Comparative Analysis of Activity-Based and Spend-Based Methods for Scope 3 Greenhouse Gas Emissions Calculation

Author: Dr Li Yuanzhe

Abstract

This paper presents a comparative analysis of two primary methodologies for calculating Scope 3 greenhouse gas (GHG) emissions: the activity-based approach and the spend-based approach. Scope 3 emissions, encompassing all indirect emissions within a company's value chain, pose significant challenges in data acquisition and accuracy. The activity-based method provides a detailed calculation by directly measuring emissions from all activities in the value chain, thus offering granular insights into environmental impacts but requiring extensive data collection. In contrast, the spend-based method estimates emissions based on financial expenditures on goods and services, simplifying data collection but potentially sacrificing specificity for convenience. This study assesses the efficacy, challenges, and suitability of each approach depending on various industry needs, the complexity of supply chains, and regulatory compliance requirements, such as those from the Corporate Sustainability Reporting Directive (CSRD) and the Science Based Targets initiative (SBTi). The findings suggest a potential hybrid approach, leveraging the detailed accuracy of the activity-based method where feasible, supplemented by the broader overview provided by the spend-based method for initial assessments and less critical areas.

Keywords: GHG Scope 3 Emissions; Activity-Based Method; Spend-Based Method; Environmental Impact Assessment; Corporate Sustainability Reporting Directive; Emission Reduction Strategy

1. Introduction to Scope 3 GHG Emissions

In the context of escalating global climate challenges, corporate accountability for greenhouse gas (GHG) emissions extends beyond direct operational outputs (Scope 1) and indirect emissions from purchased energy (Scope 2), to encompass all other indirect emissions (Scope 3). Scope 3 emissions, deriving from a company’s entire value chain—both upstream and downstream—are pivotal in the comprehensive assessment of a company's environmental footprint. These emissions are integral for companies committed to reducing their ecological impacts, adhering to sustainability benchmarks such as the Corporate Sustainability Reporting Directive (CSRD) and the Science Based Targets initiative (SBTi).

The complexity of Scope 3 emissions lies in their broad spectrum, covering activities from the production of purchased goods and services to end-of-life treatment of sold products. Unlike Scope 1 and 2, Scope 3 challenges companies to manage emissions they do not directly control, necessitating robust methodologies for accurate tracking and reporting. This first chapter outlines the importance of Scope 3 emissions in corporate sustainability strategies and sets the stage for exploring methodologies for their calculation, which are critical for both regulatory compliance and the enhancement of environmental performance.

2. Foundations of GHG Emission Calculations

The methodology prescribed by the GHG Protocol for calculating Scope 1, 2, and 3 emissions operates on a fundamental principle: multiply the volume of an activity by its associated emission factor to determine the total GHG emissions. This straightforward approach forms the backbone of emission tracking and management across diverse organizational activities.

2.1 Simplifying Scope 1 and 2 Calculations  & Complexity in Scope 3 Emissions

For Scope 1 and 2 emissions—direct emissions from owned or controlled sources and indirect emissions from purchased energy, respectively—the calculation process is relatively straightforward due to the direct access to operational data. Organizations can readily obtain this data from their internal systems, facilitating timely and accurate reporting. The complexity escalates significantly when addressing Scope 3 emissions, which include all other indirect emissions linked to a company’s value chain. These emissions are not under direct control and require a comprehensive approach to data collection, spanning multiple stages of the supply chain from upstream to downstream activities. Accurately categorizing these activities into one of the 15 impact categories defined in the GHG protocol is crucial. Each category must be aligned with the appropriate emission factors, which adds layers of complexity to the data integration and calculation processes.

2.2 Diverse Methodologies for Scope 3 Calculation

To tackle the intricacies of Scope 3 emissions, two primary methods are employed: the activity-based approach and the spend-based approach.

·       Activity-Based Approach: This method involves direct calculations based on specific activities within the company’s value chain, requiring detailed data collection on every relevant activity. It is particularly effective for gaining precise insights into specific emission sources but demands substantial data collection efforts.

·       Spend-Based Approach: Alternatively, the spend-based method estimates emissions based on the monetary value of goods and services, simplifying the data collection process. This approach is less precise but useful for providing a high-level overview of emission hotspots, especially when detailed activity data is unavailable.

Both methods have their merits and can be used independently or in conjunction to complement each other, depending on the company's specific needs and the availability of data.

3. Strategic Importance of Comprehensive Scope 3 Emission Calculation

3.1 Activity-based approach

The activity-based approach to calculating Scope 3 emissions utilizes detailed data derived directly from the activities and processes within a company's value chain. This method emphasizes specificity and granularity, involving a thorough accounting of emissions from various stages such as procurement of raw materials, transportation modalities, waste management, and the disposal or recycling of end products.

Detailed Data Requirements

Implementing this approach necessitates comprehensive data collection across the entirety of the value chain. This includes, but is not limited to, detailed metrics on raw material volumes, transportation distances and methods, waste stream management, and end-of-life processes of products. Each of these aspects must be meticulously quantified to ensure accuracy in the emissions calculation.

Scope of Emissions Analysis

The strength of the activity-based approach lies in its ability to provide a highly detailed analysis of emissions sources within Scope 3 categories. By categorizing emissions according to the 15 designated impact categories of the GHG Protocol, this method facilitates a deep dive into the specific areas where environmental impact is most significant. This structured categorization not only enhances the precision of the data but also aids in identifying key areas for emissions reduction.

Suitability and Challenges

Due to its rigorous data requirements, the activity-based approach is particularly well-suited for industries with complex value chains, such as manufacturing, where the ability to track and measure inputs and outputs at each stage is feasible. However, the challenge lies in the exhaustive nature of data collection required, which can be resource-intensive. Ensuring the accuracy and completeness of data across all segments of the value chain is critical but often challenging, particularly in sectors with less transparency or control over upstream and downstream processes.

Critical Assessment

While the activity-based approach yields highly accurate and actionable insights into the specific contributors to Scope 3 emissions, its implementation can be hindered by practical limitations related to data availability and the logistical feasibility of comprehensive tracking. Companies must weigh the benefits of detailed emissions insight against the costs and effort involved in data collection, making this approach more viable for larger corporations or those in heavily regulated industries that can justify the investment in detailed environmental monitoring and management.

3.2 Spend-based approach

The spend-based approach offers a simplified, indirect method for calculating Scope 3 emissions by focusing on financial expenditures on goods and services rather than specific operational activities. This method estimates emissions based on the costs associated with purchased inputs, making it a more accessible option when detailed activity data is unavailable.

Advantages of Simplified Data Collection

One of the key benefits of the spend-based approach is its reduced complexity in data collection. Organizations can leverage existing financial and procurement systems to gather necessary data, bypassing the intricate details required in the activity-based approach. This accessibility makes it a practical choice for initial assessments of environmental impact, especially in complex supply chains where direct emission data may be hard to track.

High-Level Emission Insights

By converting financial expenditures into emission estimates, this method provides a broad overview of potential emission hotspots. It identifies areas where spending aligns with significant emissions, guiding strategic decisions about where to focus reduction efforts. However, it's important to note that this approach offers less granularity and may overlook specific emission drivers within the supply chain.

Critical Considerations for Emission Factors

When using the spend-based approach, several critical factors must be considered to ensure accuracy and relevance:

1. Market Average Emission Factors: The emission factors used are typically based on industry averages. This can lead to discrepancies between the estimated emissions and the actual emissions specific to a company’s operations or products, as these factors may not account for unique practices or efficiencies.

2. Impact of Inflation and Exchange Rates: Financial expenditures can be influenced by external economic factors such as inflation and currency exchange rates. This adds a layer of complexity to the calculations, as changes in spending may not directly correlate with changes in emissions.

3. Price Variability Effects: Changes in supplier pricing, independent of operational practices, can artificially inflate or reduce calculated emissions. An increase in prices might suggest higher emissions when, in reality, operational emissions have not changed, and conversely, a reduction in prices might suggest a reduction in emissions where none has occurred.

Comprehensive and Critical Review

The spend-based approach, while beneficial for its simplicity and the macro-level insights it provides, has limitations in precision and may not fully capture the nuances of a company's environmental impact. Companies need to be aware of these limitations when using this method, especially in the context of regulatory compliance and detailed environmental performance tracking. Combining this approach with activity-based calculations can offer a more balanced and accurate assessment of Scope 3 emissions, aligning financial insights with actual environmental impacts.

4. Considerations for Method Selection

Resource Allocation and Accuracy

Choosing the right methodology for calculating Scope 3 emissions involves a careful assessment of resource availability and the desired level of accuracy. Activity-based calculations, while resource-intensive, provide a detailed and accurate measure of emissions throughout the value chain. This method requires significant investment in terms of both budget and time but is unparalleled in its ability to deliver precise emission data.

On the other hand, the spend-based approach is less resource-demanding and offers a broader overview, making it ideal for preliminary assessments. It utilizes data readily available from procurement and supplier systems, making it easier and faster to implement than the activity-based method.

Data Collection and Stakeholder Engagement

Effective implementation of the activity-based approach necessitates active engagement with various stakeholders across the value chain to gather relevant and detailed data. This process can be complex and time-consuming but is essential for achieving a comprehensive understanding of emissions sources. Conversely, the spend-based method, while simpler, relies on generalized data that may not capture the nuances of specific emission factors or operational practices.

Integrating Methods for Comprehensive Insights

For organizations aiming to refine their Scope 3 emissions calculations, integrating both methods may be advantageous. The GHG protocol accommodates such an approach by allowing companies to apply different methods to different impact categories based on their materiality. Material categories should be assessed with the activity-based approach for accuracy, while immaterial categories can be evaluated using the spend-based method to conserve resources.

Strategic and Regulatory Considerations

The selection of a calculation method is also influenced by strategic goals and regulatory requirements. Companies must consider their long-term sustainability targets, such as achieving Net-Zero emissions by 2050, and ensure that their chosen methods align with these objectives. Regulations such as the CSRD mandate comprehensive GHG emissions reporting, necessitating methods that provide both breadth and depth of data.

Moreover, for companies at the beginning of their sustainability journey, starting with the spend-based approach can provide a valuable initial overview, identifying major emission hotspots and informing more targeted actions in the future.

The decision on which calculation method to employ should consider a balance between detailed accuracy and resource efficiency, the company’s position in its sustainability journey, and the specific requirements of regulatory frameworks. By thoughtfully selecting and potentially combining methods, companies can optimize their emissions tracking and management to better support their environmental and regulatory objectives.

5. Conclusion

This study has extensively analyzed the activity-based and spend-based approaches for calculating Scope 3 greenhouse gas emissions, highlighting their respective advantages, challenges, and applicabilities across various industrial contexts and regulatory environments. The activity-based approach, with its detailed data requirements and comprehensive emissions tracking, offers precision and depth, making it ideal for industries with complex supply chains where such detail is necessary for both compliance and effective emissions management. However, this method's resource intensity and need for extensive stakeholder engagement can limit its applicability to organizations with sufficient resources. Conversely, the spend-based approach provides a more accessible but less granular overview of emissions, making it suitable for initial assessments and organizations at the early stages of their sustainability journey. This method’s reliance on financial data simplifies the process but may not capture the full complexity of a company’s environmental impact, especially when detailed activity data is challenging to obtain. Integrating both methods can address the limitations inherent in each, allowing organizations to tailor their approach based on the materiality of different impact categories. This hybrid strategy enables companies to balance resource allocation with the need for accuracy and detail, aligning with strategic goals and compliance requirements.

Ultimately, the choice of method depends on multiple factors, including the company's specific needs, the complexity of its value chain, and its regulatory context. Organizations must strategically select and potentially combine methods to enhance their Scope 3 emissions management, supporting broader sustainability objectives such as achieving Net-Zero emissions and complying with international standards like the CSRD and SBTi. This comprehensive approach not only aids in regulatory compliance but also enhances the company's sustainability profile, contributing to a more accurate and actionable understanding of its environmental impact.