Why Are Scope 3 GHG Emissions Important for Your Company?

I. Introduction: Beyond Direct Operational Boundaries

In the modern business landscape, focusing on sustainability and decarbonization is no longer an option, but a strategic imperative. Companies are required not only to maximize profits but also to manage their environmental impact responsibly. The carbon footprint, which measures the total greenhouse gas (GHG) emissions generated, has become a key metric in assessing a companys environmental performance. Deconstructing the scope of GHG emissions is a crucial first step in the journey to calculate and reduce global emissions and combat climate change.  

To comprehensively understand the carbon footprint, the Greenhouse Gas Protocol (GHG Protocol) categorizes emissions into three scopes based on their source :  

• Scope 1 (Direct Emissions): Emissions generated directly from sources owned or controlled by the company on-site. This includes the combustion of fossil fuels such as natural gas, coal, and oil to generate heat and power in stationary equipment (e.g., a factory burning coal in a boiler). Additionally, emissions from fuel combustion for transportation in company-owned or controlled vehicles (such as cars, trucks, planes, or ships) are also included in this scope. Process emissions released during manufacturing processes or chemical reactions (e.g., cement production) and fugitive emissions from accidental leaks (e.g., refrigerant leaks from AC) are also part of Scope 1.  

• Scope 2 (Indirect Emissions – Energy): Indirect emissions resulting from purchased and consumed energy by the company, such as electricity, steam, heating, or cooling. Although these emissions occur at the energy providers facility (e.g., PLN), their use is counted as part of the companys carbon footprint.  

• Scope 3 (Indirect Emissions – Value Chain): These are all other indirect emissions that occur throughout a companys value chain, meaning the full life cycle from production to delivery to use and disposal. These emissions are not generated from assets or activities directly owned or controlled by the company, but the company may have an influence over the emissions generated based on their consumption and partnerships with other businesses. Scope 3 emissions are divided into two main categories :  

• Upstream Scope 3 Emissions: Originate from sources related to company activities but not directly owned or operated by the company. This includes emissions generated in the supply chain before products reach the company, such as the production of purchased raw materials, transportation of goods by third parties, employee business travel, employee commuting, and emissions from capital goods (equipment, vehicles, or buildings).  

• Downstream Scope 3 Emissions: Generated from the use of the companys products or services. Examples include emissions generated when customers drive a car sold by the company, end-of-life treatment of sold products, and emissions from assets leased by the company.  

Scope 3 emissions often constitute the largest portion of a companys total carbon footprint, yet they are also the most challenging to calculate and reduce due to their indirect nature and involvement of many parties beyond the companys direct control. This indicates that Scope 3 emissions represent a companys "hidden carbon footprint." Although not directly generated from the companys operations, these emissions often form the majority of a companys climate impact. Ignoring Scope 3 means a company is only seeing a fraction of their sustainability picture. Therefore, Scope 3 disclosure and management are crucial for a comprehensive understanding of impact and true accountability.  

To provide a clearer picture, here is a brief comparison of the three scopes of GHG emissions:

Table 1: Comparison of Scope 1, 2, and 3 GHG Emissions

This table provides a quick and clear visual summary of the fundamental differences between the three scopes of GHG emissions. It helps readers quickly grasp the definitions, sources, company control levels, and challenges associated with each scope. In particular, the table effectively highlights the complexity and significant proportion of Scope 3, which is the main focus of this article.

II. Why Are Scope 3 Emissions Crucial for Your Business?

Managing Scope 3 emissions is not merely a regulatory compliance requirement, but a strategic opportunity to achieve competitive advantage. By proactively managing Scope 3, companies not only meet evolving expectations but also pave the way for increased profitability, operational efficiency, enhanced brand reputation, and investor appeal, transforming challenges into drivers of business growth.

Here are some reasons why Scope 3 emissions are becoming critically important for companies:

Representing the Majority of the Carbon Footprint

For many companies, Scope 3 emissions far exceed the total emissions from Scope 1 and 2. This means that decarbonization efforts focused solely on internal operations will be less effective in achieving ambitious emission reduction targets. Identifying and managing Scope 3 is key to achieving substantial climate impact reductions. As a real example, Musim Mas successfully reduced its upstream GHG emission intensity (part of Scope 3) by 53.4% compared to 2006, demonstrating significant potential in this area. Effective Scope 3 management allows companies to gain a more accurate picture of their environmental impact and design more comprehensive decarbonization strategies.  

Increasing Stakeholder Expectations

Pressure from various stakeholders continues to mount. Investors are increasingly using ESG (Environmental, Social, and Governance) performance as an investment criterion, demanding transparency and concrete action on climate change, including Scope 3 emissions management. Customers, employees, and the public also increasingly expect companies to take proactive action on climate change. Companies that are transparent in measuring and managing their emissions will build a better reputation and increase trust. Conversely, failure to measure Scope 3 can potentially damage a companys reputation in the eyes of the public and stakeholders. Overall carbon emission disclosure can enhance a companys reputation and attract support and investment.  

Regulatory Compliance and Business Resilience in a New Era

The regulatory framework related to GHGs continues to evolve and become stricter, both globally and in Indonesia. Indonesia itself has committed to significantly reducing GHG emissions, with a target of 31.89% independently and up to 43.2% with international support by 2030. The Financial Services Authority (OJK) through POJK No. 51/2017 has mandated financial entities, issuers, and public companies to submit sustainability reports. Although specific mandates for Scope 3 reporting are still under development and recommendation, OJK recommends banks prioritize Scope 1 and 2 in the first year of reporting and expand to Scope 3 in subsequent reports.  

Furthermore, international standards such as IFRS S1 and S2 issued by the International Sustainability Standards Board (ISSB) (which has absorbed TCFD) encourage mandatory climate-related disclosures. Managing Scope 3 helps companies meet current regulatory requirements and build resilience against future regulations, including the potential implementation of a carbon tax in Indonesia designed as an instrument to encourage emission reduction. Third-party verification is also becoming increasingly important to ensure the accuracy and reliability of GHG reporting.  

Financial Opportunities and Competitive Advantage

Managing Scope 3 emissions is not just a cost, but an investment. Companies that establish GHG emission reduction strategies, including Scope 3, report increased profitability, cost savings, and improved operational efficiency. By identifying energy-inefficient operational areas throughout the value chain through carbon reporting, companies can significantly reduce costs. This step is beneficial not only from a sustainability perspective but also in terms of profitability.  

Additionally, transparent and effective Scope 3 management increases investor confidence and ESG scores, attracting capital that is increasingly sustainability-conscious. The market responds positively to companies efforts in providing information related to climate change risks caused by their GHG emissions. Strengthening brand reputation and gaining a competitive advantage in an increasingly environmentally conscious market are also tangible benefits. Compliance with global carbon reporting regulations can even facilitate international market expansion, opening up broader and more sustainable new business opportunities.  

Better Supply Chain Management and Strategic Collaboration

Focusing on Scope 3 emissions forces companies to understand their value chain more deeply, identifying risks and opportunities across the business ecosystem. This opens the door for closer collaboration with suppliers, distributors, and even customers to collectively reduce emissions. This collaboration can drive innovation, improve efficiency, and create shared value. Decarbonizing the supply chain has the potential to multiply a companys overall carbon reduction impact. Thus, the supply chain, which is often the most challenging source of Scope 3 emissions, can be transformed from a burden into a strategic asset. Through active collaboration and deep engagement with value chain partners, companies not only overcome the complexities of measurement and reduction but also create opportunities for joint innovation, improved efficiency, and collective value creation that multiplies the impact of decarbonization.  

III. Challenges in Managing Scope 3 Emissions: Complexity and Solutions

Despite its importance, managing Scope 3 emissions is not easy. There are several significant challenges that need to be addressed:

Data Complexity and Measurement

One of the biggest challenges in Scope 3 management is data complexity. The required data is highly varied and often comes from various sources beyond the companys direct control, often unstructured or stored in third-party systems. Identifying all sources of indirect emissions, especially in long and complex supply chains, is a difficult task. A lack of accurate and transparent data can lead to incorrect emission calculations, hindering a companys ability to ascertain their carbon footprint and comply with sustainability standards.  

Although the GHG Protocol provides guidance with 13 calculation methods and a decision tree, and recommends the use of proxy data if primary data is insufficient , consistency in implementation remains an issue. In Indonesia, this challenge is exacerbated by the lack of adequate MRV (Measurement, Reporting, and Verification) systems at the company level. Many companies do not yet have the technical capacity or reliable emission recording systems. There are also significant data gaps between national GHG inventory reports and independent estimates, as seen in methane emissions from coal mines, which risk undermining the governments efforts to meet Indonesias commitment to the Global Methane Pledge. Data gaps and inconsistencies in Scope 3 emission measurement, especially at the supply chain level and compounded by MRV challenges in Indonesia, are significant obstacles not only for individual companies but also for achieving national decarbonization targets. Without accurate and verified data from Scope 3, the governments efforts to meet its climate commitments become vulnerable, highlighting the urgency of improving reporting capacity and standardization across the private sector.  

Limited Control and the Need for Collaboration

Unlike Scope 1 and 2, which are under the companys direct control, Scope 3 emissions occur outside the companys direct operations and involve many parties in the value chain. The challenge is how companies effectively engage these various parties—from raw material suppliers to distributors and end-users—to collectively manage Scope 3 emissions. This requires a different approach, focusing on influence and collaboration rather than direct control.  

Cost and Lack of Standardized Methodology

Implementing technologies, systems, and processes to accurately measure and manage Scope 3 can require significant financial investment. Furthermore, despite guidance like the GHG Protocol, challenges remain regarding the lack of a universally standardized methodology for Scope 3 calculations. This can lead to differences in how companies measure their emissions, making performance comparisons between companies difficult and reducing reporting credibility.  

The Role of Technology and Global Standards as Solutions

To overcome these challenges, technology and global frameworks play a crucial role:

• Carbon Accounting Software: Enables accurate recording and analysis of emission data, as well as structured and centralized data management. Examples include carbon emission calculation software from BATS Consulting.  

• ERP (Enterprise Resource Planning) Systems: Can integrate carbon data into business operations automatically, ensuring faster, more accurate, and globally compliant reporting, and optimizing emission trend analysis for long-term sustainability strategies.  

• International Reporting Frameworks:

• GHG Protocol: Provides a recognized global standard for GHG emission calculation and reporting.  

• CDP (Carbon Disclosure Project): A platform that helps companies measure and manage their environmental impact.  

• GRI (Global Reporting Initiative): A framework used to measure and report the level of GHG emission disclosure in sustainability reports.  

• TCFD (Task Force on Climate-related Financial Disclosures) & ISSB (International Sustainability Standards Board): Encourage consistent and reliable climate-related financial disclosures. ISSB has issued IFRS S1 and S2 standards leading to mandatory disclosure.  

IV. Strategic Steps Towards Effective Scope 3 Emission Management

Effectively managing Scope 3 emissions requires a structured and collaborative approach. Here are strategic steps companies can take:

Identification and Assessment of Emission Sources

The fundamental step is to conduct a thorough identification of all potential Scope 3 emission sources, both upstream and downstream, as part of a comprehensive GHG inventory (Scope 1, 2, and 3). This involves a detailed analysis of the companys current emission profile to identify the largest emission hotspots and most promising reduction opportunities. Companies also need to select the Scope 3 emission categories most relevant to their industry and business model, and establish clear reporting boundaries.  

Prioritization and Development of Targeted Reduction Strategies

After identification, the focus should be on the most significant and material emission sources. This involves developing and implementing targeted reduction measures, ideally aligned with a 1.5°C climate change scenario, such as through the setting of Science-Based Targets (SBTi). Setting Specific, Measurable, Achievable, Relevant, and Time-bound (SMART) targets for the short and long term is essential to guide decarbonization efforts.  

Active Engagement with Value Chain Partners

Given that Scope 3 emissions are largely outside the companys direct control, active collaboration with suppliers, distributors, customers, and other partners throughout the value chain is crucial. This approach can involve developing incentive programs, knowledge transfer, or even contractual requirements that encourage sustainable practices. This collaboration aims not only to collectively reduce emissions but also to build a more resilient and innovative supply chain. The supply chain, often the most challenging source of Scope 3 emissions, can be transformed from a burden into a strategic asset. Through active collaboration and deep engagement with value chain partners, companies not only overcome the complexities of measurement and reduction but also create opportunities for joint innovation, improved efficiency, and collective value creation that multiplies the impact of decarbonization.  

Transparent Reporting and Third-Party Verification

Maintaining transparency in emission reporting is key to building and maintaining stakeholder trust. Reporting must be accurate and comprehensive, and ideally verified by a third party to ensure data credibility and reliability. Utilizing international reporting frameworks such as CDP, GRI, and TCFD/ISSB can help companies prepare reports that meet global standards and market expectations.  

Continuous Improvement

Managing Scope 3 emissions is a dynamic and continuous process. Companies need to regularly refine their management practices, monitor progress against targets, and adjust strategies based on new data and insights. The use of emission management software can be very helpful in tracking and reporting progress efficiently, as well as providing insights for further emission reduction opportunities.  

V. Conclusion: Moving Forward with BATS Consulting

In todays business climate, managing Scope 3 GHG emissions has transformed from merely a best practice into an unavoidable strategic imperative for long-term business sustainability and success. Understanding and managing this "hidden carbon footprint" is key to gaining a comprehensive picture of a companys environmental impact, meeting the increasing expectations of investors and other stakeholders, complying with increasingly stringent regulations, and most importantly, unlocking significant new business opportunities in the low-carbon economy era.

BATS Consulting fully understands the complexity and urgency inherent in managing Scope 3 emissions for companies. We recognize that challenges in data collection, lack of standardization, and limited control can be major obstacles. However, we see them as opportunities for innovation and excellence. BATS Consulting serves as a vital bridge connecting companies with solutions to overcome the complex challenges of Scope 3 emissions. Given the difficulties in data collection, lack of standardization, and limited control, BATS Consulting positions itself as a provider of expertise that translates complex environmental data into actionable business strategies, enabling companies to not only comply with regulations but also achieve competitive advantage and long-term sustainability goals.

As a strategic partner, BATS Consulting is here to help companies navigate this complex sustainability landscape, transforming complex environmental data into actionable business insights.

Our Services Include:

• Comprehensive Sustainability Consulting: We help design and implement holistic sustainability strategies, aligned with core business objectives and global decarbonization targets, including guidance towards Net Zero.

• Carbon Accounting and GHG Inventory (Scope 1, 2, & 3): Our team of experts ensures accurate and verified emission measurements, in accordance with global standards such as the GHG Protocol. We help identify emission sources, collect complex data from across the entire value chain, and compile credible and auditable inventories.

• Supply Chain Decarbonization Strategy: We develop realistic and effective emission reduction roadmaps, with a special focus on upstream and downstream collaboration. This includes helping set Science-Based Targets (SBTi) and designing programs to reduce emissions across the entire supplier and distribution ecosystem.

• Sustainability Reporting and Regulatory Compliance: We guide in preparing transparent sustainability reports, meeting domestic regulatory requirements (such as POJK No. 51/2017) and leading international standards (such as CDP, GRI, TCFD/ISSB). Accurate reporting not only ensures compliance but also enhances investor and stakeholder trust.

• Climate Risk Analysis and Green Business Opportunities: We help identify, assess, and manage climate-related physical and transition risks within operations and the value chain, while also uncovering new business opportunities arising from the transition to a green economy.

By partnering with BATS Consulting, companies not only fulfill their sustainability obligations but also build a more resilient, efficient, and future-ready business foundation for a sustainable and competitive future.