Global awareness of the impact of greenhouse gas emissions on global warming and the climate crisis has increased in recent years. This has led to various initiatives requiring companies and organizations to report these emissions and maintain orderly records of them. Reporting systems are in place in Israel and around the world, but, for the time being, most are voluntary reporting systems. At the same time, when organizations decide to join the voluntary reporting system, they are undertaking to report in conformity with predefined guidelines (in order to ensure reliable monitoring of the data disclosed in reports).

This trend of GHG reporting, coupled with the growing market for socially responsible investments, have convinced companies and organizations that they need to align with the global trends and voluntarily report their greenhouse gas emissions.

The monitoring of greenhouse gas emissions offers many advantages. These include, inter alia, analyzing the nature of the organization’s emissions (and the potential for reducing them), the ability to participate in carbon emissions trading markets, and higher positioning vis-à-vis the investor community.

The reporting process consists of numerous stages, but the first and main stage is analyzing and classifying the organization’s sources of emissions. To this end, three greenhouse gas emission sources (scopes) were defined for reporting purposes. The goal is that reporting of all three scopes will provide a complete and comprehensive picture of all emissions, both direct and indirect, caused by the reporting organization’s activities.

Scope 1, 2, and 3 Emissions

Scope 1

Scope 1 is straightforward and includes only direct emissions (originating from facilities and machinery owned by the organization). An organization’s report of Scope 1 emissions will include, for example, emissions resulting from manufacturing operations; the self-generation of energy (for electricity and heat, for example); the transport of employees, materials, or products (using vehicles owned by the organization); and the like.

Scope 2

Scope 2 is comprised of indirect emissions originating from energy generation for an organization. An organization’s report of Scope 2 emissions will include energy purchased from external parties for use by the organization, i.e., energy emitted by an external party but consumed by the reporting organization. Consequently, these upstream emissions are also considered emissions the organization must report.

Scope 3

Scope 3 encompasses downstream emissions caused by the organization’s supply chain. These include emissions resulting from operations in facilities not owned by the organization, but caused because of the organization’s activities. Scope 3 includes everything not falling under Scope 1 and Scope 2 (but that constitute Scope 1 or Scope 2 emissions for other organizations, such that these emissions are reported several times by different organizations).

The Criticality of Scope 3 Emissions Reporting

Environmental organizations worldwide support the adoption of Scope 3 disclosure requirements, considering the difficulty in mapping all downstream Scope 3 emissions (and the multitude of indirect downstream emissions that every organization causes). For example, the EU’s Corporate Sustainability Reporting Directive, which came into effect in January 2023, requires in-depth ESG disclosures, including comprehensive reporting of Scope 3 emissions.

Scope 3 emissions are becoming a burning and critical issue for both organizations and investors. The European Union is actively advocating the most comprehensive disclosure and reporting obligation possible in relation to Scope 3 emissions, especially since environmental considerations have already been widely expressed in European regulations. Scope 3 emissions are considered the most critical due to the fact that this is the category of emissions over which organizations wield power to significantly and rapidly reduce the carbon footprint (through the heightening of awareness and the implementation of green policies).

Therefore, it appears the demand for comprehensive reporting of greenhouse gas emissions is gaining momentum in the corporate world and is becoming a key issue for investors and from a regulatory perspective. Greenhouse gas emissions reporting requires considerable efforts and preparation. It is worthwhile, however, since even early voluntary reporting will entitle the reporting organization to recognition of future emissions reductions.

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