Unlocking the Scope 3 accounting puzzle

An initiative to unleash “vast new climate finance” has entered its pilot phase, the organizers announced this week. The Advanced and Indirect Mitigation (AIM) Platform, which counts Amazon, Dow and others as pilot testers, is creating guidelines companies can use to claim Scope 3 reductions when they help suppliers and customers cut emissions. 

“The aim is to unlock the finance and the energy to be able to address the challenge of value chain decarbonization, which I personally have always felt is the kind of the keys to the universe of net zero,” Owen Hewlett, chief technical officer at the Gold Standard Foundation, said on an AIM webcast last year. Gold Standard is a partner on the project together with two other non-profits, the Center for Green Market Activation and the Center for Climate and Energy Solutions.

Other AIM participants include A.P. Moller Maersk, H&M Group, Levi Strauss, Netflix, Patagonia, REI, Salesforce and Shell Chemicals.

The heart of the challenge is an accounting problem: Many companies are interested in assisting suppliers and customers in switching to low-carbon energy sources and implementing other climate solutions, but existing emissions accounting and reporting guidelines often make it impossible for the companies to claim a Scope 3 reduction when they do so.

‘Investment mismatch’

“We don’t feel today the corporate accounting aligns with the investments that are required to decarbonize,” said Vanessa Miler-Fels, vice president for climate and environment at Schneider Electric, another of the companies participating in the pilot. “This mismatch could even stop the investment.”

In the long term, AIM hopes to create guidelines that other key bodies, including the GHG Protocol and the Science Based Targets Initiative (SBTi), will integrate into their work. The pilot is designed to test one component of those guidelines: A three-part “association test” for determining whether an intervention can be considered within the investor’s value chain and hence part of its Scope 3 emissions.

The first two parts are relatively straightforward. Companies begin by assessing their greenhouse gas inventory to quantify how a particular product or component contributes to their emissions. A food manufacturer, for example, might add up the emissions associated with the beef it uses. Next, companies demonstrate that the proposed intervention leads to lower emissions. In the beef example, an intervention might involve paying farmers to use feed additives that reduce methane emissions from cows.

To complete the process, companies have to show that the supplier sits within their value chain. The simplest option is to show a direct relationship. However, a company may want to assist suppliers one or more tiers back in their supply chain, which can make it difficult or impossible to establish such a link. In these cases, AIM guidelines state that companies can claim credit for investments in any supplier within a “sourcing region.” If a product mostly comes from suppliers in a handful of countries, for example, investments in suppliers in any of those states qualify.

Exception for hard-to-abate

This requirement is relaxed if the investment is targeted at one of seven sectors that AIM views as hard to abate, including steel, cement and aviation. For these sectors, investments anywhere in the world are eligible for Scope 3 reductions, provided the solution being paid for has significant decarbonization potential. “The AIM association test says: If it’s really hard to abate and it meets these criteria, you don’t need to prove a physical relationship,” said Holly Lahd, standards director at the Center for Green Market Activation.

The rules also cover downstream investments. For Schneider Electric, close to 90 percent of the company’s emissions — across all scopes — come from the operation of the motors, circuit breakers and other electrical equipment that it sells. Miler-Fels said the AIM guidelines would allow Schneider to claim Scope 3 reductions by investing in clean energy in countries where it sells products and which have carbon-intensive grids, such as India. 

Other initiatives are already tackling the link between value-chain investments and Scope 3 credits, also known as “insetting,” at a sector level. The Ecosystem Services Market Consortium is focused on agricultural products. A “book and claim” approach is being used in maritime shipping and aviation to allow companies to pay and claim credit for use of low-carbon fuels even when those fuels are not burned on the ships or planes that transport their goods and employees. Lahd characterized AIM as developing a set of “common operating principles” that others can align with. Connecting the sector-specific initiatives in a “more holistic way,” she added, will increase buyers’ confidence in the schemes.

Achieving that integration may be one of AIM’s biggest challenges. Companies are used to following the GHG Protocol’s guidelines for carbon accounting and to having targets validated by the SBTi. The AIM guidelines may require blessing by both those organizations in order to be successful. “Something we identified early on is that we want to contribute and be a source of information for the incumbent standard setters in this space,” said Lahd. “So with the GHG Protocol on the accounting and reporting and SBTi and their target setting, we purposely wrote this in this style of those documents, and we work collaboratively with them.”