The GHG Protocol (Greenhouse Gas Protocol), developed by the World Resources Institute and the World Business Council for Sustainable Development since 1998, is the foundation of essentially all corporate carbon accounting. Its categorisation of emissions into three 'scopes' is the most-cited framework in sustainable finance — and the source of most confusion.
The three scopes
- Scope 1: direct GHG emissions from sources owned or controlled by the company. Examples: company vehicles, on-site boilers, manufacturing process emissions, refrigerant leaks.
- Scope 2: indirect emissions from the generation of purchased electricity, steam, heating, and cooling. The grid your office plugs into.
- Scope 3: all other indirect emissions in the value chain. Split into 15 categories: purchased goods, capital goods, fuel-and-energy upstream, transportation, waste, employee commuting, business travel, leased assets, processing of sold products, use of sold products, end-of-life treatment, investments, franchises, downstream leased assets, and 'other'.
Why Scope 3 dominates
For a consumer-goods company, ~80% of emissions sit in Scope 3 — primarily in the upstream supply chain (purchased goods) and downstream use (consumer use of the product). For a bank, Scope 3 is ~99% — Category 15 (financed emissions) is essentially the bank's whole emissions footprint, because lending decisions enable real-world emissions elsewhere. Ignoring Scope 3 means ignoring the actual climate impact.
Calculation methods, ranked by quality
- Direct measurement: emissions monitored at source. Highest quality, lowest coverage (mostly Scope 1).
- Activity-based: known activity quantity × emissions factor (e.g. litres of diesel × kgCO2e per litre). Standard for Scope 1 and 2.
- Spend-based: dollar spend × industry-average emissions intensity per dollar. Standard for Scope 3. Lowest quality — distinguishes only the industry of suppliers, not their actual practices.
- Hybrid: spend-based for long tail, activity-based or supplier-specific for top suppliers (those that account for 80%+ of spend).
The data-quality problem
The PCAF (Partnership for Carbon Accounting Financials) standard requires disclosing a data-quality score (1 = audited, supplier-specific; 5 = spend-based with industry averages). Most reported Scope 3 numbers are PCAF score 4 or 5. They are real estimates, not measurements. Treat them as order-of-magnitude correct, not point-correct.
Reading a corporate emissions disclosure
When you see a company report '5.2 MtCO2e Scope 1+2, 18.7 MtCO2e Scope 3', the questions to ask are:
- Which Scope 3 categories did they include? (Most companies under-report by skipping inconvenient categories.)
- What's the data quality / PCAF score per category?
- How does this compare to a prior year on a consistent basis? (Restatements are common and important.)
- What's the carbon intensity per unit of revenue or per unit of output, not just absolute? (Growth muddies absolute changes.)
Exercise
Pull the most recent emissions disclosure from a listed company. Tabulate Scope 1, Scope 2 (location-based vs market-based), and Scope 3 by category if available. What fraction of total is Scope 3? Which Scope 3 categories are reported, and which are missing? Spot the methodology footnotes — do they tell you whether numbers are activity-based or spend-based?