Greenhouse Gas Emissions: Scope 1, Scope 2 and Scope 3

Global awareness of the impact of greenhouse gas emissions on global warming and the climate crisis has increased in recent years. This has led to various initiatives requiring companies and organizations to report these emissions and maintain orderly records of them. Reporting systems are in place in Israel and around the world, but, for the time being, most are voluntary reporting systems. At the same time, when organizations decide to join the voluntary reporting system, they are undertaking to report in conformity with predefined guidelines (in order to ensure reliable monitoring of the data disclosed in reports).

This trend of GHG reporting, coupled with the growing market for socially responsible investments, have convinced companies and organizations that they need to align with the global trends and voluntarily report their greenhouse gas emissions.

The monitoring of greenhouse gas emissions offers many advantages. These include, inter alia, analyzing the nature of the organization’s emissions (and the potential for reducing them), the ability to participate in carbon emissions trading markets, and higher positioning vis-à-vis the investor community.

The reporting process consists of numerous stages, but the first and main stage is analyzing and classifying the organization’s sources of emissions. To this end, three greenhouse gas emission sources (scopes) were defined for reporting purposes. The goal is that reporting of all three scopes will provide a complete and comprehensive picture of all emissions, both direct and indirect, caused by the reporting organization’s activities.

Scope 1, 2, and 3 Emissions

Scope 1

Scope 1 is straightforward and includes only direct emissions (originating from facilities and machinery owned by the organization). An organization’s report of Scope 1 emissions will include, for example, emissions resulting from manufacturing operations; the self-generation of energy (for electricity and heat, for example); the transport of employees, materials, or products (using vehicles owned by the organization); and the like.

Scope 2

Scope 2 is comprised of indirect emissions originating from energy generation for an organization. An organization’s report of Scope 2 emissions will include energy purchased from external parties for use by the organization, i.e., energy emitted by an external party but consumed by the reporting organization. Consequently, these upstream emissions are also considered emissions the organization must report.

Scope 3

Scope 3 encompasses downstream emissions caused by the organization’s supply chain. These include emissions resulting from operations in facilities not owned by the organization, but caused because of the organization’s activities. Scope 3 includes everything not falling under Scope 1 and Scope 2 (but that constitute Scope 1 or Scope 2 emissions for other organizations, such that these emissions are reported several times by different organizations).

The Criticality of Scope 3 Emissions Reporting

Environmental organizations worldwide support the adoption of Scope 3 disclosure requirements, considering the difficulty in mapping all downstream Scope 3 emissions (and the multitude of indirect downstream emissions that every organization causes). For example, the EU’s Corporate Sustainability Reporting Directive, which came into effect in January 2023, requires in-depth ESG disclosures, including comprehensive reporting of Scope 3 emissions.

Scope 3 emissions are becoming a burning and critical issue for both organizations and investors. The European Union is actively advocating the most comprehensive disclosure and reporting obligation possible in relation to Scope 3 emissions, especially since environmental considerations have already been widely expressed in European regulations. Scope 3 emissions are considered the most critical due to the fact that this is the category of emissions over which organizations wield power to significantly and rapidly reduce the carbon footprint (through the heightening of awareness and the implementation of green policies).

Not only does the European Union promote a comprehensive disclosure and reporting obligation in connection with Scope 3 emissions, but regulators in the United States also require it. Currently, the US Securities and Exchange Commission mandates disclosure of emissions included in Scope 1 and Scope 2. However, given the heavy weight of Scope 3 emissions, the obligation to report them becomes particularly critical for reporting companies.

Collecting data on Scope 3 emissions requires information from multiple sources. For this purpose, companies will have to modify their data collection methods. As mentioned, this reporting obligation will necessitate the investment of resources and renewed organizational preparation, which will translate into high costs.

Therefore, it appears the demand for comprehensive reporting on greenhouse gas emissions in the corporate world is gaining momentum and becoming central, from both an investment and regulatory perspective. Many companies are concerned about the renewed preparation this reporting obligation will require, and understand it is better to prepare as soon as possible, since even early voluntary reporting will earn the reporting organization recognition for future reductions.

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The ESG team at Barnea Jaffa Lande is at your service to answer any questions about ESG metrics and environmental quality reporting.

Adv. Izabel Pashayev is an associate in the firm’s Corporate Department.