What are supply chain emission amount? Differences between Scope 1, 2, and 3, and key points to understand in practice.

As climate change response shifts from "corporate social responsibility (CSR)" to "a requirement for business survival," managing emission amount within a single company alone is no longer sufficient to meet the demands of investors and customers. With the publication of draft disclosure standards by the Sustainability Standards Committee and strengthening international regulations such as Europe's CSRD(Corporate Sustainability Reporting Directive), understanding and disclosing greenhouse gas (GHG) emission amount across the entire supply chain (value chain) has become an urgent necessity.

This article provides a thorough explanation from a practical perspective, covering everything from the basic definition of "supply chain emission amount," to the clear differences between them and Scope 3 3, the classification of all 15 Category, and the "calculation hurdles" that practitioners face and how to overcome them.

What are supply chain emission amount?

Definition and Overview

Supply chain emission amount refer to greenhouse gas (GHG) emission amount generated throughout the entire value chain (supply chain), including raw material procurement, Manufacturing , logistics, sales, use, and disposal, in connection with a company's business activity .

The international GHG Protocol classifies and organizes corporate emission amount into three categories: Scope 1, Scope 2, and Scope 3 .

Therefore, in practice, it is common to understand the total of these emissions as supply chain emission amount , representing the overall picture of emission amount related to business activity .

Supply chain emission amount = Scope 1 emission amount + Scope 2 emission amount + Scope 3 emission amount

In other words, supply chain emission amount are an indicator used to understand the total emission amount from a company's activity , including not only its own direct emissions but also activity of its business partners and customers.

Relationship and differences between Scope 1, 2, and 3

Scope 3 refers only to a portion of supply chain emission amount(emissions generated outside of the company itself).

In many companies, the majority of emission amount are concentrated in Scope 3, so discussions often revolve around Scope 3. However, supply chain emission amount are a concept that includes all three Scope 1, 2, and 3 emissions.

The definitions of each are as follows:

In short, Scope 3 refers to "emissions that occur outside of the company's direct control but are caused by the company's business activity."

Why supply chain emission amount are important

Why most emissions are concentrated in Scope 3

For many Manufacturing and Retail businesses, the GHG emissions (Scope 1, 2) from their own factories and offices represent only the tip of the iceberg. This is because the vast majority of emissions occur during the raw material procurement stage (upstream) and when the sold products are used by customers (downstream).

For example, for an automobile manufacturer, "gasoline combustion during driving (Category 11)" accounts for the majority of emissions. Similarly, for home appliance manufacturers and IT equipment manufacturers, the use phase of products (Category 11) is often the biggest hotspot for emission amount. On the other hand, for food manufacturers, "production of agricultural products used as raw materials (Category 1)" generally accounts for the majority of emissions.

Thus, since Scope 3 emissions account for the majority of emission amount in many companies, reducing only Scope 1 and 2 emissions may be seen as having only a limited substantial impact on climate change.

Investor/customer requirements (CDPs/SBT)

In corporate environmental assessments, supply chain emission amount are a mandatory requirement in the following contexts:

• Responding to the CDPs Questionnaire: The CDPs, which is highly valued by institutional investors, requires the calculation and disclosure of Scope 1, 2, and 3 emission amount. Scope 3 emissions, in particular, are considered a crucial item where comprehensiveness and accuracy significantly impact the evaluation. Requests for responses are being sent primarily to companies listed on the Prime, and failure to respond or providing insufficient responses risks lowering market valuation.

• SBT (Science Based Targets) Certification: To obtain SBT certification, which is the level of reduction targets in line with the Paris Agreement, companies whose Scope 3 emission amount account for 40% or more of their total emissions (the sum of Scope 1, 2, and 3 emission amount ) are required to Settings Scope 3 reduction targets.

• Customer requests: For large companies to achieve their SBT targets, reducing emissions from their suppliers is essential. Therefore, there is an increasing demand for the calculation and disclosure of emission amount as a condition of trade.

Business risks and opportunities

As carbon pricing, such as carbon taxes, becomes more widespread, emission amount across the entire supply chain represent a "business risk" that directly translates to increased costs in the future. On the other hand, building low-carbon products and supply chains can become a "source of competitive advantage" that attracts environmentally conscious customers.

Organizing the 15 Category of Scope 3

Scope 3 Category are classified into 15 types according to the GHG protocol. In practice, it is common to organize these into "upstream" and "downstream" categories.

This upstream/downstream distinction is based on the position within the supply chain (value chain) (whether it's the procurement side or the sales side). In practice, it's easiest to understand upstream as anything related to purchasing activity, and downstream as anything related to the products that have been sold.

Furthermore, the GHG protocol does not require the calculation of all 15 Category ; it only requires the calculation of Category related to a company's business activity .

Internationally, the GHG Protocol serves as the standard for defining Scope 3 Category and their calculation scope. However, there are some differences in treatment compared to the Japanese Ministry of the Environment guidelines (e.g., the treatment of transmission and distribution losses and investment Category). This article organizes the information based on the definitions in the GHG Protocol *1 , taking into account international consistency and connection with frameworks such as SBT.

Upstream Category(Category 1-8)

These are emissions related to items purchased or procured to support our company's production and sales activity.

Lower Category(Category 9-15)

These are emissions related to the processes after a company's products have been shipped. This is particularly important for B2C companies and durable goods manufacturers.

Method for calculating supply chain emission amount

The basic method for calculating supply chain emission amount is the following simple multiplication:

emission amount = activity level × Emission intensity

• activity Data: Quantities that represent the scale of business activity(e.g., purchase amount, purchase weight, electricity consumption, transport ton-kilometers, etc.).

• Emission intensity : emission amount per unit of activity (e.g., CO2 emission amount per kg of iron, CO2 emission amount per ton-kilometer of truck transport).

Furthermore, within supply chain emission amount, Scope 3 in particular targets activity not directly under a company's control, and therefore calculations are based on estimations rather than actual measurements. For this reason, it is common practice to begin calculations with rough estimates using average Emission intensity and then gradually refine the calculations for important Category.

Two approaches used in practice

1. Intensity method (using secondary data)

   • overview: This method uses average values ​​(secondary data) from databases such as the Ministry of the Environment and IDEA (Inventory Database for Environmental Analysis).

   • Advantages: If you have your own purchase amount and weight data, you can calculate it and get started easily.

   • Disadvantage: Because industry averages are used, even if suppliers make individual reduction efforts, these efforts are unlikely to be reflected in their own Scope 3 reduction figures.

2. Utilizing primary data (supplier-specific data)

   • overview: A method that uses actual measured values ​​and calculated values ​​obtained directly from suppliers.

   • Benefits: It allows for more precise calculations and enables the reflection of reduction effects achieved in collaboration with suppliers in the numerical data. The GHG protocol also recommends a "hybrid method" that combines primary data and secondary databases for calculation.

   • Disadvantages: The amount of work required for data collection is enormous, and it also depends on the supplier's calculation capabilities.

Basic steps of calculation

1. Settings the purpose of the calculation: Is it for internal monitoring only, for SBT application, or for external disclosure?

2. Confirmation of the scope (boundaries) of the calculation: Should it include group Company, or should it also include equity-method Company?

3. Category Classification: Identify the categories that apply to your company's business from the total of 15 Category.

4. Calculation for each Category: Collect activity data and multiply by the appropriate Intensity.

Common misconceptions

• "All Category must be calculated perfectly": In practice, Category with extremely small emission amount can be excluded or handled with estimates based on "materiality." First, "screening" to grasp the overall picture is important.

• "Double counting in upstream and downstream is not allowed": Supply chain emission amount are, conceptually, indicators that assume overlap with other companies' Scope 1 and 2 emissions (e.g., a company's Scope 3 Category 1 corresponds to its suppliers' Scope 1 1 and 2). While overlap is problematic for society as a whole, it is acceptable as a management indicator for a single company.

5. Common Issue in practice

There is a Issue that practitioners who are about to begin the calculation will inevitably face.

Difficulties in data collection

The biggest obstacle is that the data is scattered throughout the company.

• Category 1 (Purchased Products) contains purchase data.

• Category 4 (Logistics) includes logistics management data.

• Category 6 (business trips) and 7 (commuting) include HR and general affairs data. To integrate this data, a cross-departmental collaborative system is essential.

Hurdles to supplier collaboration

To obtain primary data, it is necessary to request emission amount data from suppliers. However, many small and medium-sized suppliers do not have the necessary calculation systems in place, resulting in problems such as not receiving a response or receiving data with low accuracy.

Limitations of Excel management

While it's possible to perform calculations using Excel in the initial stages, as the number of location and items increases, the files become bloated, and managing the updating of coefficients (adapting to annual Intensity revisions) and reliance on individual expertise pose risks. As a result, many companies are moving towards adopting cloud-based calculation Service.

How to proceed with practical work (organized in 5 steps)

This is a roadmap for efficient and effective calculation and reduction.

STEP 1: Boundary Settings and establishment of a promotion system

We will determine the scope of calculation (consolidated companies) and establish a project team involving relevant departments within the company (purchasing, logistics, Manufacturing, sales, etc.). We will also create an environment where necessary data can be extracted from accounting data and ERP systems.

STEP 2: Identifying priority Category(screening)

Instead of immediately performing detailed calculations for all items, we first create a rough overall picture using monetary data and other information. We identify "what are the major Category that account for 80% of emission amount " and decide which areas to concentrate resources on. This is called "screening calculation."

STEP 3: Calculation of the base year using the Intensity method

For the identified priority Category , the base year emission amount are determined using secondary data (average Intensity ) from databases such as the Ministry of the Environment. This forms the basis for Settings targets such as Science Based Targets (SBTs).

STEP 4: Refinement (Switching to primary data)

For items and key suppliers with particularly high emission amount and significant potential for reduction, we will gradually shift from collecting and applying average Intensity data to collecting and applying primary data that reflects actual values. This will allow the effectiveness of specific reduction measures to be reflected in the numbers.

STEP 5: Connecting to Reduction Measures

The calculation is not the goal, but the starting point.

• Procurement: Switching to low-carbon materials, supplier engagement (e.g., requesting SBT certification)

• Design: Lightweight product, improved energy efficiency, and recyclable design.

• Logistics: We will translate these ideas into concrete action plans, such as improving loading efficiency and modal shift, and implement the PDCA cycle.

summary

Calculating and managing supply chain emission amount is now becoming part of a company's "report card."

1. Scope 3 is the main focus: For many companies, the main battleground for emissions is Scope 3, and managing it throughout the entire supply chain (value chain), including Scope 3, is considered crucial.

2. In practice, the focus shifts from "rough estimates" to "refined calculations": Instead of aiming for perfection from the start, it's common practice to grasp the overall picture (screening) using a Intensity method based on monetary values, and then proceed to create primary data starting with the most important hotspots.

3. Recognition as a management Issue: This is not merely a data aggregation task, but a theme related to "management strategy" that leads to reducing procurement risks, responding to customer feedback, and creating new low-carbon businesses.

On the other hand, in practice, many Issue arise, such as data being scattered across different departments and difficulty in collecting information from suppliers, resulting in a heavy burden of calculation and management.

Our company provides support for everything from calculating supply chain emission amount , including Scope 1 , 2, and 3 emissions, to data collection and management, and the consideration of reduction measures.

"First, I want to understand the overall picture of our company's Scope 1, 2, and 3 operations."

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reference:
*1) https://ghgprotocol.org/