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Scope 1, 2 and 3 GHG Emissions

What are Scope 1 emissions?

Canadian companies are increasingly setting net-zero targets and working to reduce their carbon footprints to meet public expectations and to address future climate-related risks. To do so, however, they first need to accurately track and report on direct emissions from their operations and indirect emissions from their value chain. This can be challenging and many companies are struggling to capture this information.

GHG emissions, under the GHG Protocol fall into three broad categories.1 Scope 1 is the most straightforward and includes emissions that “… occur from sources that are owned or controlled by the company, for example, emissions from combustion in owned or controlled boilers, furnaces, vehicles, etc.”2 Scope 1 emissions are generally where firms start when they begin measuring their GHG emissions. These emissions are not evenly distributed across economic sectors. For example, oil and gas firms generally have much higher Scope 1 emissions when compared to financial services firms.

What are Scope 2 emissions and what are the different methods used to estimate them?

Scope 2 emissions, initially were defined as the “… GHG emissions from the generation of purchased electricity [short for electricity, steam, and heating/cooling] consumed by the company.” However, this definition changed in 2015 with an update from the GHG Protocol that separated those emission into two distinct groups, location- and market-based.3

The location-based method is based on the emissions intensity of the grid from which a firm consumes energy. The market-based approach reflects emissions from the electricity that companies have intentionally procured.

The additional Scope 2 guidance aims to address several technical and conceptual challenges including how to account for the purchase of renewable energy in Scope 2 reporting.4 Firms that are able to build facilities in areas with relatively low-carbon electricity grids (i.e. powered largely by hydro, nuclear, wind or solar) will naturally have lower location-based Scope 2 emissions.

Scope 3 Emissions?

The Scope 3 emissions of one organization are another organization’s Scope 1 and 2 emissions, meaning these emissions occur from sources not owned or controlled by the disclosing firm. Scope 3 emissions are also commonly referred to as value chain emissions. Within Scope 3 there are 15 sub-categories of emissions, and their relevance varies by economic sector.5 For example, the vast majority of Scope 3 emissions from the financial services sector will be under Category 15, commonly referred to as financed emissions. For other sectors such as mining, Category 10, processing of sold products, will usually be the largest and most relevant.

It is common for firms to disclose Scope 1 and 2 emissions, and omit Scope 3. These emissions are generally more difficult to estimate than Scope 1 and 2. More firms disclosing their primary Scope 1 and 2 emissions, along with training on Scope 3 emission accounting should increase the quality and overall amount of Scope 3 reporting.

What is the state of GHG reporting for Canadian Firms?

One way to measure the current state of emissions disclosure is by looking at data from CDP, a London, U.K.-based not-for-profit charity which holds the most comprehensive data on self-reported emissions.

In 2022, 145 Canadian firms reported Scope 1 emissions data to CDP. For this same reporting year, 138 firms reported Scope 2 emissions under at least one of the two reporting methods, with the majority reporting on location-based emissions. For Scope 3 emissions, 107 Canadian firms reported at least one of the 15 categories. Thirteen firms reported emissions under Category 15 (Investments), with most coming from the materials sector. Only one of the 13 firms was from the financial services sector. The disclosure of Category 15 emissions by the financial services sector is expected to grow as it is of particular relevance to the sector.

The Figure below shows the number of Canadian firms that reported each scope of emissions to CDP in 2022

Some Canadian firms report emissions independently of CDP with their own sustainability reports. In some cases, they disclose Scope 1, 2, and 3 independently and only formally submit Scope 1, 2, and parts of Scope 3 to CDP (usually omitting Scope 3 Category 15), potentially highlighting a lack of confidence in emissions estimates. More emissions reporting across all scopes and more categories of Scope 3 is anticipated.

This series explores the foundations of sustainable finance, one of the most important emerging fields of our time. Sustainable finance aligns financial systems and services to promote long-term environmental sustainability and economic prosperity.