Sustainability Sustainability & ESG

Why Scope 1 and 2 Emissions are Critical for Corporate Sustainability

Scope 1 and 2 emissions classify emissions by businesses' direct and indirect control. Learn how reporting them can bring a competitive advantage.

Measuring corporate greenhouse gas (GHG) emissions is an important first step towards improving business sustainability, which investors view as a source of long-term value. A 2023 Institutional Investor Survey from Schroder’s shares the views of 770 institutional investors around the globe, with $35 trillion in assets under management (AUM). They named their top reasons for sustainable investing as:

  1. Long-term financial returns (64%)
  2. Portfolio diversification (62%)
  3. Regulatory and legal compliance (60%)

Based on current trends, PwC expects institutional investors responsible for half of global AUM to increase sustainability investments 84% by 2026. This growth is driven in part by investors’ stated GHG emissions reduction commitments. 

Nearly 70% of the Schroder’s survey respondents have a GHG emission reduction target for their portfolios, and 39% of this group has a net zero by 2050 commitment. This not only drives demand for emissions-reducing companies, but ones that have the well-managed emissions data to back up their claims. 

Demand from consumers is growing, too. Gen-Z and Millennials care more about sustainability than older generations, and they now make up more than two-thirds of the consumer market in the US. In a First Insight survey, 73% of Gen-Z respondents said they would pay more for sustainable products. 

For all of these reasons, more organizations are reporting their Scope 1 and 2 emissions. Morningstar research on 16,000 global companies found that 40% were reporting their Scope 1 and 2 emissions in 2021, compared to just 33% in 2020, and in the U.S. 71% of companies listed on the S&P 500 Index report their GHG emissions. 

 With growing pressure from investors, customers and regulators, more businesses are expected to become more transparent about their emissions and improve their sustainability. 

Definitions of Scope 1 and 2 Emissions

GHG emissions are classified into three main scopes for business reporting, and businesses usually start by reporting Scopes 1 and 2. 

Scope 1 emissions are the direct emissions associated with an organization’s directly owned assets or controlled operations such as fuel or oil consumption in boilers or directly owned vehicles, fugitive emissions from equipment or appliance use, and process emissions from producing cement or related materials. 

Scope 2 emissions are the indirect emissions from the purchased or acquired steam, electricity, heat and cooling used by businesses. 

The business mantra, “you can’t manage what you can’t measure” applies to GHG emissions as well. Preparing a GHG inventory for Scope 1 and 2 emissions gives businesses a solid footing for managing their GHG emissions. Its sound measurement guidelines are a first step towards developing a management approach and business strategy for addressing climate change. 

Why Scope 1 and 2 Emissions Matter for Businesses

GHG emissions accounting is essential for organizations to both internally manage their emissions and externally communicate their climate impact to investors, consumers and regulators. GHG accounting serves multiple purposes within a business: 

  • It can help organizations align with the Paris Agreement target of limiting global warming to a global average temperature increase of 1.5 degrees Celsius. 
  • Calculating emissions can support organizations in accurately labeling products with claims such as “carbon neutral.”
  • Carbon accounting can help businesses document their GHG emissions performance to access sustainability-linked loans or other forms of investment. 
  • Suppliers increasingly receive requests for reporting their emissions from their purchasers, who reflect these emissions in their reports on supply-chain emissions.   
  • In some regions, GHG emissions disclosures are mandated for businesses or buildings of a certain size. For those who are not operating in these regions, calculating GHG emissions can help them prepare for the likelihood of regulations in the future. 

How Carbon Accounting Became Business-as-Usual

Climate change became a pressing issue for large corporations and political leaders as early as the 1980s. After several decades, the current global impacts of climate change show that scientists’ predictions and warnings are accurate, though they had originally underestimated the rate that climate change impacts would intensify.  

The underlying science of climate change is relatively simple, because the amount of CO2 or equivalent (CO2e) greenhouse gas emissions present in the atmosphere directly correlates to the global average temperature.  

To address the risks of climate change, world leaders established an agreed limit for climate change in the Paris Agreement. It currently stands at an average temperature rise limit of well under 2°C, with a strong recommendation for 1.5 degrees Celsius. Determining the safe threshold required compromise between high-polluting nations and the nations experiencing the worst impacts, such as small island nations

With an agreed limit, scientists could calculate backward from the estimated amount of CO2e that would align with the limit and establish a global carbon budget. Scientists estimate we need to reduce carbon emissions by an estimated 1.4 billion tonnes per year to achieve the 1.5°C limit. 

Finally, in a 2018 Special Report on 1.5°C, the Intergovernmental Panel on Climate Change (IPCC) shared science-based pathways to achieve the limit by reaching net-zero emissions by 2050. This target is well known today, because many businesses around the world have made pledges to achieve this goal. 

As they transition to net-zero, many businesses have adopted the GHG Protocol Corporate Standard to measure and report their GHG emissions. 

What is the GHG Protocol Corporate Standard? 

As early as 1998, the GHG Protocol, a joint project of the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD), began to develop a corporate GHG accounting method to serve as an international standard all businesses could use. This method enables organizations of all sizes and types to measure and report their emissions using the same terminology and approach, known as the Corporate Standard. 

The main aim of the Standard is to provide a uniform method for businesses to conduct a GHG inventory using these scopes. This inventory provides a transparent calculation of an organization’s emissions for a given time period, aiding comparisons for businesses, regions and industrial sectors.  

A GHG inventory using the Corporate Standard calculates the following GHGs: 

  • Carbon dioxide (CO2)
  • Methane (CH4)
  • Nitrous oxide (N2O)
  • Hydrofluorocarbons (HFCs)
  • Perfluorocarbons (PCFs)Sulphur hexafluoride (SF6) 
  • Nitrogen trifluoride (NF3) 

To reflect the climate change impact of each GHG in a comparable way, these GHGs are associated with a global warming potential that reflects their impact in terms of the CO2 equivalent (CO2e). 

A GHG inventory will also classify the reported emissions by Scopes 1, 2 and 3. Emission boundaries are used to specify which business entities are included in the inventory calculation. For example, businesses may wish to exclude joint ventures in which they lack a majority decision-making authority.  

Finally, organizations can choose whether to calculate these emissions as an absolute value or as an emissions intensity value, which shows the amount of emissions relative to a business activity metric, such as CO2e per million dollars in revenue. 

Important Considerations for Scope 1 and 2 Emissions 

While the definitions of Scope 1 and 2 emissions are relatively easy to understand, complex business models can make the boundaries harder to distinguish. Here are a few examples. 

Equity Share vs. Financial Control

Businesses can choose to calculate their GHG emissions based on their equity shares or their financial control of emissions during their process of setting organizational boundaries. This flexibility enables organizations with multiple owners to identify a suitable calculation method. The equity share approach calculates emissions using the same percentage from the total emissions of the invested company as the percentage of shares held by the reporting entity. In the financial control method, group companies or subsidiaries and franchises will report 100% of the GHG emissions, while associated companies will report 0% of the emissions. Under this method, joint ventures will calculate emissions using their percentage of equity shares. 

Location- vs. Market-based Scope 2 Emissions 

According to the GHG Protocol’s guidance on Scope 2 emissions calculation, there are two main methods for reporting emissions: location-based and market-based. The location-based method estimates the emissions from purchased energy amounts based on the local average for that area. The market-based method calculates the emissions, from the same energy consumption, based on contractual agreements. This method is used to reflect an organization’s proactive choice of lower-emissions energy sources through agreements such as renewable energy credits (RECs) and direct renewable energy contracts, etc.   

Reporting Scope 1 and 2 Emissions 

Scope 1 and 2 emissions reporting is recommended under numerous environmental, social and governance (ESG) reporting frameworks and standards.  

California Climate Disclosure Rule SB253 requires both public and private businesses with activities in California and revenue over $1B to report Scope 1, 2 and 3 emissions. 

The European Sustainability Reporting Standard (ESRS) E1 for Climate Change will soon require businesses of a certain size and with headquarters or subsidiaries in Europe to report Scope 1, 2 and 3 emissions,  per the legally binding Corporate Sustainability Reporting Directive (CSRD)

The Global Reporting Initiative (GRI) Topic Standard 305: Emissions covers Scope 1 and 2 emissions reporting. The standards 305-1 and 305-2 require organizations to report details about the calculated amounts for Scope 1 and 2 emissions, the gases included, base year selection, emissions factor source, consolidation approach, and other standards, methodologies or assumptions included. 

The Task Force on Climate-Related Financial Disclosures (TCFD) recommends organizations disclose their Scope 1 and 2 emissions, along with the related risks to these emissions in its Metrics and Targets section.  

The International Financial Reporting Standard (IFRS) S2 climate-related disclosures requires organizations to report on their performance toward targets, such as Scope 1 and 2 emissions reductions. 

The Global Real Estate Standards Board (GRESB) annual assessment includes questions on GHG Emissions for indicator GH1, including Scope 1 and 2 emissions. 

The CDP (formerly Carbon Disclosure Project) Questionnaire asks the gross global Scope 2 CO2 emissions in metric tons (C6.3) and otherwise aligns with TCFD for Scope 1 and 2 reporting recommendations.

Strategies for GHG Emissions Management 

Scope 1 and 2 emissions reporting requires strong internal management from organizations. Assigning roles and responsibilities for GHG emissions data collection may require training and communication about the purpose and goals for collecting the data. Once internal data owners are assigned, the next step is to establish a home for the data. 

Atrius Sustainability is a technology tool that supports efficient, accurate management of GHG emissions data that can improve your reporting and analysis towards stronger GHG emissions management. Atrius not only aligns with GHG Protocol calculation methodologies, it enables strong analysis of the GHG emissions data through intuitive, dynamic dashboards that reveal an organization’s impact at a glance. 

The Future of Carbon Accounting

Carbon accounting is growing in importance as climate disclosure rules have become commonplace around the world. The role of Scope 1 and 2 emissions measurement is growing from a niche requirement for large listed companies to a mainstream business practice affecting small- and medium-sized enterprises across global supply chains. 

With more organizations establishing net-zero emissions targets and participating in carbon markets through the purchase of offsets in the form of credits or projects, carbon accounting will only increase in importance. 

Innovative approaches to carbon management are constantly evolving. Companies are now developing GHG emissions data collection methods using Ai and IoT, while they apply machine learning strategies for estimating climate-related impacts in the future. Throughout these changes, Atrius Sustainability remains a single source of truth for tracking and monitoring the GHG emissions data over time.   

Learn more about how Atrius simplifies GHG reporting, especially for organizations creating their first GHG inventory.

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