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Talking GHG: Practical insights on measuring scope 3 emissions · PwC's accounting podcast

• 0:00
  SPEAKER_02: Thought Leadership from PwC's National Office.
• 0:06
  SPEAKER_01: I think the one of the important takeaways from this is that scope three, you really want to look at it as it's a marathon, right?
• 0:12
  SPEAKER_01: It's not a sprint.
• 0:13
  SPEAKER_01: You're not going to get there overnight.
• 0:14
  SPEAKER_01: You have to, it's a time-intensive piece of reporting, right?
• 0:18
  SPEAKER_01: You have to get your collect your data, collect your completeness, and then apply the effort to get the more precise data over time.
• 0:27
  SPEAKER_03: Hello.
• 0:28
  SPEAKER_03: Today we're back talking ESG, continuing our series on the building blocks of GHG emissions reporting.
• 0:36
  SPEAKER_03: In today's episode, we continue our discussion of step four, measurement, with a focus on measuring scope three emissions.
• 0:43
  SPEAKER_03: This is PWC's Accounting Podcast.
• 0:51
  SPEAKER_03: I'm Heather Horn, and thanks so much for joining us today.
• 0:55
  SPEAKER_03: In today's episode, we'll start with an overview of what's included in Scope 3.
• 0:59
  SPEAKER_03: We'll highlight some of the challenges in identifying a complete inventory of sources, and then we'll discuss the various methods for measuring those sources.
• 1:08
  SPEAKER_03: Back today on the podcast, I have Marchina Lewinsky, a partner who leads our global technical working group, Focus on GHG, and Chris Osterman, a director in PwC's sustainability practice, who specializes in GHG emissions.
• 1:21
  SPEAKER_03: They'll provide some practical perspectives from their many experiences with companies as it relates to navigating scope three emissions reporting.
• 1:29
  SPEAKER_03: With that, here's my conversation with Marchin and Chris.
• 1:34
  SPEAKER_03: Marchin, Chris, welcome back for the third of our three-part mini-series within our GHG mini-series about GHD measurement.
• 1:42
  SPEAKER_03: And no surprise to our listeners, today's episode is about scope three.
• 1:46
  SPEAKER_03: But before we get into any of the detail, Chris, I thought it'd be helpful to just remind people what we're talking about when we say scope three emissions.
• 1:55
  SPEAKER_01: Thanks, Heather, for having us back.
• 1:57
  SPEAKER_01: Scope three emissions refer to the indirect emissions that occur in a company's value chain.
• 2:01
  SPEAKER_01: Simply put, it's the emissions that are not included in your scope one and two and represent um the emissions that are associated with your suppliers, your customers, or even from the products that you sell, the emissions can come from there.
• 2:13
  SPEAKER_01: It's all accounted within scope three.
• 2:16
  SPEAKER_01: Scope three emissions often represent the largest source of emissions, the largest reporting point for a company that's disclosing its emissions.
• 2:23
  SPEAKER_01: Sometimes it can be as much as 10 or 100x your scope one and two emissions.
• 2:27
  SPEAKER_03: So can I ask a question?
• 2:28
  SPEAKER_03: Because we always say this often, larger.
• 2:32
  SPEAKER_03: And again, I know it's a limited sample, but from the two of your experience, have you ever seen a company where it was not larger than scope one and scope two?
• 2:40
  SPEAKER_01: Aaron Powell The only example we ever give would be like uh steel refining, right?
• 2:44
  SPEAKER_01: So it's super intensive for making steel versus the cost for them to buy the steel is much smaller than the amount of energy that they need to make the steel products.
• 2:56
  SPEAKER_03: So with that said, recognizing there may be very limited exceptions, for most companies, scope three will be the biggest GHG number they're reporting and likely very prominent as companies who are trying to understand the upstream and downstream value chain.
• 3:11
  SPEAKER_03: Before we keep going, I should note that for SEC reporters, they are not required to report scope three and may come up in some cases if they're talking about targets or metrics, but in but there's actually not a specific requirement for scope three.
• 3:29
  SPEAKER_03: But if you're reporting in accordance with uh California 253 or ESRS or the IFRS sustainability disclosure standards, then scope three would be required.
• 3:40
  SPEAKER_03: So don't change the channel.
• 3:41
  SPEAKER_03: Now, one of the unique things about scope three compared to scope one and scope two is this idea of scope three categories and ESRS, the IFRS sustainability disclosures, and uh the GHG protocol reporting for purposes of California 253, you would be required to also disclose your significant scope three categories.
• 4:03
  SPEAKER_03: So, Martin, as you're thinking about this, what are the categories and you know what's the background so we can dig in a little deeper?
• 4:12
  SPEAKER_00: Yeah, thanks, Heather.
• 4:13
  SPEAKER_00: So GEG protocol basically defines 15 distinct categories of scope three emissions.
• 4:19
  SPEAKER_00: They divide it by upstream categories and downstream categories.
• 4:22
  SPEAKER_00: So upstream categories relate to all the emissions that are generated within value chain of reporting entity before or upstream of that entity.
• 4:32
  SPEAKER_00: So we're talking about purchases of goods or services, everything that happens before those goods and services end up at factories or companies' door, right?
• 4:43
  SPEAKER_00: Then you have a downstream emissions or downstream categories.
• 4:47
  SPEAKER_00: Those are the emissions created with value chain downstream of the company.
• 4:51
  SPEAKER_00: So emissions associated with use, uh sell and use of a product that company is manufacturing and selling to its customers, everything basically that happens downstream of a company.
• 5:02
  SPEAKER_00: So it's very important to perform that, identify the material and relevant uh categories for a company, and um, because that's gonna drive how the companies are gathering the data needed to calculate those emissions and how they report that.
• 5:17
  SPEAKER_03: All right.
• 5:18
  SPEAKER_03: So that's helpful.
• 5:19
  SPEAKER_03: I think though it's more helpful instead of just saying there are 15 categories, to actually run through at least a few examples of some of the categories.
• 5:27
  SPEAKER_03: So, Chris, maybe starting with these upstream categories, uh, can you give us some examples of what would be captured there?
• 5:34
  SPEAKER_01: Certainly.
• 5:34
  SPEAKER_01: So the upstream categories are the first eight categories within the scope three protocol, and they're broken down into the activities that, uh, as March was saying, that they flow towards the business.
• 5:45
  SPEAKER_01: So the most significant category for reporters are going to be categories one and two.
• 5:49
  SPEAKER_01: That's purchased goods and services and capital goods.
• 5:52
  SPEAKER_01: Purchased goods and services are just like it sounds, it's all the goods and act and things that you need to purchase to make your product happen, right?
• 5:59
  SPEAKER_01: It's the ingredients and the recipe.
• 6:01
  SPEAKER_01: These are all the things that get uh reported in that category.
• 6:03
  SPEAKER_01: And capital goods, similarly, is the capital expenditures without the year that you need to process your product to make the make your product.
• 6:11
  SPEAKER_03: All right, and I think another notable one that's in that category that may come up for some of our reporters is business travel, because again, that is something that most companies will have.
• 6:22
  SPEAKER_03: And so uh that's often a place where we get questions.
• 6:26
  SPEAKER_03: Otherwise, though, I think a lot of these will depend on the type of company, although I guess employee commuting is similar as well to business travel, that most many or most companies will also have both of those, but perhaps they'll be much smaller compared to those category one and two.
• 6:42
  SPEAKER_01: Absolutely.
• 6:43
  SPEAKER_01: It's very much dependent on the type of activity the reporting company has.
• 6:46
  SPEAKER_01: If you're a manufacturer, also the transportation of your goods are going to be a significant factor of in your reporting for your scope three upstream emissions.
• 6:54
  SPEAKER_03: Aaron Powell But then if you're a consulting company, business travel perhaps or employee commuting is going to be more significant.
• 7:01
  SPEAKER_00: Aaron Powell Yeah, I think Heather, it's a very important distinction, right?
• 7:04
  SPEAKER_00: And that's why it's so important to identify and categorize those emission sources properly before you start reporting, because you know your footprint is going to be different depending on the type of activity that you have.
• 7:16
  SPEAKER_00: As you mentioned, um financial services companies or you know, uh professional services companies, that business travel might be a significant element for um for production company not.
• 7:27
  SPEAKER_00: Then when you move to the downstream uh emission sources, uh again, all the emissions that are generated in the value chain after your product leaves your um uh your facility.
• 7:38
  SPEAKER_00: So any transportation of your of your product from uh get you of your facility to the final customer, any emissions uh generated during the utilization of your product, right?
• 7:50
  SPEAKER_00: For financial services companies, investments.
• 7:53
  SPEAKER_00: So any emissions associated uh with the investments that they have uh on their balance sheet, right?
• 7:58
  SPEAKER_00: So a lot of banks and and other financial institutions, big part of their uh you know, assets and balance sheets are investments, so and they all have um associated emissions that have to be reported as category 15 uh investments.
• 8:11
  SPEAKER_00: So in in real life, somebody can ask what is the really kind of uh let's say use of my product sold, right?
• 8:19
  SPEAKER_00: So let's imagine that the our client is a company that sells gasoline, right?
• 8:25
  SPEAKER_00: And um you can imagine this this gasoline is later on combusted uh by cars.
• 8:31
  SPEAKER_00: When you buy customers who buy the gasoline, they combust it in the car.
• 8:35
  SPEAKER_00: So the company that produces this gasoline has to report emissions associated with combustion of their fuel, of this fuel, barric by their custom customers.
• 8:44
  SPEAKER_00: So it's as you as we said before, uh that can be quite significant part of their emissions footprint for for this company, right?
• 8:52
  SPEAKER_00: So um the same investment category 15, let's let's imagine our reporting entity is bank, and they have uh two investments, like they own 20% of uh of some other companies.
• 9:06
  SPEAKER_00: They have to report 20% of emissions generated by these two companies.
• 9:10
  SPEAKER_00: Although you know, bank itself did not generate those emissions, but that's the concept of value chain emissions.
• 9:16
  SPEAKER_00: And that's why oftentimes, as I said before, the scope three emissions within the value chain are generally higher than emissions that uh scope one and scope two emissions generated by a reporting entity.
• 9:27
  SPEAKER_01: I think it ties back to the point you had made earlier about the different um regulatory reporting requirements.
• 9:33
  SPEAKER_01: No one shoe fits all feet, right?
• 9:34
  SPEAKER_01: So it's it's the materi it's the significant categories that are to your business.
• 9:39
  SPEAKER_01: It may not be the same as the next business down the road.
• 9:42
  SPEAKER_03: Yeah, I think that's a good point.
• 9:44
  SPEAKER_03: I also think it's important as we're listening.
• 9:46
  SPEAKER_03: We did name a few of the categories there uh from for our listeners' benefit.
• 9:51
  SPEAKER_03: But one of the things that really struck me when I started working in this space was the fact that people actually typically just use the category numbers.
• 9:59
  SPEAKER_03: They don't necessarily say uh investments, they would say category 15.
• 10:04
  SPEAKER_03: And so just it's a relatively small thing.
• 10:07
  SPEAKER_03: But as you start to work with this, learning the numbers for the significant categories that your company's in will make it a lot more easier to talk to people about it and to even understand things you're reading or otherwise.
• 10:18
  SPEAKER_03: So just a small thing there to think about.
• 10:20
  SPEAKER_00: And I I think header it's a very important element because um it's not only GHG protocol kind of a category.
• 10:27
  SPEAKER_00: So when you look at all the major reporting frameworks, they basically maintain the same categorization and requirement to report those emissions using those categories outlined in GHG protocol.
• 10:38
  SPEAKER_00: So that's not only voluntary reporting, all the regulatory reporting maintains the same categorization, the same numbers.
• 10:44
  SPEAKER_00: So it's even more important to have that knowledge and and remember this.
• 10:49
  SPEAKER_03: Yes, exactly.
• 10:50
  SPEAKER_03: All right.
• 10:51
  SPEAKER_03: So one point then that if our listeners are are uh thinking about this, and it's a question we often get is that inherently in this, then the same emissions are being counted by multiple companies.
• 11:07
  SPEAKER_03: So the the company that manufactures the good might be counting those as its category one emissions, and then the the entity buying the good is counting those as its category three, and then the company that's buying the finished product is counting all of that as its category three.
• 11:25
  SPEAKER_03: And you know, again, it's you result in an exponential amount of emissions, but the actual amount of emissions is all the same.
• 11:33
  SPEAKER_03: And so I think we often get a question well, so how is this actually helpful?
• 11:37
  SPEAKER_03: Because you're just sort of multiplying emissions and it's not in the company's direct control.
• 11:43
  SPEAKER_00: Yeah, so so I think it's a great question, Heather.
• 11:45
  SPEAKER_00: And as an accountant, right?
• 11:46
  SPEAKER_00: I mean, it's at the beginning, it's foreign concept to some extent.
• 11:50
  SPEAKER_00: The easiest way to explain to um non-emission specialists is there's no really global consolidation for scope for a GEG emissions calculation.
• 11:59
  SPEAKER_00: So you're right, you can't just add up all three scopes of every company and and hope that this is you're gonna be our global emission footprint, right?
• 12:07
  SPEAKER_00: Because as you mentioned, the double counting is is almost embedded into the the uh the whole emissions reporting system.
• 12:14
  SPEAKER_00: And you might ask why, right?
• 12:16
  SPEAKER_00: Because that that was the first question, why?
• 12:18
  SPEAKER_00: That's again, as an accountant, it's it's sort of you want for some sort of eliminations out there.
• 12:24
  SPEAKER_00: But um, I think the system was designed, our accounting model was designed to encourage companies to uh try to influence um the emissions that that they're responsible for, not only their own emissions, but also the value chain partners.
• 12:39
  SPEAKER_00: So it is given that it's gonna be double counted multiple times between scope one, two, and three.
• 12:46
  SPEAKER_00: But the idea was that me as a reporting company, I'm not only intended to try to limit my own emissions or reduce my emissions, but also, you know, the idea is that I try to influence my value chain partners to um to reduce their emission footprint.
• 13:06
  SPEAKER_00: Because the if I have to report it, that's an incentive for me to actually influence my value chain um uh partners to reduce their emissions or uh produce the products that are gonna be less emission intensive, the product that I sell to my customers.
• 13:23
  SPEAKER_00: So you remember emissions reporting was designed to encourage people to limit those emissions.
• 13:30
  SPEAKER_00: That was the main purpose of emissions reporting since the very beginning.
• 13:33
  SPEAKER_00: So um hence the double counting.
• 13:35
  SPEAKER_03: Yeah, and I think maybe uh embedded in the answer you just gave, Martin, is this idea that ultimately if I wasn't buying the good from you, you know, those emissions would not have been reported.
• 13:48
  SPEAKER_03: And then if I wasn't selling the good to my customer, those emissions wouldn't have occurred.
• 13:52
  SPEAKER_03: So even though those emissions are not in my direct control, as a result of some activity that I'm engaging in, you know, resulted in those emissions.
• 14:01
  SPEAKER_03: And again, well, you could say, well, then if you weren't selling to me, sell to Chris.
• 14:05
  SPEAKER_03: But that's sort of beside the point.
• 14:07
  SPEAKER_03: I think you know, your points about trying to reduce the emissions in your value chain is very critical here.
• 14:13
  SPEAKER_01: I think the concept of partnership within your value chain is an important thing that you were just mentioning.
• 14:18
  SPEAKER_01: It's not just purely a transactional, I buy one thing from you and my it's done.
• 14:22
  SPEAKER_01: It's the concept that we're all working this together enhances that need for double counting because not only am I in your value chain, but I'm also in your value chain and your value chain, and we're all working towards that same goal then of reduction.
• 14:34
  SPEAKER_03: So obviously, that is a very high-level and simplistic explanation of the different categories.
• 14:40
  SPEAKER_03: I would definitely encourage our listeners, obviously, to check out our sustainability reporting guide, but probably for this particular point, even more so, to check out the scope three standard, which was issued by the GHG protocol.
• 14:53
  SPEAKER_03: As Marcha mentions, both the ESRS and the ISSB standards reference that guidance for determining your categories.
• 15:01
  SPEAKER_03: So it's very helpful in understanding the components in each category.
• 15:05
  SPEAKER_03: So I think the more familiar you get with this, the easier it is to uh actually do your reporting.
• 15:12
  SPEAKER_03: And I will remind listeners from our last two episodes that one of the key points that Marchin and Chris made was the importance of understanding what you're reporting because it's very easy to make little mistakes that can become exponential.
• 15:24
  SPEAKER_03: So this is a good place where you can build your foundation.
• 15:28
  SPEAKER_03: So, with all of that said, why don't we get into some of the measurement requirements?
• 15:33
  SPEAKER_03: And Marchin, I'll go to you first to run through what guidance is in the frameworks as it relates to scope three measurement, and then we can talk a little bit about how you do the measurement.
• 15:44
  SPEAKER_00: Yes, I think it's a great question, Heather.
• 15:46
  SPEAKER_00: So let me start with like stating the obvious.
• 15:49
  SPEAKER_00: Obviously, GHG protocol, it's oftentimes foundational to uh scope three emission measurement across various frameworks.
• 15:57
  SPEAKER_00: So, but it's not always um uh the case.
• 16:00
  SPEAKER_00: So when you look at the GHG protocol, we have two documents that are very important here that inform us how to measure those emissions is scope three standard and scope three measurement guidance.
• 16:11
  SPEAKER_00: Between those two documents, you're gonna find description of various measurement techniques, you know, how to think about the different categories and relevant uh measurement methodologies.
• 16:21
  SPEAKER_00: So I think that's a sort of foundational.
• 16:23
  SPEAKER_00: Then when you go through different frameworks, ESRS basically refers to uh GEG protocol for measurement, unless specific kind of specific guidance in ESRS that would that is um contradictory.
• 16:36
  SPEAKER_00: SEC obviously does not require the measurement, so there's no point to talk about it.
• 16:40
  SPEAKER_00: Um ISSB is uh is interesting uh because they refer to, as we mentioned during our like one of the earlier podcasts, um for scope three measurement, they refer to corporate standard, GHG protocol corporate standard, and to specific um uh rules that they have embedded in an appendix B, right?
• 17:00
  SPEAKER_00: Um they don't indicate what methodology, specific methodologies should be used, or what data or inputs should be used to measure um uh scope three emissions.
• 17:10
  SPEAKER_00: However, they introduce the measurement framework, right, uh, that requires entity to prioritize inputs and assumptions used in the measurement of scope three.
• 17:20
  SPEAKER_00: Uh this these frameworks basically identify main characteristics uh such as that uh uh data should be based on the direct measurement, data from specific activities within entity must be from specific activities within the entity's value chain.
• 17:35
  SPEAKER_00: Um the timely data must faithfully represent the jurisdictions or technologies used that are relevant, and data that has been uh verified must be also disclosed uh that the data was verified.
• 17:49
  SPEAKER_00: So they kind of talked about these main characteristics of data that that is used in uh in a calculation of scope three emissions as opposed to telling you what formulas to use.
• 18:01
  SPEAKER_03: Well, and I think what's very interesting there, March, and is we gave the example earlier that you were talking about influencing your value chain, and that's one of the reasons it's important.
• 18:10
  SPEAKER_03: And if I'm trying to estimate my scope three emissions, and for example, I don't know the details of your like if I'm purchasing goods and services from you and I don't have um entity-specific information, I'm using some general factors that may not actually be reflective of the underlying activity.
• 18:32
  SPEAKER_03: And so, Chris, you probably can give a better example there.
• 18:35
  SPEAKER_03: And and how do you think about sort of this issue that you may not have enough detail about the components in your value chain?
• 18:46
  SPEAKER_01: I think what we see with reporters is that as they start to unpack and unfold what their scope three emissions profile looks like, I think they start to realize that you need to start making more general statements about the data and more uh foundational assumptions about data, because I don't know that you'll ever get to that level of detail that we had talked about with the scope one and two, or we get direct measurement for some of the activities.
• 19:10
  SPEAKER_01: You have to make some assumptions and you have to inform your user of the data, the assumptions that you're making to build on this inventory, right?
• 19:17
  SPEAKER_03: So I think what's interesting there is the reason that triggered my question is that Marchin mentioned the fact that the ISSB appendix B is very specific that to the extent possible, you're supposed to use activities actually within your value chain.
• 19:32
  SPEAKER_03: And uh the example that I was asking uh Chris and Marchin about before the podcast was okay, well, so gasoline, if I'm selling gasoline, combustion of gasoline, I learned from them, is always the same emissions.
• 19:47
  SPEAKER_03: But then perhaps there'd be if I was selling a car, the ultimate use of that car, I don't know how far they're gonna drive.
• 19:54
  SPEAKER_03: I don't know if they're the type of driver that uses extra gasoline when they're driving.
• 19:57
  SPEAKER_03: There's lots of assumptions.
• 19:59
  SPEAKER_03: Um, and there's probably some other examples.
• 20:01
  SPEAKER_03: So, how do you think about those things?
• 20:03
  SPEAKER_00: Well, so um, but even when we talk about gasoline, um, yeah, the basic example is that uh it's gonna be combusted, but the main judgments to be made, will it really be combusted?
• 20:14
  SPEAKER_00: Because when you look at a gasoline, it can be uh utilized also in some uh industrial processes that does not have to be combusted.
• 20:21
  SPEAKER_00: Think or or or crude, right?
• 20:24
  SPEAKER_00: It could be turned into the um like for some plastic, so it could be processed in other ways.
• 20:29
  SPEAKER_00: So there's a lot of judgment that has to be made by reporting entity as to what's the ultimate use.
• 20:34
  SPEAKER_00: I can tell you from practical examples today for a limited number of companies that um uh that report this this information, we've seen oftentimes people go to most conservative routes.
• 20:45
  SPEAKER_00: So let's say all my you know uh fuels that I'm saying, I'm gonna assume they're gonna be combusted.
• 20:51
  SPEAKER_00: That gives you the most probably conservative and the largest number, but that's pretty far from reality because that's not really, but it's really difficult to figure out how to best estimate that.
• 21:01
  SPEAKER_00: Once we start moving into regulatory uh environment, most probably companies would have to be making more effort trying to estimate, you know, what is the use of a car or what is the use of a you know um petroleum products that I'm selling, right?
• 21:16
  SPEAKER_00: How much of that is combusted, how much of that is processed.
• 21:19
  SPEAKER_00: It could be done in various ways.
• 21:20
  SPEAKER_00: You could use some general country statistics, right?
• 21:23
  SPEAKER_00: What's the overall split of the fuels, right?
• 21:27
  SPEAKER_00: Or when you mention Heterman, you mentioned cars, right?
• 21:30
  SPEAKER_00: You there is a statistical data available, what type of cars exist out there, and they differ in terms of you know um efficiency, how uh based on what how they were produced or how old they are.
• 21:42
  SPEAKER_00: So you can make those assumptions based on statistical data, but again, it's gonna be a high level assumption.
• 21:47
  SPEAKER_03: So, Chris, from your experience, then what are you seeing people do in practice?
• 21:51
  SPEAKER_01: Aaron Powell I think this concept of measurement precision comes with time, right?
• 21:55
  SPEAKER_01: I think that if we think about the reporter that's gonna start the scope three inventory for The very first time they're going to start making their reporting journey into Scope 3, there'll be a lot of estimations.
• 22:05
  SPEAKER_01: There'll be a lot of assumptions made about all the units of gasoline are going to be combusted, all the cars are going to drive 12,000 miles a year.
• 22:12
  SPEAKER_01: But as you start to mature in that process in your reporting, you start to get to know where is in your value chain and how your customers are using your product.
• 22:20
  SPEAKER_01: So then your gasoline, you may be connecting with plastics companies to find out if they're transitioning that into different products, co-products, feedstock products versus just combustion.
• 22:31
  SPEAKER_01: Or you may find that some of your bigger uh purchasers of cars are only driving 5,000 miles a year and you would modify your assumptions.
• 22:40
  SPEAKER_03: Wow, so definitely a lot to think about.
• 22:42
  SPEAKER_03: And I think for a company, then I was just thinking about electronics and the fact that often now you're incentivized to turn back in when you're buying a new electronic, they'll even pay you.
• 22:53
  SPEAKER_03: And again, I those types of programs, recycling is a little different than emissions, but it's uh it has some of the same thing that they are trying to get more visibility into the final end use of their product.
• 23:04
  SPEAKER_03: But then they still have to estimate while you were using that phone, how much did you use it, you know, how much did you charge it, all those different types of things.
• 23:12
  SPEAKER_03: So it's a huge amount of estimation.
• 23:14
  SPEAKER_00: It there is.
• 23:15
  SPEAKER_00: I mean, I think the ultimate goal is that we all be using like supplier-specific factors or have access to this data.
• 23:22
  SPEAKER_00: I can tell you that, you know, for example, the car is a good example.
• 23:25
  SPEAKER_00: I have a client who have a huge fleet of vehicles, and um, even for them, it's theirs within their scope one.
• 23:32
  SPEAKER_00: So I'm gonna go back to scope one, but I'm gonna make a connection to scope three later on.
• 23:37
  SPEAKER_00: Um so when you have a large fleet, it's really difficult for them to really have a good grasp of how many miles each car goes every year, right?
• 23:44
  SPEAKER_00: And get this data reliably and fast.
• 23:47
  SPEAKER_00: So you have companies on the market who actually offer service whereby they plug in in devices that measure specifically miles driven and report electronically through their computer systems, how many miles they drive, what's the you know emissions being calculated.
• 24:02
  SPEAKER_00: So you as a company have this data for scope one.
• 24:05
  SPEAKER_00: Theoretically, this data later on could be sold and somebody could use it in scope three calculations.
• 24:10
  SPEAKER_00: Again, it's theory, but like in it, the fact of what we see, we see you know a lot of uh market participants trying to figure out the ways how to have an access to more accurate data, especially now when we're gonna be reporting this based on regulatory requirements.
• 24:26
  SPEAKER_03: All right.
• 24:26
  SPEAKER_03: So I guess now I'm a company that was already worried about scope three, and I am more worried now that I listened to us just talk about the some of these uh assumptions that are going to need to be made.
• 24:38
  SPEAKER_03: But from a practical point of view, if you're measuring and reporting your scope three, you do have to make these assumptions and you're gonna have to have support for them and you're going to need to disclose them, and all the points, Chris, you've made on other uh you know factors that feed into the uh reporting.
• 24:56
  SPEAKER_03: But if I'm a company, then where do I start in terms of getting the data and thinking through some of these key assumptions?
• 25:05
  SPEAKER_00: So I think I can I start here.
• 25:07
  SPEAKER_00: The first of all, you have to figure out what measurement methodology you're gonna be using, right?
• 25:11
  SPEAKER_00: Because when you look at the existing guidance, and let's focus on GHG protocol and scope three calculation guidance, it it offers you different calculation methodologies depending on availability of data.
• 25:24
  SPEAKER_00: So the first you have to analyze what data you have available, then it's gonna drive the calculation methodology uh that you're gonna use to calculate um scope three emissions.
• 25:34
  SPEAKER_00: And that varies depending on category which one we're talking about, because some of them have a different uh uh calculation methodology.
• 25:42
  SPEAKER_00: So I think the starting point is to know what data is needed, what data you have, and then that's gonna drive your selection of method calculation methodology.
• 25:51
  SPEAKER_01: Exactly.
• 25:52
  SPEAKER_01: I think uh one of the examples that we can give is around scope three, category one.
• 25:56
  SPEAKER_01: We talked in the both in the podcast for scope one and scope two of the concept of a data quality hierarchy being published, and the scope three guidance is no different.
• 26:07
  SPEAKER_01: There's uh a data hierarchy uh guidance within that scope one that talks about spend data being uh one of the more common, more simple ways to collect data for that category, where the amount of money spent on a product is then tied to a commodity factor.
• 26:22
  SPEAKER_01: And as you get into that, the next step up is an average data method where you would use weights and a published factor that's based on a weight intensity, then a hybrid factor, and then all the way up to supplier specific factors where you're working with your value chain partners to get a specific factor associated with your good or service.
• 26:39
  SPEAKER_00: Which I think we should do have to do the step back and you know repeat the same kind of uh thing we talked about uh when we talked about scope one and scope two.
• 26:47
  SPEAKER_00: So calculation methodology and formula is pretty much the same.
• 26:50
  SPEAKER_00: So we're talking about uh uh activity data, we're talking about emission factors and potentially uh global warming potential.
• 26:58
  SPEAKER_00: So the only thing is the type of activity data might be changing, as as Chris said.
• 27:03
  SPEAKER_00: If you have a supplier-specific factors, then you're really kind of using your products that you purchased from a supplier and using the specific emission factors that they provided you with that represents how many emissions were generated during the production uh of specific good that that that you acquired, right?
• 27:22
  SPEAKER_00: When you're looking at average data, right, you're looking at emission factors that um that are calculated based on the average market kind of uh um emissions generated to produce specific goods that you um that you acquired.
• 27:37
  SPEAKER_00: And the last one, Chris mentioned spend data.
• 27:39
  SPEAKER_00: As an activity, you use the dollar spent.
• 27:42
  SPEAKER_00: And again, there are companies that provide emission factors that are you know specifically calculated to translate dollar spent in specific industries or on specific goods, right, into the emissions uh generated during the production of those goods.
• 27:58
  SPEAKER_00: And each of these, the quality or precision of measurement is different.
• 28:02
  SPEAKER_00: So supplier specific is most precise, and spend data is probably least precise because you're trying to convert dollars into the emissions, which you can imagine that you have inflation going in, you can, you know, you have a different producer price, so it's not as easy or as precise as a supply-specific method.
• 28:19
  SPEAKER_01: I think something else to point out here is we're talking about emission factors, in contrast to the scope one and two data that we talked about, is they're not up.
• 28:27
  SPEAKER_01: The scope three emission factors are not updated as frequently as your scope one and two factors, which may come out annually.
• 28:33
  SPEAKER_01: The spend factors may take five or ten years before they get updated.
• 28:36
  SPEAKER_01: So it really, that hierarchy really goes to the level of precision a reporter can put into their report.
• 28:45
  SPEAKER_03: So, from a practical point of view, then uh you know, thinking about a business that if you have only a few suppliers, or maybe you only have one main customer or a few main customers, it's it's still difficult, but at least you can sort of get your head around what may be required there.
• 29:02
  SPEAKER_03: But again, I'm gonna go back to our car example.
• 29:04
  SPEAKER_03: If I'm a company manufacturing automobiles, think of the multitude of suppliers I have.
• 29:11
  SPEAKER_03: And then think of the multitude of assumptions I need to make about the end use of that product.
• 29:16
  SPEAKER_03: And it's again, I think we've I used this word before, exponential in terms of all of the different assumptions that that company is going to need to make and to gather all this data.
• 29:26
  SPEAKER_03: And I think one of the questions we often get about scope three, so I have two questions here, but I have to ask the first one because I'm sure our listeners are asking how meaningful is this data by the time it's reported after you've made an umpting number of assumptions to you know to come up with the number that's being reported?
• 29:47
  SPEAKER_00: Well, I I still think that the data is meaningful, but that's what it emphasizes is need for really good disclosures, right?
• 29:54
  SPEAKER_00: So you can make this data comparable as long as uh the users can fully understand the assumptions that you made, right?
• 30:02
  SPEAKER_00: And um some of those emissions, you know, obviously if you have a lower precision of data, you more or less report some high-level kind of averages from a country, from the industry, which might not be fully representative of actual decisions that you're making as a company, right?
• 30:21
  SPEAKER_00: With exception of maybe removing certain products from your portfolio or redirecting your spend toward the countries or or companies that you know that are kind of a more uh emissions um effective or efficient.
• 30:35
  SPEAKER_00: I'll give you an example, right?
• 30:36
  SPEAKER_00: So you have two potential suppliers, and I'm not making any advice here to anybody, but as a good comparison, you have two suppliers.
• 30:45
  SPEAKER_00: One supplier doesn't, you know, uh they they provide you with the same type of goods.
• 30:49
  SPEAKER_00: One supplier doesn't um produces any kind of uh or publishes any emissions information, you can't get anything from them.
• 30:56
  SPEAKER_00: The other supplier you can get their publicly available emissions information, information about their um um journey to limit the emissions, all the actions they're taking to reduce the emissions, right?
• 31:09
  SPEAKER_00: You have a decision to make.
• 31:10
  SPEAKER_00: You might go with maybe the the uh the supplier that doesn't give you any information slightly cheaper, but maybe you want to you know demonstrate to your stakeholders or regulators that you're making efforts to to consciously you know um uh source your your goods and services or uh from your from your vendors, and you go with a company that provides that information.
• 31:32
  SPEAKER_00: Again, it's it it's not like oftentimes companies make a decision, but it could be one of the ways.
• 31:36
  SPEAKER_00: And and that's how we can you know um achieve certain level of comparability or or or it that's how we could drive your actions.
• 31:44
  SPEAKER_01: I think that ties back to that concept you made earlier about the value chain partners, right?
• 31:48
  SPEAKER_01: It's a partnership.
• 31:49
  SPEAKER_01: You're gonna work with your with your suppliers to try to get that data to be more precise so that you can try to get your company away from reporting based on spend to get more actual data into your overall footprint.
• 32:00
  SPEAKER_01: I also think, too, that when we start to look at this data, we that 80-20 rule starts to apply.
• 32:06
  SPEAKER_01: That 80% of your emissions are probably gonna come from 20% of your suppliers, right?
• 32:10
  SPEAKER_01: So you you had mentioned that you're gonna have umpteen number of suppliers in your overall spend in the year, but when you really sit down and focus on it, maybe that top 20, top 30 suppliers are really contributing the most to your emissions, and that's where you would start your partnership, right?
• 32:24
  SPEAKER_01: Really to work with those to get that refined piece of data.
• 32:27
  SPEAKER_00: Well, and the other thing which is also important, when you do the step back and you think about all the new regulatory requirements, right?
• 32:34
  SPEAKER_00: So different uh jurisdictions, you know, uh implementing rules require companies to report emissions, that will also increase the availability of data.
• 32:43
  SPEAKER_00: Because in the past it was all voluntary.
• 32:46
  SPEAKER_00: Now you have like entire European Union where companies operating there will have to be disclosing their emissions, which eventually is gonna give you access to the data that you might need to calculate your value chain emissions.
• 32:57
  SPEAKER_00: If your suppliers is publishing their scope one and two emissions, that's gonna be a very valuable piece of information for you to calculate the emissions associated with the production of the goods that you're buying from them.
• 33:09
  SPEAKER_00: Again, it's not gonna be perfect for I think many years to come because we're talking about a certain level of, I don't want to use the word infancy, but it's early stages of development and uh of this data and this reporting.
• 33:21
  SPEAKER_00: But over time, I think a lot of regulators, basically, that was their idea.
• 33:25
  SPEAKER_00: We want to create a system in which the data is available and you know people can access it and assess for themselves, right?
• 33:32
  SPEAKER_03: Yeah, I guess the point here is well, it's order of magnitude.
• 33:35
  SPEAKER_03: And I think, Chris, your point is very well taken.
• 33:38
  SPEAKER_03: You don't start with your entire population of all suppliers and your entire population of potential uses of your product.
• 33:45
  SPEAKER_03: You think of the ones that are the highest uh in emissions, uh CO2E, so CO2 equivalent, and then start to get more information on those and you know, sort of build from there.
• 33:58
  SPEAKER_03: I think as well, Marching, your point about you might select the supplier depending on information.
• 34:04
  SPEAKER_03: I think the other thing we're starting to see is that in some cases for very significant types of goods, you know, that a company will include requirements in a contract to get different data.
• 34:17
  SPEAKER_03: So that's something I think we're gonna continue to see evolve over time.
• 34:21
  SPEAKER_00: Yeah, and I and I think I think key to reporting of scope three emissions is doing making those decisions, looking at the quality of the data that is available.
• 34:30
  SPEAKER_00: Even before you start measuring the first step, when you look at the all 15 categories, you know, when you're deciding what to report, you're first starting with what categories are significant, right?
• 34:41
  SPEAKER_00: What are your priority emissions, which ones are important to your stakeholders?
• 34:45
  SPEAKER_00: Where do you have a data?
• 34:46
  SPEAKER_00: So it's all part of a consideration before you even start reporting emissions.
• 34:51
  SPEAKER_00: And that's why I think it's so important to plan it upfront.
• 34:54
  SPEAKER_00: You know, have a good plan and a policy and good understanding of value chain too, because that's gonna be translated into data availability and then decisions you make in how you want to report those emissions.
• 35:05
  SPEAKER_03: Well, and then I so a couple of follow-up questions to that.
• 35:08
  SPEAKER_03: One of them, though, is that in some ways, then this starts to almost seem endless if I'm thinking about my value chain, like how far do I need to go in either direction?
• 35:17
  SPEAKER_03: And this is probably a topic for an entire podcast by itself, but I do think there's an idea of time boundaries that we at least talk about, and that's applicable for certain categories.
• 35:27
  SPEAKER_03: So maybe if you want to give a couple examples of places where we do have this concept in place, I think it would help illustrate.
• 35:34
  SPEAKER_00: Yeah, so I think time time boundaries, it's a really interesting concept, but in many of these categories, it's kind of a logical.
• 35:40
  SPEAKER_00: So let's look at the um uh purchase goods and services.
• 35:44
  SPEAKER_00: So category one, we we said we're gonna start using numbers, right?
• 35:48
  SPEAKER_00: Um so uh the time boundaries, you as a reporting entity, you have to report craddle to gate emissions associated with production uh of uh goods and services that you're purchasing.
• 35:59
  SPEAKER_00: So not only the you know the company that directly sells it to you, but anything before them that you know contributed to production of that specific good.
• 36:10
  SPEAKER_00: So give you an example.
• 36:11
  SPEAKER_00: If you're buying, um let's say purchasing metal widgets from your supplier, right?
• 36:19
  SPEAKER_00: It's not only emissions generated by the company that is actually manufacturing the widgets, but also emissions from a company from a steel uh manufacturer, right, and and a company that actually extracts the iron to produce the steel.
• 36:34
  SPEAKER_00: So that's the concept of a craddle to gate.
• 36:37
  SPEAKER_00: On the other hand, when you look at time time boundary, what's really important is like category 11, right?
• 36:43
  SPEAKER_00: Use of product sold, right?
• 36:45
  SPEAKER_00: You have to calculate the emissions associated with, you know, or generating during use of your product throughout the entire time.
• 36:52
  SPEAKER_00: So not like year one or every year, what's your estimate that during this year the the consumer of your product is generating well using that product?
• 37:01
  SPEAKER_00: In year one, when you're selling the product to your consumer, you have to estimate emissions that this product is gonna generate through lifetime, right?
• 37:09
  SPEAKER_00: Until it's being disposed of or like, you know, um utilized as a scrap or what have you.
• 37:16
  SPEAKER_03: So then, Martin, um you uh gave this example of like purchase goods that you would have these cradle-to-gate emissions.
• 37:23
  SPEAKER_03: So if I purchase goods from you this year, when do I report all the emissions associated with those goods?
• 37:32
  SPEAKER_03: Is it in this year or in which period do I report them?
• 37:36
  SPEAKER_00: Yes, so exactly it's a it's a good answer, Heather.
• 37:38
  SPEAKER_00: Uh so you should report those emissions in a year when you purchase that good.
• 37:42
  SPEAKER_00: Why it's important?
• 37:43
  SPEAKER_00: Because physically those emissions were generated probably year before, maybe this year, maybe a year before, maybe even for during the depending on the nature of what you're purchasing.
• 37:53
  SPEAKER_00: Those, you know, that though this good that you purchase could be manufactured over a period of time, but you reporting this emissions at once when you buy them, not when the good was was manufactured.
• 38:05
  SPEAKER_00: The capital goods is another good product, right?
• 38:07
  SPEAKER_00: So for example, you use the capital, you buy the capital goods to construct or build the building that you will be using, right?
• 38:14
  SPEAKER_00: Um, and you're gonna be using this building for for um 20 years.
• 38:19
  SPEAKER_00: In financial accounting, there is a concept of amortization or depreciation, whereby you buy this capital goods, you put it in a balance sheet and and depreciate for like useful life.
• 38:28
  SPEAKER_00: There's no such concept of emission reporting.
• 38:30
  SPEAKER_00: So when you buy those capital goods, you report emissions associated or generated with production of those goods in a year when you when you um acquired those goods.
• 38:40
  SPEAKER_00: So irrespective for how long and you're gonna be using those things, you always report those emissions in year of purchase.
• 38:48
  SPEAKER_03: So let me loop back to something we were talking about before, which is uh if I'm a company and deciding which emissions to focus on, maybe I I think about the magnitude of emissions.
• 39:00
  SPEAKER_03: But I know there's some other factors you should think about.
• 39:03
  SPEAKER_03: Again, if I'm trying to figure out which part of my supply chain to focus on or which part of my downstream.
• 39:09
  SPEAKER_03: So, what are some of the other uh priority or prioritization factors you would consider in deciding where to focus on data collection and otherwise?
• 39:19
  SPEAKER_03: And maybe, Chris, if you have a couple and then March and go to you.
• 39:23
  SPEAKER_01: I would say uh you you would focus on the most impactful areas first, right?
• 39:27
  SPEAKER_01: So you would look at your if use of sold product is a is a big concern, you would focus your efforts there.
• 39:32
  SPEAKER_01: If uh you're, as we talked about earlier, with the 80-20 supplier rule, you would focus your efforts with your top-tier suppliers first to refine that picture and get a more precise measurement available to use.
• 39:46
  SPEAKER_01: Uh those are the ones that come off the top of my head.
• 39:48
  SPEAKER_00: Well, and before I go ahead, or let me clarify, just make sure that people don't get confused.
• 39:52
  SPEAKER_00: When we talked about focusing, we that we don't mean the company shouldn't be reporting all significantly.
• 39:57
  SPEAKER_00: Yes, sorry, yes, that's exactly what I think.
• 39:59
  SPEAKER_00: That's important because we get this question like, well, only focus on three categories.
• 40:02
  SPEAKER_00: No.
• 40:02
  SPEAKER_00: No.
• 40:03
  SPEAKER_00: The requirement is you have to report all the significant categories to you practically across all the framework.
• 40:08
  SPEAKER_00: So all we're talking about is like how you should focus and where I to get more uh precise data versus I'm using higher, you know, higher estimation methodologies.
• 40:17
  SPEAKER_03: Well, and as well, maybe where the company would want to make an effort to reduce its emissions.
• 40:22
  SPEAKER_03: So it's both those two.
• 40:23
  SPEAKER_00: And that's exactly a good example, right?
• 40:25
  SPEAKER_00: You focus on things where you you have more influence, right?
• 40:28
  SPEAKER_00: Uh, where is your revenue?
• 40:30
  SPEAKER_00: What how how big of a spend you you have on certain type of uh value chain activities, right?
• 40:35
  SPEAKER_00: Um, what is important to your stakeholders, right?
• 40:38
  SPEAKER_00: That also might drive where you want to prioritize, right?
• 40:42
  SPEAKER_00: Risk exposure, right?
• 40:43
  SPEAKER_00: Which parts of uh value chain create more risk exposure uh to your company, right?
• 40:49
  SPEAKER_00: Um and um what is your sector doing, right?
• 40:52
  SPEAKER_00: So what are the important uh elements to um uh to your to your sector participants?
• 40:57
  SPEAKER_00: So there's a multiple of these factors you could use when you're prioritizing.
• 41:01
  SPEAKER_00: It's all about prioritizing the data, data inputs and getting the more accurate kind of uh um uh measurement methodologies.
• 41:08
  SPEAKER_00: But I think I like what Chris said.
• 41:09
  SPEAKER_00: It's 80-20 rules, like with almost everything in life, most probably, you know, um it's 80% of your emissions from 20% of um of effort or sources.
• 41:19
  SPEAKER_00: So I'm going back.
• 41:21
  SPEAKER_00: It's so important to understand really everything upfront, right?
• 41:25
  SPEAKER_03: All right.
• 41:26
  SPEAKER_03: So we've definitely hit a lot of ground.
• 41:28
  SPEAKER_03: I think this could probably be its own series of uh podcasts about scope three emissions, but I think this is a great place to at least start.
• 41:36
  SPEAKER_03: But perhaps to wrap things up, some final words of wisdom for our audience.
• 41:39
  SPEAKER_03: I know you just gave some, March and so think of a few more.
• 41:42
  SPEAKER_03: Well, Chris, I'll go to you first.
• 41:44
  SPEAKER_01: I think the one of the important takeaways from this is that scope three, you really want to look at it as it's a marathon, right?
• 41:49
  SPEAKER_01: It's not a sprint.
• 41:50
  SPEAKER_01: You're not gonna get there overnight.
• 41:52
  SPEAKER_01: You have to, it's a time-intensive piece of reporting, right?
• 41:55
  SPEAKER_01: You have to get your collect your data, collect your completeness, and then apply the effort to get the the more precise data over time.
• 42:04
  SPEAKER_00: Yeah, and I I think Header, um, I don't want to say I fully agree with Chris, but I do.
• 42:08
  SPEAKER_00: Uh but I think it's critical, right, not to think about this as a one and done, right?
• 42:15
  SPEAKER_00: Because the when you compare it between scope three and scope two and one, scope two and one are way more advanced, and the changes in terms of a quality of information, of calculation methodologies are not so fast.
• 42:28
  SPEAKER_00: So it's when you're looking at scope one and two, it's more often just kind of a steady state, right?
• 42:34
  SPEAKER_00: Uh looking at the new emission factors.
• 42:36
  SPEAKER_00: When we're talking about scope three, it's truly a much bigger effort to analyze the existing quality of data and it's more continuous, right?
• 42:43
  SPEAKER_00: So the fact that they're using one methodology any given year doesn't mean they have to continue using it over and over again.
• 42:50
  SPEAKER_00: When you look at certain uh regulatory frameworks, they even require you to assess it periodically.
• 42:55
  SPEAKER_00: What's the access to the data, what's the quality that you know effectively is gonna make you or potentially could make you to change your calculation methodology.
• 43:04
  SPEAKER_00: So I agree with Chris here.
• 43:06
  SPEAKER_00: It's about you know watching the market, looking what's available, and the data quality we expect is going to be improving practically on an annual basis, especially after all these regulatory frameworks are being implemented.
• 43:18
  SPEAKER_03: All right.
• 43:19
  SPEAKER_03: Well, it sounds like definitely more to come in this area.
• 43:22
  SPEAKER_03: It's always such a pleasure to talk to both of you.
• 43:24
  SPEAKER_03: Thanks so much for joining me today.
• 43:26
  SPEAKER_00: Thank you, Heather.
• 43:28
  SPEAKER_03: That's our show for today.
• 43:30
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• 43:33
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• 43:41
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• 43:50
  SPEAKER_03: From Thought Leadership at PwC, I'm Heather Horn.
• 43:55
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