Greenhouse gas emissions are categorized into three scopes, and organizations can separate their emissions into these scopes to better understand their environmental impact, comply with regional reporting requirements, and create relevant emissions reduction plans. Scope 1 emissions are the direct emissions emitted by an organization, while Scope 2 indirect emissions derive from an organization’s electricity, steam, heat, and cooling.
ComplianceESGApril 16, 2025
Sustainability reporting and auditing Scope 3 supplier emissions
What are Scope 3 emissions?
Scope 3 emissions refer to the indirect greenhouse gas emissions resulting from activities within an organization’s value chain, strictly excluding any emissions already accounted for under Scope 1 and 2. Scope 3 emissions combine upstream and downstream activities, such as purchased goods and services, capital goods, transportation and distribution, employee commuting, and waste generated in an organization’s operations. In short, Scope 3 emissions are the emissions a company is responsible for outside its own organizational walls. Interestingly enough, Scope 3 emissions can often account for the largest share of an organization’s total emissions, underscoring the importance of reporting these emissions.
Do Scope 3 emissions need to be reported?
In Europe, all organizations subject to the European Union Corporate Sustainability Reporting Directive (CSRD) are mandated to disclose information on Scope 3 emissions. As part of these requirements, an organization must conduct a double materiality assessment (DMA), which identifies material sustainability matters for organizations. It requires organization to assess sustainability matters from a financial (how a sustainability matter affects organizational financial performance) and impact (how a sustainability matter affects people or the environment) perspective. For each sustainability related topic, financial materiality and impact materiality assessments must be conducted. The DMA results in a list of material sustainability matters that organizations must report on. Accordingly, the CSRD requires a comprehensive approach to reporting Scope 3 emissions, necessitating that organizations disclose all relevant categories of emissions that are deemed material as part of the outcome of the DMA. Examples of potential material categories for an organization include data processing, hosting services, and freight air transportation.
Further, to account for Scope 3 emissions the CSRD requires that organizations disclose the data sources and methodologies used to calculate Scope 3 emissions, as well as highlight any environmental targets set, such as an organization’s science-based targets. There are goals set by an organization to reduce their emissions in line with the goals of the Paris Agreement, to limit global warming to 1.5 degrees Celsius. The framework established by the CSRD, along with the corresponding European Sustainability Reporting Standards (ESRS), aims to enhance transparency across organizations and drive meaningful decision-making toward reducing indirect emissions in the value chain.
On the other hand, in the United States, Scope 3 reporting requirements are still being defined. At the time of writing this article, the Securities and Exchange Commission (SEC) does not require organizations to disclose Scope 3 emissions reporting, unless the organization has deemed their Scope 3 emissions to be material or if the organization has set targets for reducing them. However, organizations operating in California with global annual revenues of more than $1 billion will have to report their Scope 3 emissions starting in 2027, under the proposed Climate Corporate Data Accountability Act (CCDAA).
Accordingly, it is worth noting that reporting requirements currently differ across regions of the world and are continuously evolving. As a result, organizations should be prioritizing sustainability beyond simply meeting reporting requirements. Out of principle, organizations should be interested in understanding where and how they can reduce their emissions to contribute to a more efficient and sustainable future.
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A focus on Scope 3 supplier emissions
Scope 3 emissions are divided into fifteen different categories (3.1 – 3.15) to help organizations identify emissions in the value chain from both upstream and downstream activities. The remainder of this article will focus on Scope 3 supplier emissions, which are emissions originating in the supply chain. More specifically, this article addresses methodologies and reviews of Scope 3.1, 3.2, and 3.4 emissions which were deemed materially significant to our organization in 2024. Scope 3.1 includes all emissions from the production of goods and services, Scope 3.2 are emissions from the production of capital good purchased by the organization, and Scope 3.4 includes the emissions produced from upstream transportation and distribution of products purchased. Organizations typically report these Scope 3 supplier emissions in carbon dioxide equivalent (CO2 equivalent) emissions, expressed in metric tons, rather than as individual gases like methane or sulfur dioxide.
What is the role of internal audit in Scope 3 supplier emissions reporting?
Internal audit can play a key role in reviewing Scope 3 supplier emissions by providing independent and objective assessments of the processes and data involved. More specifically, internal audit can critically review and re-perform the calculation methodologies to ensure transparency and replicability. Further, engaging in Scope 3 supplier emissions analyses allows internal audit to continually develop expertise in sustainability reporting requirements, which is becoming an increasingly important topic for all organizations.
How internal audit can calculate Scope 3 supplier emissions
There is no single correct method to calculate Scope 3 supplier emissions, and the CSRD does not require specific methodologies to be used. With this in mind, the following describes the Scope 3 supplier emissions calculation steps that were taken by our organization and highlights meaningful checks that can be performed by internal audit.
Firstly, it is crucial to understand what type of data an organization collects regarding its suppliers, for example, supplier spend and recorded categorizations. Once this knowledge has been obtained, it should be possible to split relevant suppliers into distinct types. The CSRD does not mandate splitting suppliers into these types, however, this exercise was simply the approach our organization chose to adopt to reflect our Scope 3 supplier emissions.
Type A suppliers can be categorized as suppliers that can provide company-specific emissions data to organizations. For now, very few suppliers can provide such detailed information to individual organizations, but internal audit can review which suppliers are able to provide specific data and confirm whether the values provided are in line with expectations, based on who the supplier is and how much the organization utilizes its products or services.
For type B suppliers, emissions can be calculated using publicly reported emissions data found in annual reports, sustainability statements, and data listed in the Carbon Disclosure Project (CDP) database. An example of a type B supplier could be Salesforce, which publicly reports its own Scope 3 emissions on an annual basis. For these suppliers, emissions can be calculated by dividing spend by revenue of the supplier and multiplying this value by the respective scope 3 supplier emissions reported by the individual supplier. Here, internal audit can re-perform the analysis done to identify type B suppliers, validate the identified supplier spend, and reassess the reliability of data coming from annual supplier emissions reports.
Lastly, type C suppliers can be categorized as suppliers for which emissions can be calculated based on spend data. These suppliers can be grouped into industry sectors and US dollar spend can be converted into CO2 equivalent metrics using supply chain industry emissions factors from the US Environmental Protection Agency (EPA). Spend in other currencies - for examples euros - can also be converted using the same methodology. Whenever supplier industry sectors are unknown, a weighted-average industry emission factor can be used to convert spend into CO2 equivalent metrics. Internal audit can play a key role here by analyzing the completeness and accuracy of industry mapping, as well as ensuring that no data is missing, and reviewing factors like inflation adjustments and currency conversions.
Once all suppliers have been appropriately mapped to their relevant types, the next step should be a simple exercise of combining the total metric tons of CO2 equivalent emissions.
Following the above referenced steps, our internal audit team not only checked the appropriateness of supplier allocations across the distinct supplier types, but also played a key role in ensuring that the methodology used is reliable and future-proof. Our team effectively assessed the completeness of the data provided, verified its accuracy, and ensured that the methodologies used were consistent with best practices and regulatory requirements. We also assessed the overall outcome of metric tons of CO2 equivalent emissions and provided assurance on the total quantity reported in the annual report. By performing these tasks, we helped ensure compliance with reporting requirements and supported the organization's broader sustainability efforts.
Key lessons learned from auditing Scope 3 emissions
The following outlines three fundamental lessons learned from auditing scope 3 supplier emissions:
- Understand and review the data your organization already collects. For suppliers, it is possible that pre-existing company data may be leveraged to help calculate scope 3 supplier emissions.
- Perform sensitivity tests when key assumptions are made. Sensitivity tests help to justify any assumptions made in the calculation process and will help to demonstrate why certain decisions were made. For example, testing different inflation rates when calculating emission factors for supplier industries.
- Stay up to date on reporting requirements. Currently, most organizations report CO2 equivalent emissions, rather than individual GHG emissions like methane and sulfur dioxide. However, it is important to consider that reporting requirements may change in the future and therefore require constant monitoring. This means regularly reviewing regulatory updates, industry best practices, and emerging methodologies to adapt to new standards and expectations.