Understanding Scope 3 Emissions: Strategy, Risk, and Compliance

For organizations pursuing credible decarbonization strategies, Scope 3 emissions are no longer optional—they are fundamental. Unlike Scope 1 (direct emissions from owned operations) or Scope 2 (indirect emissions from purchased energy), Scope 3 emissions account for all other indirect emissions across a company’s value chain. That includes everything from the extraction of raw materials, employee commuting, and business travel to product use and end-of-life treatment.

These emissions often represent over 70 percent of a company’s total carbon footprint, yet they are the least understood and least controlled. According to the Carbon Disclosure Project (CDP), more than 90 percent of a typical company’s emissions fall into Scope 3 categories. Still, fewer than half of reporting companies currently disclose Scope 3 data in full.

In our experience, we’ve found that Scope 3 strategies often fail without clear supplier engagement frameworks and a focused approach to data reliability. Too many companies stop at estimation models that offer limited strategic value.

The Scope 3 Challenge

The complexity of Scope 3 stems from three core barriers:

• Data availability: Scope 3 data relies heavily on third parties, often across fragmented, global supply chains with limited transparency.

• Measurement ambiguity: Many companies default to industry-average emission factors rather than actual supplier-specific data.

• Control limitations: Unlike Scope 1 or 2, most Scope 3 sources are not owned or operated by the reporting entity.

These constraints introduce both uncertainty and risk. Misreporting Scope 3 data can expose firms to reputational damage, regulatory scrutiny, and ESG fund exclusion.

As regulatory pressure mounts, the challenge has become more urgent. The U.S. Securities and Exchange Commission’s (SEC) proposed climate disclosure rule, for instance, may require Scope 3 disclosures if they are material or included in emissions targets. In the EU, the Corporate Sustainability Reporting Directive (CSRD) is even more prescriptive, requiring extensive Scope 3 transparency for large companies by 2025.

Global capital is watching. The Task Force on Climate-related Financial Disclosures (TCFD), now embedded in GRI, ISSB, and other frameworks, reinforces the idea that Scope 3 blind spots are financial risk blind spots.

Where the Leverage Is

For organizations seeking to act, understanding where to intervene in Scope 3 is critical. Not all emissions are created equal. The GHG Protocol breaks Scope 3 into 15 categories, but in practice, upstream purchased goods and services and downstream product use tend to dominate.

A few focus areas with high strategic return:

• Purchased goods and services: Engage Tier 1 suppliers directly to obtain real data. Create incentives linked to procurement decisions. Use supplier codes of conduct as leverage.

• Capital goods: Often overlooked, capital expenditures like new manufacturing equipment or infrastructure can carry significant embodied emissions.

• Use of sold products: Especially critical in sectors like automotive, electronics, or consumer goods, where downstream emissions dwarf all others.

We have found that companies attempting to address all 15 categories equally often stall. Prioritization must be data-informed, value-driven, and resourced accordingly.

Why Now: The Strategic Inflection Point

Scope 3 is not just a compliance issue—it is a strategic signal. Investors, customers, and regulators are beginning to view it as a proxy for operational resilience, supply chain transparency, and climate credibility.

Recent developments underscore this:

• In 2025, the EU CSRD will go into full effect, requiring large firms to disclose Scope 3 and validate their claims.

• California’s Climate Corporate Data Accountability Act (SB 253) mandates Scope 3 disclosure for large firms operating in California starting in 2027.

• Major asset managers and private equity firms are asking portfolio companies to address Scope 3 in risk analyses and transition plans.

This confluence of investor demand, policy change, and reputational pressure creates a moment of strategic opportunity—or exposure. Firms that treat Scope 3 as a compliance box to tick will likely fall behind. Those who treat it as an operating model transformation lever will uncover cost efficiencies, innovation pathways, and stakeholder trust.

From Mapping to Action: Building an Effective Scope 3 Strategy

For companies ready to take Scope 3 seriously, the first step is clarity. An accurate emissions inventory must be more than an Excel sheet populated with emission factors. It should provide decision-useful insight, granular enough to inform procurement, design, and capital allocation. This is where many sustainability initiatives stall—they are built for disclosure, not decision-making.

Start with a materiality-driven segmentation. Map Scope 3 categories against financial, operational, and reputational risk. Then assess which data streams are realistically accessible, which can be influenced, and where early wins are most feasible.

Some practical levers:

• Supplier-specific emissions data: Move from spend-based estimates to primary data. In strategic categories, consider requiring product carbon footprints (PCFs) as part of procurement RFPs.

• Embedded carbon in product design: Evaluate emissions across the product lifecycle. Design decisions made early can lock in 80 percent of future emissions.

• Digital tracking tools: Leverage supplier platforms and blockchain-based traceability systems. New technologies can make Scope 3 more visible and auditable.

In our advisory work, we’ve found that the most successful Scope 3 programs are integrated with procurement, product development, and finance—not siloed in ESG teams.

Beyond Data: Engaging the Supply Chain

Scope 3 transformation cannot be solved unilaterally. It requires building influence in systems you do not directly control. This means shifting from enforcement to partnership.

Key actions that have proven effective:

• Supplier engagement programs: Co-develop decarbonization roadmaps with high-emitting suppliers. Offer capacity-building or co-finance key transitions.

• Incentivize with contracts: Introduce climate-linked clauses or scoring in RFPs. Use emissions intensity as a selection metric.

• Transparency expectations: Embed disclosure requirements into supplier onboarding. Offer feedback loops, not just penalties.

Some multinationals are going further. Companies like Unilever, IKEA, and Microsoft are tying executive compensation to supplier climate performance or creating supplier-focused climate funds. These moves signal that Scope 3 is becoming embedded in how firms do business, not just how they report it.

The Risk of Inaction

Firms that delay on Scope 3 face multiple risks:

• Regulatory non-compliance, especially under EU CSRD, SB 253 in California, and evolving UK and Australian reporting frameworks.

• Capital access constraints, as ESG fund managers and insurers increasingly demand full-scope emissions visibility.

• Brand vulnerability, especially for consumer-facing companies. Consumers and watchdogs are quick to call out greenwashing when Scope 3 is excluded.

There is also an operational risk. Many companies assume they have time to act on Scope 3, but fail to recognize that supplier transitions often have long lead times. Retooling a supply chain or shifting to lower-emission materials can take years, and waiting until Scope 3 is mandatory will not leave enough time to respond strategically.

A Strategic Asset, Not a Reporting Burden

Done well, Scope 3 data unlocks value. It can reveal inefficiencies, reduce exposure to volatile commodity prices, and guide resilient procurement decisions. It can also inform product innovation and help companies differentiate in ESG-driven markets.

But unlocking that value requires more than accounting. It demands integrated strategy, cross-functional collaboration, and often, cultural change.

Our team has worked with leaders across sectors to build actionable, scalable Scope 3 frameworks. These projects do not start with software—they start with clarity of purpose, executive alignment, and a commitment to reshaping the value chain.

If your organization is facing the Scope 3 challenge and looking for a practical way forward, we can help.

Ready to Move Beyond Estimates?

Connect with us to explore how we can help you quantify, prioritize, and reduce Scope 3 emissions in a way that supports both compliance and competitiveness. We offer strategic advisory, implementation support, and cross-sector expertise to help your team build a roadmap that works.

Written by: Gasilov Group Editorial Team

Reviewed by: Arif Gasilov, Partner - Sustainability Strategy​​

Meet Our Team →

Frequently Asked Questions (FAQ): Scope 3 Emissions

What are Scope 3 emissions and why do they matter?

Scope 3 emissions are all indirect emissions that occur in a company’s value chain, both upstream and downstream. They typically account for the largest share of a company’s carbon footprint, making them essential to address for credible sustainability and risk management strategies.

How can companies measure Scope 3 emissions accurately?

Accurate Scope 3 measurement starts with mapping material categories, collecting supplier-specific data where possible, and avoiding over-reliance on industry averages. Best practices include using product-level carbon footprints and engaging suppliers for primary data.

Are companies required to report Scope 3 emissions in 2025?

In many jurisdictions, yes. The EU’s CSRD mandates Scope 3 disclosure for large companies beginning in 2025. In the US, California’s SB 253 and potential SEC rules will also require certain companies to report Scope 3 in the coming years.

What are the biggest challenges in Scope 3 reporting?

Common challenges include data availability, supplier engagement, inconsistent methodologies, and lack of internal integration between sustainability and procurement or finance teams. These issues can lead to unreliable estimates and strategic blind spots.

How can companies reduce Scope 3 emissions effectively?

Effective strategies include collaborating with suppliers on decarbonization plans, embedding emissions criteria in procurement, redesigning products for lower lifecycle impact, and using digital tools for better traceability and measurement.