutting both costs and scope 3 emissions. Companies can redesign products for longevity, to cut emissions and increase customer loyalty.
Drive innovation
Measuring and addressing scope 3 emissions can be a catalyst for innovation. Companies can uncover opportunities to rethink the way they design products, structure supply chains, and deliver services. This can lead to the development of more sustainable materials, energy-efficient processes, and even entirely new business models.
For example, a company might realize that the materials it uses have a heavy carbon footprint, leading them to explore alternatives that are more sustainable and just as effective. They could also start collaborating with suppliers to develop cleaner production methods, switch to lower emission transportation, or even create a closed-looped system 1 to minimize waste.
Some companies have also launched carbon-neutral product lines to meet the growing demand of eco-conscious customers.
Increase sales and customer loyalty
When a company focuses on reducing its scope 3 emissions and becomes more transparent about its sustainability efforts, it can have a big impact on both sales and customer journey. Today’s consumers are more conscious than ever about the environmental impacts of the products they buy, and they want to support companies that align with their values.
By reducing scope 3 emissions, companies can attract consumers who are actively seeking brands that are committed to sustainability. Environmental responsibility of these brands often leads to an increase in sales.
Moreover, transparency in sustainability efforts creates a deeper connection between the brand and the consumer, fostering loyalty. When people feel like they are supporting a company that shares their values, they are more likely to come back, recommend the brand to others, and stick with the company for a long time.
Improve stakeholder relations
Big investors are prioritizing ESG factors. High emissions imply high risk. Companies with strong emission-reduction strategies attract more investment, lower financing costs, and better stock performance.
Additionally, consumers trust brands that take real climate actions, not just greenwashing. Companies that openly track and cut scope 3 emissions can build long-term customer loyalty and avoid backlash.
Also, sustainability-focused companies attract & retain employees better, reducing hiring costs and boosting engagements.
Moreover, businesses that proactively cut emissions can get ahead of regulations, access tax breaks, and strengthen government relations.
Company differentiation
Companies that take bold action on scope 3 set the standard for their industry. Being an early mover in low-carbon supply chains, sustainable sourcing, or net-zero commitments creates a reputation as an innovator.
Additionally, businesses that prove they are reducing scope 3 emissions earn deeper loyalty and outshine competitors stuck in old models.
Moreover, sustainable brands can charge more because customers see higher value in ethically sourced, low-carbon products. Low-carbon certification & carbon labeling can create a premium brand image.
Cutting scope 3 emissions also makes a company more attractive to purpose-driven professionals, helping secure the best employees.
2) Identify GHG reduction opportunities, set reduction targets, and track performance
The scope 3 inventory provides a quantitative tool for companies to identify and prioritize emissions-reduction opportunities along their value chain.
Scope 3 inventories provide detailed information on the relative size and scale of emission-generating activities within and across the various scope 3 categories. This information may be used to identify the largest emissions sources (hot spots) in the value chain and focus efforts on the most effective emission-reduction opportunities, resulting in cost savings for companies.
Conducting a GHG inventory according to a consistent framework is also a pre-requisite for setting credible public GHG reduction targets. External stakeholders, including customers, investors, shareholders, and others are increasingly interested in companies’ documented emissions reductions.
Identifying reduction opportunities, setting goals, and reporting on progress to stakeholders may help differentiate a company in an increasingly environmentally-conscious marketplace.
3) Engage value chain partners in GHG management
For many companies, a primary goal of developing a scope 3 inventory is to encourage supplier GHG measurement and reduction, and to report on supplier performance. A company may engage with their major suppliers to obtain emissions information on the products it purchases from them, as well as information on supplier’s GHG management plans.
Successful engagement with suppliers often requires a company to work closely with its supply chain partners to build a common understanding of emissions-related information and the opportunities and benefits of achieving GHG reductions. Reporting on the progress of company’s engagement with its supply chain can be useful information for the reporting company’s internal and external stakeholders.
Companies can also engage with customers by providing information on product use and disposal. For example, a company may want to work with stakeholders such as retailers, marketers or advertisers to convey information to customers on less energy intensive products, how to use a product more efficiently, or to encourage recycling. A scope 3 inventory enables companies to identify their downstream hotspots so that they can credibly engage with customers to reduce their value chain emissions.
By developing a scope 3 inventory, companies can identify where the largest energy, material and resource use is within the supply chain. This knowledge can inform cost savings through reducing material, energy and resource use, improving overall efficiency of companies’ supply chains, reducing regulatory risks, and strengthening supplier and customer relationships.
4) Enhance stakeholder information and corporate reputation through public reporting
NGOs, investors, governments and other stakeholders are increasingly calling for greater disclosure of corporate activities and GHG information. They are interested in the actions companies are taking, and in how companies are positioned relative to their competitors. For many companies, responding to this stakeholder interest by disclosing information on corporate emissions and reduction activities is a business objective of developing a scope 3 inventory.
Companies can improve stakeholder relationships through proactive disclosure and demonstration of environmental stewardship. They can demonstrate fiduciary responsibility to shareholders, inform regulators, build trust in the community, improve relationships with customers and suppliers, and increase employee morale.
Companies can disclose information through stand-alone corporate sustainability reports, mandatory government registries, industry groups, or through stakeholder-led reporting programs.
An example of a global voluntary reporting program is the Carbon Disclosure Project (CDP). CDP requests corporate GHG performance information on behalf of a community of investors.
Companies may also find that public reporting through a voluntary GHG reporting program can strengthen their standing with customers and differentiate them from their competitors.
Footnotes
A closed-loop system is a business model or process designed to minimize waste by keeping materials in continuous use rather than discarding them after a single use. It’s a key part of the circular economy, where products and materials are reused, refurbished, or recycled instead of ending up in landfills.↩︎