ESG Reporting: Decoding Greenhouse Gas Emissions – A Guide to Scope 1, Scope 2, and Scope 3

Greenhouse Gas (GHG) emissions are an inevitable byproduct of business operations, stemming from activities such as burning fossil fuels, waste disposal, and raw material consumption. To help better manage the environmental impact and enhance informed decision making, GHG specific reporting has been introduced for organisations.

The GHG Protocol Corporate Accounting and Reporting Standard, established in 2004, set a global benchmark for GHG reporting with a standardised framework for entities worldwide.

This standard laid the foundation for IFRS S2, which mandates that organisations use the GHG Protocol framework and with a specific focused on climate-related disclosures. Subsequently, entities already familiar with the GHG Protocol will have a smoother transition into the requirements for IFRS S2.

In Australia, the National Greenhouse and Energy Reporting (NGER) Scheme provides a framework for reporting GHG emissions, energy production and consumption. It aligns closely with international standards but incorporates local requirements and context.

Australian entities are awaiting new sustainability reporting standards based on the Task Force on Climate-related Financial Disclosures (TCFD)’s four-pillar framework. As highlighted in our article ESG Reporting: IFRS S1 and IFRS S2 – What’s next?, the TCFD’s framework includes crucial metrics and targets for assessing and managing climate-related risks and opportunities, necessitating the disclosure of GHG emissions into three scopes to help organisations to account for their carbon footprint. The figure below outlines an overview of these three GHG Protocol scope. Let’s explore what these scopes entail.  

Source: Greenhouse Gas Protocol, Corporate Value Chain (Scope 3) Accounting and Reporting Standard

Scope 1 emissions are direct GHG emissions from sources that are owned or controlled by the organisation. They fall into three categories: stationary combustion, mobile combustion, and fugitive emissions. For example, under mobile combustion, Scope 1 emissions include the fuel consumed by vehicles owned by the organisation.

Scope 2 emissions are indirect GHG emissions from the generation of purchased electricity, steam, heat, or cooling. Unlike Scope 1 emissions, these emissions occur at the energy generation facilities.

There are two primary methods for calculating Scope 2 emissions:

1. Location-based method: Reflects the average emissions intensity of the grid where the energy is consumed.
2. Market-based method: Accounts for emissions from specific energy purchases.

An example of Scope 2 emissions can be illustrated by a factory that relies on electricity from the grid to power its machinery and lighting. The factory must measure its directly purchased electricity from the energy provider and account for the associated indirect emissions resulting from the generation of this electricity at the power plants supplying the grid.

In Australia, the NGER Scheme requires the location-based method for reporting Scope 2 emissions if a facility consumes more than 20,000 kWh of purchased electricity in the reporting year.

Scope 3 emissions often represent the largest portion of an organisations carbon footprint, encompassing all indirect emissions along an organisations value chain not covered under Scope 1 and Scope 2. These emissions occur from sources not owned or controlled by the organisation and are divided into two categories:

1. Upstream: Emissions from activities before a product reaches the organisation, such as those from suppliers.
2. Downstream: Emissions from activities after a product leaves the organisation, such as product use and disposal.

Scope 3 emissions can account for over 90% of an organisations total GHG impact, making them crucial to measure and manage. Despite being challenging to quantify and not directly controlled by the reporting entity, addressing Scope 3 emissions is essential for a comprehensive understanding of environmental impact and for identifying reduction opportunities.

With 15 categories to consider, managing Scope 3 emissions is complex but valuable for driving significant reductions and contributing to global climate goals.

The NGER Scheme requires registered organisations to submit an annual report covering GHG emissions, energy production and consumption from their operational activities.

The proposed Australian sustainability reporting standards will require organisations to measure Scope 1, Scope 2, and Scope 3 GHG emissions and apply the methodologies set out in the NGER Scheme, ensuring their calculations and measurements are consistent throughout their reporting.

Both the GHG Protocol and the NGER Scheme provide tools for GHG emission reporting:

1. The GHG Protocol offers an Emission Factors Calculator to calculate emissions specifically for Scope 1 and Scope 2.
2. The NGER Scheme provides the NGER Emissions and Energy Threshold Calculator to assist Australian entities determine their emissions thresholds.

With the alignment of IFRS S2 and the GHG Protocol, Australian entities should prepare for the new sustainability reporting standards by integrating NGER requirements into their ESG roadmap. Entities should understand how they fit within the reporting thresholds and the requirements they must comply with.

Accru Felsers offers external audit and a range of other audit and assurances services for a diverse array of organisations. To learn how we can help enhance your sustainability reporting through our audit services, please contact us to find out more.