Profits, Progress, and the Planet: A Business Lens on Greenhouse Gas Emissions

Greenhouse gas (GHG) emissions are the primary drivers of climate change and are of growing concern to companies and their stakeholders. Organizations today are increasingly focused on managing their carbon footprint and mitigating the risks associated with GHG emissions. 

In this article, we’ll introduce GHG emissions and explain the difference between Scope 1, Scope 2, and Scope 3 emissions. We’ll also examine the ESG (Environmental, Social, and Governance) benefits of lowering emissions from a business perspective. 

What exactly are GHG emissions? 

GHG emissions are gasses that trap heat in the Earth's atmosphere, contributing to global warming and climate change. The most common GHG emissions are carbon dioxide (CO2), methane (CH4), and nitrous oxide (N2O). These gases are emitted through a variety of human activities, including the burning of fossil fuels, deforestation, and agriculture. Carbon dioxide (CO2) is the most significant contributor—in 2021, CO2 accounted for 79% of all U.S. GHG emissions from human activities.  

GHG emissions are broken into three categories for businesses and organizations—Scopes 1, 2, and 3. The concept was originally developed by the Greenhouse Gas Protocol (GHGP), a widely recognized accounting and reporting standard for GHG emissions that was jointly created by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). 

The separation between Scopes 1, 2, and 3 helps organizations identify both direct and indirect emissions—enabling companies to understand their complete carbon footprint and develop targeted strategies for emissions reduction. Scopes 1 and 2 are carefully delineated in this standard to avoid risking two or more companies accounting for emissions in the same scope (otherwise known as “double counting”). 

Understanding Scopes 1, 2, and 3 emissions

Let’s take a closer look at the scope categories and how they’re defined: 

Scope 1: “Direct" emissions from sources that are owned or controlled by an organization. These can be produced by operating equipment to manufacture goods, driving vehicles, or simply by heating buildings and powering computers if that energy production is owned and operated by the company.

Scope 2: “Indirect” emissions that result from the generation of purchased electricity, steam, or other energy sources. An example of this would be the use of electricity generated from fossil fuels, which can be cut by switching over to solar panels or renewable energy sources.

Scope 3: Indirect emissions that result from the organization's value chain, including emissions from suppliers, customers, and transportation. 

Together, all three scopes make up a comprehensive framework for tracking and managing emissions across different sources and activities within an organization. Companies must reduce their emissions across all three categories to meet the global and corporate sustainability goals laid before them.

Why should companies calculate their GHG emissions? 

Understanding the different scopes of GHG emissions is essential for those who want to manage their carbon footprint. Companies can generally easily calculate their Scope 1 and 2 emissions, and manage them by implementing actions like adopting renewable energy or switching to electric vehicles. Scope 3 emissions are the hardest to calculate. Yet they can account for over 70% of a business’ carbon footprint and are often the most significant category. 

Despite how challenging cutting Scope 3 emissions can be, a growing number of companies are pledging to do so. Why? Because companies that do so not are not only future-proofing themselves against physical and regulatory risk, they’re also increasing the value of their business in the eyes of investors and stakeholders—especially when being evaluated from an ESG perspective. 

Environmental factors: Lowering GHG emissions helps to mitigate the effects of climate change and reduce the negative impact of businesses on the environment. For example, a company can implement measures to reduce its carbon footprint by using renewable energy sources or improving energy efficiency.

Social factors: Reducing GHG emissions can have a positive impact on public health by mitigating air pollution and related health risks. By promoting cleaner air and reducing respiratory ailments, companies contribute to the overall well-being and quality of life for communities in which they operate. Sustainable initiatives can also enhance a company’s reputation with investors and stakeholders. Companies can benefit from stronger community engagement and relations, boosts in employee satisfaction and retention, and higher stakeholder trust and transparency.

Governance factors: Companies that focus on climate action also reap the benefits of better risk management and access to capital. Putting measures in place to lower GHG emissions in compliance with regulatory requirements, for instance, helps reduce exposure to potential penalties and reputational damage.

Additional business benefits of emissions reduction

From a purely economic perspective, there are even more upsides to tracking and reducing a company’s carbon footprint. Such as:

Cost Savings: Implementing measures to reduce carbon emissions can also lead to cost savings for companies. For instance, switching to renewable energy sources can reduce energy costs, and improving energy efficiency can decrease utility bills.

Increased Innovation:  Lowering GHG emissions can also lead to increased innovation and new business opportunities. For example, companies dedicated to emissions reduction may invest in research and development, driving the creation of better products and processes that increase competitiveness. Such companies are also more incentivized to evaluate and streamline their operations—uncovering opportunities for methodological improvements, resource conservation, and waste reduction.

Competitive Advantage: Businesses that demonstrate robust emissions reduction strategies and sustainability practices are more likely to attract and benefit from increased access to capital. GHG emissions reduction can position businesses as leaders in sustainability, drive cost savings, ensure regulatory compliance, attract investment, and capitalize on evolving market trends, thereby acting as a competitive advantage in today's business landscape.

To wrap it all up 

In conclusion, GHG emissions are a critical issue for businesses and organizations to consider, especially with the increasing expectations for companies to commit to sustainability targets and to prove their impact. Understanding the difference between Scopes 1, 2, and 3 emissions is essential for managing an entity’s carbon footprint and mitigating climate-related risks.

Business leaders who prioritize ESG considerations should carefully evaluate their companies' carbon footprints to strengthen their ESG performance and drive positive environmental and social outcomes. As climate change continues to dominate conversations as a pressing global issue, companies who focus on reducing their carbon footprint and building sustainable businesses will be better positioned for long-term success.