Authors: Carli Schoenleber, Sean Birnbaum, Akshata Shanbhag, Jamie Bemis
September 26, 2024
The commercial real estate (CRE) sector is confronting a new climate reality: achieving net zero requires navigating the complexities of scope 3 emissions. These indirect emissions, which stem from activities across a company’s value chain, can account for up to 95% of a real estate company’s total carbon footprint, according to Morningstar Sustainalytics.[1] This has prompted CRE leaders to realize that decarbonization efforts must start long before a building is constructed and continue well after tenants occupy the space. Although more difficult to measure and mitigate than scope 1 and 2 emissions, addressing scope 3 emissions is essential for CRE companies seeking to set comprehensive and credible net zero targets.
Scope 3 Emissions Reporting: Drivers and Trends
The regulatory landscape for scope 3 disclosures is evolving rapidly across key regions:
In 2023, California passed SB 253, requiring public and private companies to report scope 1, 2, and 3 emissions, starting as early as 2026 for scope 1 and 2 and 2027 for scope 3.[2]
In the EU, companies will begin publishing their first reports in 2025 under the 2022 Corporate Sustainability Reporting Directive (CSRD), which mandates scope 1, 2, and 3 emissions reporting alongside other sustainability disclosures, according to the European Sustainability Reporting Standards (ESRS).[3]
While the SEC dropped its scope 3 mandate in its 2024 climate-related disclosure rules, companies may still need to disclose qualitative information on material scope 3 targets or goals.[4] The SEC put a stay on the rules on April 4, 2024, pausing implementation until legal challenges have been settled.[5]
The IFRS Sustainability Disclosure Standards, although not mandated until adopted by specific jurisdictions, also require scope 3 reporting. Designed to become the global baseline for sustainability financial disclosures,[6] these standards are expected to be adopted in countries like the United Kingdom, Australia, and Singapore.[7]
Beyond scope 3 disclosures, the CRE industry is also facing regulatory scrutiny over embodied carbon, a significant component of upstream scope 3 emissions. Embodied carbon primarily refers to the carbon emissions generated from building materials and construction processes. In 2023, California pioneered advanced building code changes that limit embodied carbon emissions in commercial buildings,[8] while Vancouver, Canada, began requiring new developments to limit embodied carbon and conduct whole-building life-cycle assessments.[9] In Europe, the Carbon Border Adjustment Mechanism is adding further pressure on the market to reduce embodied carbon by imposing taxes on high-carbon imports such as steel and concrete.[10]
Even companies not directly subject to these regulations are feeling pressure from investors who use scope 3 disclosures to evaluate a company’s climate risks.[11] Major global asset manager BlackRock recently published new climate and decarbonization stewardship guidelines that require material scope 3 emissions disclosure for funds with explicit decarbonization objectives.[12] According to MSCI, more than 40% of public companies globally are already reporting on at least a portion of their scope 3 emissions.[13]
As the importance of scope 3 emissions grows, the real estate industry is steadily developing tools and initiatives to help companies set targets, measure, and report these complex emissions more effectively. Advancements like Lendlease's Scope 3 Emissions Protocol are paving the way for more standardized practices in scope 3 measurement and reporting, helping to scale and accelerate efforts across the industry.[14] The industry has also seen the rise of building-focused decarbonization commitment initiatives that provide guidance on scope 3 target setting, including the Science Based Targets initiative's buildings sector target-setting criteria (released August 2024) and the World Green Building Council’s Net Zero Carbon Buildings Commitment.[15][16] The upcoming LEED v5 standard is further expected to place greater emphasis on embodied carbon, encouraging reductions in scope 3 emissions for both new developments and renovations.[17]
Frequently Asked Questions: Scope 3 Emissions for CRE
Given the rising regulatory pressures, investor expectations, and industry initiatives, it is crucial for real estate owners to begin systematically measuring scope 3 emissions as part of their sustainability programs. However, embarking on the scope 3 journey is often more complex than what many companies are accustomed to with scope 1 and 2 emissions. Drawing from our discussions with commercial real estate clients, we’ve compiled a list of frequently asked questions to help companies better understand scope 3 emissions in CRE, how to identify and measure these emissions for reporting, and how they fit into broader corporate sustainability strategies.
Scope 3 emissions refer to the indirect emissions that result from activities within a company’s value chain but are generated by assets or activities not owned or directly controlled by the company. These emissions can be divided into two categories: upstream and downstream.
Upstream scope 3 emissions, associated with the "cost of doing business," are generated from activities that go into creating a company's product or service. For real estate, these emissions often result from the production and transportation of construction materials and building systems, waste disposal during construction, fuel extraction, business travel, and corporate office operations.
Downstream scope 3 emissions are the emissions that result from the use of a company’s products or services by its customers or clients. They can be thought of as the emissions associated with a company’s revenue streams. In real estate, they mostly stem from tenant energy consumption and the disposal of materials during demolition or decommissioning. This category also includes financed emissions related to investments such as joint ventures, mortgages, and lending.
Effectively, scope 3 emissions can be understood as the scope 1 and 2 emissions of other entities in a company’s value chain, whether they supply products or services to the company (upstream) or use the company's products (downstream).
The most relevant frameworks for real estate companies looking to understand scope 3 emissions include GRESB, CDP, the UK Green Building Council’s Net Zero Carbon Buildings Standard, and the Partnership for Carbon Accounting Financials’ Global GHG Accounting and Reporting Standard for the Financial Industry. Notably, all of these sector-specific frameworks ultimately reference the GHG Protocol, which provides comprehensive, sector-agnostic guidance on measuring and reporting scope 3 emissions, making it the foundational standard and an essential resource for real estate companies beginning their scope 3 journey.
Because scope 3 emissions often constitute the largest share of a company’s carbon footprint, addressing them is essential to mitigating climate change and advancing decarbonization efforts. In the process of measuring and mitigating these emissions, companies are required to collaborate and engage with external partners across their value chain. This process not only gives the company a deeper and more comprehensive understanding of their value chain emissions but also empowers them to take more strategic, informed actions that accelerate their decarbonization and sustainability efforts. Evaluating scope 3 emissions allows companies to:
Identify emission hotspots in their value chain, helping to prioritize areas for targeted reduction efforts
Recognize which suppliers are excelling or falling behind in sustainability, enabling more informed decisions in supply chain management
Inform decisions across procurement, product development, and logistics, focusing on interventions that deliver the most impactful emission reductions
Encourage product innovation to create more sustainable and energy-efficient products
Reporting scope 3 emissions provides crucial visibility to stakeholders, including investors, suppliers, customers, and lenders. It demonstrates that a company is actively managing its supply chain in a responsible and climate-conscious manner, while also identifying risks and areas for improvement. By providing this transparency, key stakeholders can make informed decisions regarding their engagements with the reporting company:
Investors may choose to increase or decrease their investment based on how effectively the company is managing its scope 3 emissions, as these emissions impact climate risk exposure.
Lenders could evaluate a company’s climate-related risks more accurately, which may affect lending terms, such as interest rates or the availability of green financing options.
Suppliers can adjust their own operations or emissions-reduction strategies to align with the company's climate goals, ensuring they remain a preferred partner in the supply chain.
Customers may select or maintain relationships with companies that are taking substantial steps to reduce their impact on climate change, thus aligning with their own sustainability goals.
A scope 3 inventory involves the process of collecting and computing emissions data from activities across a company’s value chain. Before starting this process, it is recommended to perform a materiality assessment to determine which of the 15 scope 3 categories from the GHG Protocol Scope 3 Accounting and Reporting Standard are most relevant to the organization. This allows the company to focus on key areas that contribute significantly to its carbon footprint.
Once the material categories are identified, the company gathers activity data related to these categories, such as miles driven, electricity used, or the tonnage of materials consumed. This data is then multiplied by emissions factors associated with each activity to calculate the emissions in metric tons of CO₂ equivalent (MTCO₂e). A spend-based approach can be used initially to estimate emissions, but direct activity data is preferred for greater accuracy.
For CRE, it may be useful to normalize the data to reflect the organization’s asset footprint, such as expressing emissions per square foot (kgCO₂e/SF). This allows companies to compare their scope 3 emissions against their scope 1 and 2 emissions and track changes over time.
Like scope 1 and 2 inventories, a scope 3 inventory should be conducted annually, and it is essential to streamline data collection processes to ensure efficient reporting.
Determining which scope 3 emissions are material to your organization requires evaluating all 15 categories of scope 3 emissions across several key parameters. These include factors such as:
Relevance: Is this emissions category relevant to the organization’s value chain?
Reduction influence: How much impact can the organization have in reducing emissions within this category?
Corporate risks: Are there risks associated with not addressing emissions in this category, such as regulatory compliance or reputational harm?
Stakeholder sentiment: How important is this category to investors, customers, or other key stakeholders?
Outsourcing reliance: Does the company rely heavily on external suppliers or contractors for activities within this category?
Sector guidance: Are there industry-specific guidelines or best practices that highlight the importance of this category?
Spending or revenue analysis: How much does the company spend on activities related to this category, or how much revenue does it generate from these activities?
Emissions size: How large is the carbon footprint associated with this category?
Scope 3 data can often be found within an organization's financial records, particularly associated with business expenditures, revenue streams, financial liabilities, and investments represented on the corporate balance sheet. Entries related to scope 3 emissions may include the following:
Rental revenues
Capital expenditures for construction and demolition
Operating expenses for business travel, employee commuting, and leased corporate offices
Capital gains from real estate investment or lending transactions
In some cases, it may be necessary to delve deeper into financial ledgers to uncover data detailed enough to correlate with specific scope 3 categories. This underscores the importance of establishing clear processes for tagging business transactions with relevant scope 3 emissions information across the company’s financial systems.
Yes, companies can estimate scope 3 emissions using spend/revenue data related to their business activities, though this approach is less accurate. Estimates should be made when direct activity data is unavailable (e.g., energy use, miles traveled), and after a materiality assessment has been completed to ensure only the most relevant scope 3 categories are included. Spend/revenue data can be used for initial estimates, but the goal should be to gather more direct activity data over time to increase the accuracy of the scope 3 inventory.
Scope 3 emissions are closely linked to an organization’s value chain, meaning effective management requires engaging with external stakeholders like tenants, suppliers, and contractors. In the CRE sector, tenant engagement is key to reducing downstream emissions, such as those from energy use and waste generation in buildings, while engagement with suppliers and contractors focuses on upstream emissions, like the carbon footprint of building materials and construction processes.
Although the CRE industry only recently matured in reporting scope 1 and 2 emissions, investor pressure and evolving regulations are rapidly shifting the focus toward understanding the relevance of scope 3 emissions from a company’s value chain, enabling a more comprehensive view of a company’s environmental impact and risk profile. Aligning with these pressures, prominent ESG reporting frameworks for real estate companies (e.g., GRESB, CDP) are raising their expectations for companies to disclose scope 3 emissions alongside scope 1 and 2.[18][19]
As scope 3 emissions become integral to ESG reporting, companies must allocate additional time and resources to thoroughly assess and inventory their emissions. This meticulous preparation is crucial for delivering complete and credible disclosures that satisfy growing stakeholder demands and withstand regulatory scrutiny.
It's also important to recognize that scope 3 emissions aren't the only aspect of ESG reporting expanding into the value chain, making it crucial for companies to streamline data collection efforts. For example, as nature-focused frameworks like the Taskforce on Nature-Related Financial Disclosures (TNFD) and Science Based Targets for Nature (SBTN) gain traction, companies may find it efficient to conduct a scope 3 inventory alongside nature reporting due to overlapping data requirements.
Conclusion
Scope 3 emissions are a critical component of a real estate company’s carbon footprint, accounting for upwards of 95% of total emissions. Given their significance, it is essential for key stakeholders to understand the company’s exposure to these indirect emissions across its value chain. Equally important is identifying which scope 3 categories are most material to the business and determining how the company can exert influence over these emissions to drive meaningful reductions.
Achieving comprehensive decarbonization, aligned with a 1.5°C scenario, is essential for both the CRE industry and individual companies aiming to contribute to the global decarbonization effort. This journey begins with a robust scope 3 materiality assessment, ensuring that companies focus on the most impactful categories. Companies can leverage established frameworks, such as CDP or UKGBC, to guide them in this process.
Once key categories are identified, the company can proceed to conduct annual scope 3 inventories alongside scope 1 and 2 assessments. This will enable full transparency on emissions across all business activities, providing stakeholders with a complete view of the company’s environmental performance. More importantly, this regular inventory process demonstrates the organization's commitment to decarbonization and showcases how reducing emissions can enhance financial performance while mitigating exposure to climate-related transition risks. By proactively managing scope 3 emissions, CRE organizations can position themselves as leaders in the transition to a low-carbon future.
Authors
Carli Schoenleber
Carli is a Senior Communications Manager, Content and Engagement Specialist, for Verdani Partners, leading thought leadership and the Engagement Committee. She has a decade of experience in the sustainability field, working across diverse roles in environmental communication research, environmental planning, marketing, and wetland science. She holds a B.S. in Environmental Science, Policy, and Management from the University of Minnesota and a M.S. in Forest Ecosystems and Society from Oregon State University.
Sean Birnbaum
Sean is a Senior Director of Engineering at Verdani Partners and co-chair of the Decarbonization Committee. With over 10 years of experience in sustainability, energy management, renewable energy, decarbonization, and ESG strategy in the built environment, he oversees the technical strategy for two of Verdani's largest clients with 2800+ assets across 20 countries. Sean holds a B.S. in Mechanical Engineering from the University of Nevada, Las Vegas, an M.S. in Green Technologies from the University of Southern California, and an Executive MBA from the Quantic School of Business and Technology. He is also a licensed Professional Mechanical Engineer, Certified Energy Manager,
LEED-AP, and Fitwel Ambassador.
Akshata Shanbhag
Akshata is an Engineering Manager at Verdani Partners, overseeing the technical services scope for diverse client portfolios and serving as a key member of the Decarbonization Committee. With a B.E. in Electrical Engineering and six years of experience in the private utility sector, she played a crucial role in ensuring grid reliability for a large consumer base in Mumbai, India. Notably, she developed a company-wide procedure for the installation and monitoring of grid-tied solar rooftop projects. Driven by her interest in grid modernization and decarbonization, Akshata earned an M.S. in Sustainable Engineering to further advance solutions on the demand side.
Jamie Bemis
Jamie, Senior Director of ESG and Head of Decarbonization at Verdani Partners, has over 12 years of experience in corporate ESG, sustainability, and decarbonization. Leading Verdani's Decarbonization Committee, she spearheads the development of resources and tools for client decarbonization programs. Her career spans public, private, and academic sectors. Jamie holds a BS in Mechanical Engineering from the University of New Hampshire and a Masters in City Planning from MIT, focusing on sustainability planning and energy efficiency.
References
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