Scope 3 Emissions

Overview of the scopes

The GHG Protocol Corporate Standard classifies a company's emissions into direct and indirect categories. Direct
emissions (Scope 1) originate from sources owned or controlled by the reporting company, while indirect emissions
(Scope 2 and Scope 3) result from activities of the reporting company but occur at sources owned or controlled by
other entities. Created to bring consistency, the GHG Protocol categorises emissions into three ‘Scopes’:
• Scope 1: Direct emissions from activities within your organisation’s control. This includes onsite fuel
combustion from buildings and company vehicles as well as manufacturing and process emissions and direct
emissions from agriculture.
• Scope 2: Indirect emissions from any electricity, heat or steam you purchase and use. By using the energy,
you are indirectly responsible for the release of GHG emissions.
• Scope 3: Any other indirect emissions from sources outside your direct control. The GHG Protocol’s Scope
3 Standard categorises emissions across 15 different categories covering business activities common to many
organisations, such as purchased goods and services, business travel and waste in operations. It also
encompasses activities like leased assets, transport and distribution, the use and disposal of sold products and
the impact of any investments.
Scope 3 almost always represents the largest proportion of emissions. Across the private and public sectors, these
emissions are typically responsible for 70-90% of an organisation’s carbon footprint. It makes accelerating action
on reducing Scope 3 emissions even more important if we want to keep 1.5C alive.
Since Scope 3 emissions can make up the majority of an organisation’s carbon footprint, the Science Based Targets
initiative (SBTi) has made quantifying and setting Scope 3 targets a requirement of their validation process. Any
business whose Scope 3 emissions represent more than 40% of the total footprint must now report on its Scope 3
reduction efforts.

Overview of the scopes

Overview of scope 3 categories
Scope 3 emissions are classified
into 15 distinct categories to help
companies organize and report on
emissions within their corporate
value chain. These categories are
designed to be mutually exclusive
to prevent double counting of
emissions. Each category consists
of various activities that contribute
to emissions.
Companies are required to report
scope 3 emissions by category,
with the option to report any
additional activities not covered by
the predefined categories List of scope 3 categories
separately. The minimum boundaries of each scope 3 category are defined to
standardize reporting and ensure major activities are included in the inventory without the need to account for every
entity in the value chain indefinitely.
For certain categories like purchased goods and services, capital goods, and fuel- and energy-related activities, the
minimum boundary includes all upstream emissions of purchased products to capture emissions throughout the
product life cycle. Other categories such as transportation, waste generation, business travel, and employee
commuting include scope 1 and scope 2 emissions of relevant value chain partners. Companies have the flexibility to
include additional emissions beyond the minimum boundaries where relevant .

Overview of GHG Protocol scopes and emissions across the value chain
Upstream scope 3
emissions
Category Category Description
Extraction, production, and transportation of goods and
1.Purchased
services purchased or acquired by the reporting company
goods and
in the reporting year, not otherwise included in Categories
services
2-8
Extraction, production, and transportation of capital goods
2. Capital
purchased or acquired by the reporting company in the
goods
reporting year
Extraction, production, and transportation of fuels and
energy purchased or acquired by the reporting company in
the reporting year, not already accounted for in scope 1 or
scope 2, including:
a. Upstream emissions of purchased fuels (extraction,
production, and transportation of fuels consumed by the
reporting company)
3. Fuel- and
b. Upstream emissions of purchased electricity (extraction,
energy-related
production, and transportation of fuels consumed in the
activities (not
generation of electricity, steam, heating, and cooling
included in
consumed by the reporting company)
scope 1 or
scope 2) c. Transmission and distribution (T&D) losses (generation
of electricity, steam, heating and cooling that is consumed
(i.e., lost) in a T&D system) – reported by end user.
d. Generation of purchased electricity that is sold to end
users (generation of electricity, steam, heating, and cooling
that is purchased by the reporting company and sold to
end users) – reported by utility company or energy retailer
only
Transportation and distribution of products purchased by
the reporting company in the reporting year between a
company’s tier 1 suppliers and its own operations (in
vehicles and facilities not owned or controlled by the
4. Upstream reporting company).
transportation Transportation and distribution services purchased by the
and distribution reporting company in the reporting year, including
inbound logistics, outbound logistics (e.g., of sold
products), and transportation and distribution between a
company’s own facilities (in vehicles and facilities not
owned or controlled by the reporting company)
5. Waste Disposal and treatment of waste generated in the reporting
generated in company’s operations in the reporting year (in facilities
operations not owned or controlled by the reporting company)
6. Business Transportation of employees for business-related activities
travel during the reporting year (in vehicles not owned or
operated by the reporting company).
Minimum Boundary
All upstream (cradle-to-gate)
emissions of purchased goods and
services
All upstream (cradle-to-gate)
emissions of purchased capital goods.
a. For upstream emissions of
purchased fuels: All upstream (cradle-
to-gate) emissions of purchased fuels
(from raw material extraction up to the
point of, but excluding combustion)
b. For upstream emissions of
purchased electricity: All upstream
(cradle-to-gate) emissions of
purchased fuels (from raw material
extraction up to the point of, but
excluding, combustion by a power
generator)
c. For T&D losses: All upstream
(cradle-to-gate) emissions of energy
consumed in a T&D system, including
emissions from combustion.
d. For generation of purchased
electricity that is sold to end users:
Emissions from the generation of
purchased energy
The scope 1 and scope 2 emissions of
transportation and distribution
providers that occur during use of
vehicles and facilities (e.g., from
energy use)
Optional: The life cycle emissions
associated with manufacturing
vehicles, facilities, or infrastructure
The scope 1 and scope 2 emissions of
waste management suppliers that
occur during disposal or treatment.
Optional: Emissions from
transportation of waste
The scope 1 and scope 2 emissions of
transportation carriers that occur
during use of vehicles (e.g., from
 Category Category Description
Transportation of employees between their homes and
7. Employee
their worksites during the reporting year (in vehicles not
commuting
owned or operated by the reporting company).
Operation of assets leased by the reporting company
8. Upstream
(lessee) in the reporting year and not included in scope 1
leased assets
and scope 2 – reported by lessee.
Downstream scope 3 emissions
Category Category Description
Transportation and distribution of products
sold by the reporting company in the
reporting year between the reporting
9. Downstream
company’s operations and the end consumer
transportation and
(if not paid for by the reporting company),
distribution
including retail and storage (in vehicles and
facilities not owned or controlled by the
reporting company)
Processing of intermediate products sold in
10. Processing of
the reporting year by downstream
sold products
companies (e.g., manufacturers)
11. Use of sold End use of goods and services sold by the
products reporting company in the reporting year
Minimum Boundary
energy use)
Optional: The life cycle emissions
associated with manufacturing
vehicles or infrastructure
The scope 1 and scope 2 emissions of
employees and transportation
providers that occur during use of
vehicles (e.g., from energy use)
Optional: Emissions from employee
teleworking.
The scope 1 and scope 2 emissions of
lessors that occur during the reporting
company’s operation of leased assets
(e.g., from energy use)
Optional: The life cycle emissions
associated with manufacturing or
constructing leased assets
Minimum Boundary
The scope 1 and scope 2 emissions of
transportation providers, distributors, and
retailers that occur during use of vehicles and
facilities (e.g., from energy use)
Optional: The life cycle emissions associated
with manufacturing vehicles, facilities, or
infrastructure
The scope 1 and scope 2 emissions of
downstream companies that occur during
processing (e.g., from energy use)
The direct use-phase emissions of sold products
over their expected lifetime (i.e., the scope 1 and
scope 2 emissions of end users that occur from
the use of: products that directly consume energy
(fuels or electricity) during use; fuels and
feedstocks; and GHGs and products that contain
or form GHGs that are emitted during use)
Category Category Description Minimum Boundary

Optional: The indirect use-phase emissions of

sold products over their expected lifetime (i.e.,
emissions from the use of products that
indirectly consume energy (fuels or electricity)
during use)

12. End-of-life Waste disposal and treatment of products The scope 1 and scope 2 emissions of waste
treatment of sold sold by the reporting company (in the management companies that occur during
products reporting year) at the end of their life. disposal or treatment of sold products.

The scope 1 and scope 2 emissions of lessees

Operation of assets owned by the reporting
13. Downstream company (lessor) and leased to other entities
leased assets in the reporting year, not included in scope
1 and scope 2 – reported by lessor.
that occur during operation of leased assets (e.g.,
from energy use).
Optional: The life cycle emissions associated
with manufacturing or constructing leased assets

The scope 1 and scope 2 emissions of

Operation of franchises in the reporting franchisees that occur during operation of
14. Franchises year, not included in scope 1 and scope 2 – franchises (e.g., from energy use)
reported by franchisor Optional: The life cycle emissions associated
with manufacturing or constructing franchises

Operation of investments (including equity

and debt investments and project finance) in See the description of category 15 (Investments)
15. Investments
the reporting year, not included in scope 1 for the required and optional boundaries
or scope 2

Scope 3 Challenges
Scope 3 emissions along the value chain are crucial for understanding a company's full greenhouse gas (GHG)
impacts, accounting for around 80% of total emissions. However, tracking and accounting for these emissions pose
significant challenges:

 Data Collection: Gathering relevant and granular data for Scope 3 emissions is complex and requires
managing large amounts of data.
 Lack of Cooperation: Collaboration with third parties like suppliers, lessors/lessees, employees, or
customers is necessary but often lacking, hindering effective management of Scope 3 emissions.
 Transparency: Companies often lack transparency regarding the relevance of Scope 3 emissions and struggle
to access data from their upstream and downstream partners, reducing the quality of information.
 Stakeholder Complexity: Scope 3 emissions involve a wide range of stakeholders across the value chain,
making data collection more complex and tracking emissions challenging.
 Resource Constraints: Calculating Scope 3 emissions requires resources, expertise, and data management
processes, which can strain personnel and financial resources without strong management support and
alignment.
Scope 3 calculation methodologies
The Greenhouse Gas Protocol (GHG) recommends the use of Life Cycle Assessment (LCA) or environmentally
Extended Input-Output Analysis (EIOA) for reporting and estimating Scope 3 emissions.
1. Life Cycle Assessment (LCA): This approach evaluates the environmental impact of a product or activity
by considering its entire life cycle, from raw material extraction to disposal. It requires detailed
knowledge about the activities and services in the supply chain and their associated emission factors.
However, for large companies with tens of thousands of products and services, collecting such detailed
physical activity data across the supply chain can be complex and impractical.

2. Environmentally Extended Input-Output Analysis (EIOA): This method is widely adopted and based
on the economic model Input-Output Analysis (IOA). EIOA captures the inter- and intra-trade relations
between various sectors of the economy across different countries. The environmental impact is included
in the environmentally Extended Input-Output model, which estimates the carbon footprint for delivering
one dollar of output by sectors or products. EIOA only requires collecting value-based (monetary values)
activity data of the company, mainly consisting of purchasing data, broadly classified into product groups
or economic sectors. Emission factors for every dollar spent on each group of products or economic
sectors can be determined from the EEIO framework.

3. Machine Learning (ML) Techniques: Some research works have explored the use of machine learning
techniques for estimating Scope 3 emissions. For example, one study used ML regressor models to predict
Scope 3 emissions using widely available financial statement variables, Scope 1&2 emissions, and
industrial classifications. Another study focused on the quality of Scope 3 emission data and the
performance of machine-learning models in predicting Scope 3 emissions using datasets from different
providers.

The Home Depot

The Home Depot is a multinational home improvement retailer based in the United States. Founded in 1978, the
company operates a chain of retail stores that sell a wide range of products for home improvement, construction, and
renovation projects. The Home Depot is known for its extensive selection of building materials, tools, appliances, and
home decor items.
With over 2,200 stores across North America, The Home Depot has established itself as a leading player in the home
improvement industry. The company also offers online shopping and delivery services to cater to the needs of its
customers.
In addition to its retail operations, The Home Depot is committed to sustainability and environmental responsibility.
The company has set goals to reduce its carbon footprint and has implemented initiatives to promote energy efficiency,
waste reduction, and responsible sourcing practices.
Overall, The Home Depot is a prominent retailer in the home improvement sector, known for its wide product
selection, convenient services, and commitment to sustainability.

ESG Journey
The Home Depot aims to reduce its Scope 3 emissions specifically from the "Use of Sold Products" category by 25%
by the end of 2030 from a 2020 base year. As the largest retailer of home improvement products, The Home Depot
recognizes that a significant portion of its total indirect emissions comes from the use of products it sells. Therefore,
the company has chosen to focus its emissions reduction efforts on this category to have the most significant impact
on carbon emissions.

The Home Depot's Commitment to Sustainable Operations

The Home Depot's "Operate Sustainably" section showcases the company's dedication to environmental responsibility
and sustainability throughout its operations. This commitment is backed by concrete actions and measurable results:
Energy Efficiency:
 35% reduction in energy consumption per square foot since 2010. This translates to over 3.5 billion kWh
of energy saved, equivalent to avoiding 2.3 million metric tons of carbon dioxide emissions.
 LED lighting, energy management systems, and efficient HVAC systems are key contributors to this
achievement.
Renewable Energy:
 Solar panels installed on over 350 stores and distribution centres. This generates more than 300 million
kWh of clean energy annually, reducing dependence on fossil fuels and lowering the carbon footprint.
 Investment in renewable energy sources demonstrates The Home Depot's commitment to a sustainable
future.
Waste Reduction:
  Over 85% of operational waste is recycled. This impressive rate is achieved through comprehensive waste
diversion programs in stores, distribution centres, and offices.
 Donation of over 100 million pounds of unsellable but usable products to charities. This initiative diverts
waste from landfills and supports communities in need.
Responsible Sourcing:
 99% of wood and paper products are FSC certified or sourced from recycled materials. This ensures
responsible forestry practices and minimizes environmental impact.
 Collaboration with suppliers to ensure ethical labour practices and environmental standards. The Home
Depot prioritizes ethical sourcing throughout its supply chain.
These facts and figures demonstrate The Home Depot's tangible progress in operating sustainably. The company's
commitment to energy efficiency, renewable energy, waste reduction, and responsible sourcing makes a significant
contribution to a more sustainable future.
The Home Depot's Sustainability Progress in 2022:
 Reduced absolute combined Scope 1 and 2 carbon emissions by 92,000 metric tons.
 Achieved its goal to eliminate certain intentionally added chemicals from its residential cleaning products.
 Helped customers save over 33 billion gallons of water and 3.8 billion kilowatt hours of electricity through
WaterSense and ENERGY STAR products.
 Diverted over 320,000 MT of non-hazardous waste away from landfills.
 Continued to invest in efficiency, renewable energy, and sustainable product offerings.
 Set ambitious emissions reduction goals and is working with suppliers to develop more sustainable products
and packaging.
 Participates in the CDP reporting process and received a score of B for its commitment to climate change
mitigation, risk reduction, adaptation, and transparency.

Home Depot's Scope 3 Emissions:

Scope 3 emissions, often referred to as "indirect emissions," are those generated by activities outside a company's
direct control. For The Home Depot, these emissions primarily stem from the use of sold products, upstream
transportation and distribution, and waste generated in the use of sold products.
Facts and Figures:
1. Total Scope 3 emissions in 2021: 37.4 million metric tons of CO2e. This represents a significant portion of
The Home Depot's overall carbon footprint.
2. Breakdown of Scope 3 emissions:
o Use of sold products: (75%) This includes emissions from the use of products such as appliances,
building materials, and tools.
o Upstream transportation and distribution: (15%) This includes emissions from the transportation
of products from suppliers to The Home Depot's distribution centres and stores.
o Waste generated in the use of sold products: (10%) This includes emissions from the disposal of
products after they are used by customers.
3. The Home Depot's Scope 3 emissions are significantly higher than its Scope 1 and Scope 2
emissions. This highlights the importance of addressing indirect emissions to achieve significant reductions in
the company's overall carbon footprint.
Challenges and Opportunities:
  Addressing Scope 3 emissions presents a significant challenge for The Home Depot. This is due to the
complexity of the company's supply chain and the diverse nature of its products.
 The Home Depot is taking steps to reduce its Scope 3 emissions. These efforts include working with
suppliers to improve their environmental performance, developing more sustainable products, and promoting
responsible waste management practices among customers.
 The Home Depot has set a target to reduce its Scope 3 emissions by 20% by 2030. This ambitious goal
will require significant collaboration with suppliers, customers, and other stakeholders.

Role of AI/ML in Life Cycle Assessment (LCA)

1. Inventory Analysis:
  Unsupervised ML algorithms like neural net clustering and K-Nearest Neighbours (KNN) can
streamline data collection from diverse sources and enhance data accuracy.
 ML algorithms such as artificial neural networks (ANN), support vector machines (SVM), and deep
neural networks (DNN) can categorize or cluster data based on criteria or learned patterns, improving
data organization and reliability.
 ML algorithms like Naive Bayes Classifier and Decision Trees can classify inventory data into
predefined categories, facilitating data categorization based on specific attributes.
 ML models such as DNN and generative adversarial network (GAN) can help in data imputation and
extrapolation, ensuring completeness and representativeness of inventory data.
2. Characterization and Normalization:
 ML algorithms can integrate and harmonize data from different sources and formats to ensure
consistency and comparability in inventory data.
 ML methods can normalize data by accounting for different units and timeframes, ensuring
consistency and accuracy in inventory analysis.
 Natural Language Processing (NLP) techniques can automatically extract relevant data from text-
based sources, such as scientific literature, reports, or websites, aiding in inventory analysis.

3. Data Pre-processing: Techniques like Principal Component Analysis (PCA), SVM, and ANN can transform
raw data into suitable formats for analysis. PCA identifies important patterns, SVM develops models for data
classification, and ANN learns complex patterns from large datasets.

4. Environmental Impact Evaluation and Interpretation: AI/ML can develop advanced models for impact
assessment, conduct sensitivity and uncertainty analysis, optimize environmental impact allocation, and
identify optimal process configurations. ML methods like regression, decision trees, random forests, SVM,
and ensemble methods can be used for impact assessment modelling, depending on data characteristics and
requirements.

5. Model Evaluation and Interpretation: Model evaluation ensures accuracy and reliability of impact
assessment models. Techniques like Monte Carlo simulation and Bayesian statistics are used for uncertainty
and sensitivity analysis. AI/ML-based methods aid in pattern recognition, anomaly detection, decision
support, data visualization, and communication of LCA results.
 A holistic AI/ML-enabled LCA framework for improved prediction of environmental impact

Overview of an HBS Working Paper

Machine Learning Models for Prediction of Scope 3 Carbon Emissions
Purpose and Scope: The machine learning model aims to predict total carbon emissions for different types of emissions
(Scope 1, Scope 2, and 15 individual Scope 3 types) at the firm level. This is based on nominal financial metrics in
addition to emissions data, specifically focusing on publicly listed firms.
Data Cleaning and Pre-Processing: The data cleaning process involved compiling emissions data from the CDP
Climate Change Questionnaire between 2013-2020. Firms with zero or missing emissions data for Scope 1 or Scope 2
were eliminated. Similarly, outliers with emissions values greater than 1 billion metric tonnes for any individual Scope
3 type were removed. Additionally, firms with missing GICS Industry classification or classified as 'Financials' Sector
were also eliminated. Imputation of missing values was done using a k-nearest neighbours imputer. Finally, certain
financial ratios were winsorized to the 1st and 99th percentile to limit the effect of outliers.
Feature and Target Transformation: To handle the distribution of features and targets, continuous predictive features
were examined under a logarithmic transformation to achieve a normal-like distribution. This transformation was
particularly effective for financial variables, as they are likely the result of multiplication of different factors, making a
log-normal distribution expected. However, ratio financial features like the inventory turnover ratio were not
transformed, as their distributions did not benefit from a log transformation. The 15 types of Scope 3 emission targets
displayed a compound Poisson-gamma Tweedie distribution, which added an additional level of difficulty in using
regression models to train for minimal error.
Model Selection: Two main models were constructed. The first model predicts 15 Scope 3 emission types as individual
targets, while the second model predicts one emissions output using the reported emissions' attributed Scope 3 type as
an additional predictive feature. The second model, with its ability to leverage a more extended data set, showed
consistent performance across Scope 3 types compared to the first model, which had reduced sample sets for specific
targets.
Model Evaluation: Various models, including k-NN, Random Forest, and AdaBoost, were evaluated against existing
models used by data providers such as OLS and Gamma-GLM. Evaluation metrics included R2 Regression Score,
Mean Absolute Percentage Error (MAPE), and Root Mean Squared Log Error (RMSLE) to assess model performance
and generalizability.
Feature Importance and K-fold Cross Validation: Feature importance was calculated to determine the relative predictive
performance of each input feature in the model for each target. K-fold cross-validation was applied to assess the
model's generalizability and expected performance on unseen data, ensuring that the model is robust and not
overfitting to the training data.
The Reporting and Analysis of scope 3 emissions
Scope 3 Emission Types:
 Scope 3 emissions are disclosed by type, with 15
types known as targets.
 Some emission types are less reported or reported
as zero due to their idiosyncratic nature.
 More companies report emissions for upstream
activities and types that are easier to measure and
control.
Models:
 Primary models: Random Forest and Adaptive
Boosting (AdaBoost) algorithms.
 Benchmark models: Linear regression estimators,
k-nearest neighbours (k-NN) algorithm.
 Random Forest uses bagging, while AdaBoost uses
boosting.
The Limitations and Aims of the machine learning approach for estimating Scope 3 emissions:
Current Limitations in Scope 3 Reporting:
 Inconsistent and partial reporting across Scope 3
types.
 Many firms lack resources and ability to measure
Scope 3 emissions due to factors like lack of data,
Fig. Feature importance heatmap of the AdaBoost
targeted by Scope 3 type model using all data
excluding zeros.
Each predictive input feature is assessed between 0
and 1 that measures the average importance of each
feature in creating a decision tree results in more
accurate predictive outcomes. The data shows that the
most useful features in creating accurate predictions
are Scope 1 emissions, number of employees, scope 2
emissions, inventory turnover, and SG&A expenses.
In general, the least useful features in creating
accurate predictions are the remaining ratio variables,
total assets, operational income, nation of domicile
and sales.
Prediction Metrics:
 Root Mean Squared Logarithmic Error (RMSLE):
Lower values indicate lower percentage errors in
predicted emissions, penalizing underestimated
predictions more.
 R-squared (R2): Higher values mean more of the
variation in reported target values is explained by
the input features.
 Mean Absolute Percentage Error (MAPE): Lower
values indicate lower percentage error, penalizing
overestimates more relative to underestimates.
Model Performance:
 Average R2 increases across models: 46% for
OLS, 68% for k-NN, 75% for random forest, and
78% for AdaBoost.
 When focusing on observations where companies
use mostly primary data, the average R2 further
increases to 83%.
control over decisions made by
suppliers/customers, and calculation difficulty.
 Scope 3 measurement primarily done by large
firms with financial resources.
Aim of the Machine Learning Approach:
 Leverage existing reporting of Scope 3 emissions
by firms that have calculated their emissions.
 Use data from these firms to train models and
document their predictive ability.
 Estimate Scope 3 emissions using different models
to provide widespread access to estimates for all
15 types.
 Enable firms lacking resources for detailed
measurement to derive a first estimate of their
emissions.
Benefits and Implications:
 Allows firms to improve measurement practices,
set emission reduction targets, and design
decarbonization strategies.
 Enables investors needing data on many
companies for portfolio construction and
benchmarking.
 Provides a more accessible method for estimating
Scope 3 emissions, benefiting a wider range of
companies.
Caveats and Considerations:
 Models estimate Scope 3 emissions using broadly
available accounting data and more easily
calculated Scope 1 and 2 emissions.
 Models may miss important features like
idiosyncratic supply chain and product choices that
could influence Scope 3 emissions.
 External validity of predictions may be limited if
firms have supply chains and product features
materially different from those in the training
dataset.