Scope 1, Scope 2, and Scope 3—and sometimes even Scope 4—are a greater focus for businesses all around the world. Many businesses recognize that CO2 emissions are harmful to the environment and want to do the right thing. In recent years, we have seen the movement toward reducing emissions pick up speed dramatically. In some cases, we are seeing companies almost take an about turn when it comes to focusing on reducing emissions and being more sustainable.
“If you look at science-based targets initiatives, or just the number of organizations in the world—which is companies and governments in the world—that have set net zero targets, you see now that over 5,000 companies or organizations in the world have done that and that represents over 90% of global GDP,” says Mark Kroese, general manager, sustainability solutions, Microsoft, “The power base of the world has committed to targets to get to net zero.”
Now that companies are on this sustainability journey all around the world, many are determining how to best measure and manage the emissions. This is where Scope 1, Scope 2, and Scope 3 enter the equation. These terms first appeared in the Greenhouse Gas protocol in 2001. Today, these are the basis for emissions reporting around the world.
Defining the Scopes
On a recent episode of The Peggy Smedley Show, Kroese defined all the Scopes to set the stage for how we can best manage and report emissions. Here is a closer look at how he defines them.
Scope 1 emissions covers the greenhouse gas emissions that a company makes directly. For Microsoft, for example, this would include the operation of all the campus shuttles and vehicles. Those are direct emissions that are born from operations.
Scope 2 emissions are emissions that a company makes indirectly like when it purchases electricity for heating and cooling of buildings or for data centers. So, this is energy that is being produced on a company’s behalf that the company is choosing to use.
Scope 3 emissions, this is where it gets tricky. This is the category that is associated with everything else and not just the company, but all of the suppliers upstream and downstream of the value chain.
In continuing the conversation with Eugenio Longo, sustainability director, TCS, we also learn there is a Scope 4, due to the fact Scope 1, 2, and 3 might not give us the full picture in the sense that today with technology, and especially IT technology, you would have the opportunity to look at things differently.
Quite simply, he is saying that “Products and services can be rethought thanks to technology, and these new systems might have much lower emissions. This is what Scope 4 is all about. If I do things completely different from a service perceptive or from a product perspective, I might have avoided emissions. And this is what Scope 4 refers to.”
Measuring the Scopes
Of all the Scopes, 1 and 2 are the easiest to measure, but Scope 3 is often harder to measure. Longo explains that many of these big corporations that have big IT architectures can have up to 9,000 suppliers. A company would have to pick up a phone 9,000 times to uncover how much emissions a partner in a value chain is using—and if you do call them, you might not get an answer. Many of them don’t know either.
Kroese uses Microsoft as an example. For the company, Scope 3 represents about 98% of its total emissions, and there are 15 subcategories in Scope 3, and these are divided into about half upstream emissions like suppliers and half downstream emissions, which is people who use Microsoft’s products. More than 90% of Microsoft’s total emissions fall into three of these 15 categories—two of which are upstream from the supply chain.
The first, which is in the supply chain, is purchased good and services like concrete and steel and construction things related to building campuses and data centers. The second, which is also in the value chain, is capital goods, so think about all the PCs and server racks in all of Microsoft’s data centers.
And then the third is a downstream one, which is called use of sold product. For example, in Scope 3, Microsoft is taking responsibility for the millions of XBox consoles around the world. Every time someone fires up an XBox, all of the electricity that is used is part of Microsoft’s Scope 3 emissions because that is the use of a sold product.
“This is where it gets really tricky,” says Kroese. “And we can talk more about the nested doll problem of measuring all of these different Scope 3 emissions because we have suppliers with suppliers with suppliers and suppliers and suppliers. So, it becomes very complicated very quickly.”
To address this, Longo suggests doing estimates and probabilistic studies to better measure how much emissions are being used in Scope 3, specifically.
“You need to start building a hypothetical supply chain and based on market intelligence and regional, geographical intelligence, you could start building your Scope 3 emissions,” he suggests.
Managing the Scopes
For Microsoft, measuring and managing Scope 1 and Scope 2 was the first step. For Microsoft, Scope 1 and Scope 2 are now down to 2% of the company—1% for Scope 1 and 1% for Scope 2.
“The world needs to get its arms wrapped around how to understand what their current emissions are, how to set targets for reducing those emissions, and you can’t manage what you can’t measure, right?” says Kroese. “I think the important thing about Scope 3 to understand is that my Scope 3 is someone else’s Scope 1 and 2. So if everyone reduced their Scope 1 and 2 to zero, there would be no Scope 3.”
While it isn’t possible for everyone to get to zero, he does say everyone should do their best job to reduce their Scope 1 and 2—and therefore we will minimize our Scope 3 emissions.
At this point many companies have the desire to do the right thing, and now we need more easy ways for people to comply. One of the things Microsoft has done is it has changed it supplier code of conduct—which is the formal agreement that any supplier enters into with Microsoft—to require the reporting of emissions.
“We have gone from 12% compliance to 87% compliance in this once we made it mandatory,” says Kroese. “We will get to 100% compliance in time. Walmart has done an excellent job. Any company with a large supply chain really has a responsibility to lead and to lead with policies that may be difficult to comply with but are ultimately going to set the right behavior and do the right thing.”
He also suggests another component here is to make data reliable and interoperable. Longo agrees, suggesting we need to treat CO2 like a dollar or a euro.
“Let’s start developing a standard to count it,” Longo suggests. “It is the baseline of everything. Once you have that, you can strategize about your financial accounting.”
Still, at the end of the day, Kroese suggests every company should embrace three words when it comes to this: just get started. And if you haven’t, then you are truly playing catchup. But remember, it’s still better late than never.
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