What are Scope 1, 2, and 3 Emissions?

Introduction

For private companies and investors, understanding carbon footprints is becoming increasingly crucial. This guide will explain the three scopes of greenhouse gas (GHG) emissions in simple terms, with concrete examples relevant to various business types and investment portfolios.

What are Greenhouse Gas Emissions?

Greenhouse gases trap heat in the Earth's atmosphere, contributing to global warming. The main GHGs include carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O). When we talk about GHG emissions, we're referring to the release of these gases into the atmosphere as a result of human activities.

The Three Scopes of GHG Emissions

GHG emissions are categorized into three scopes to help organizations and investors understand and manage their carbon footprint:

Scope 1: Direct Emissions

These are emissions that a company directly produces from owned or controlled sources.

• Examples:
  • Fuel combustion in company-owned vehicles
  • Natural gas used for heating facilities
  • Industrial processes
  • Fugitive emissions from owned equipment

Scope 2: Indirect Emissions from Purchased Energy

These are emissions associated with the generation of electricity, heating, and cooling that a company purchases and uses.

• Examples:
  • Electricity used to power offices, stores, or production facilities
  • Purchased steam or heating for workspaces
  • District cooling for data centers

Scope 3: All Other Indirect Emissions

These are emissions that occur in a company's value chain, both upstream and downstream. They're often the largest source of emissions but also the most challenging to track.

• Examples:
  • Business travel (e.g., flights, rental cars)
  • Employee commuting
  • Waste generated in operations
  • Transportation and distribution (both upstream and downstream)
  • Purchased goods and services
  • Use of sold products
  • Investments (particularly relevant for financial institutions)

Visualizing the Three Scopes

Why Should Private Companies and Investors Care About GHG Emissions?

• Regulatory Compliance: Many countries are introducing emissions regulations affecting various sectors, including certain states in the United States.
• Risk Management: Understanding emissions helps identify and mitigate climate-related risks.
• Cost Savings: Emissions analysis can reveal opportunities for energy and resource efficiency.
• Competitive Advantage: Low-emission businesses may attract more customers, partners, and investors.
• Environmental Responsibility: Reducing emissions contributes to combating climate change.
• Investment Decision-Making: For investors, understanding portfolio companies' emissions is crucial for assessing long-term value and risk.

Getting Started with Emissions Tracking

For private companies and investors looking to begin emissions tracking:

1. Identify the most significant emission sources across all three scopes.
2. Establish systems to collect and analyze emissions data (e.g., energy consumption, supply chain information).
3. Consider using sustainability software to streamline the process.
4. For investors, engage with portfolio companies to encourage emissions tracking and reporting.
5. Set science-based targets for emissions reduction and develop strategies to achieve them.

Conclusion

Understanding and managing GHG emissions is a critical step for any private company or investor looking to reduce environmental impact, manage risks, and prepare for a low-carbon future. By breaking down emissions into these three scopes, organizations can more effectively identify, measure, and reduce their carbon footprint, while investors can make more informed decisions about the long-term sustainability of their investments.

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