By Verco

Scope 3 emissions is a term that is thrown around by sustainability professionals a lot, but for those outside of the ESG sphere, it might not be clear what these emissions are and the impact they have on your sustainability journey. Verco’s Real Estate team support clients to address the challenges through practical action and Scope 3 carbon accounting. This brief article introduces the concept of Scope 3 emissions, how they apply to the real estate industry, and how they might be integrated in future business strategies.

A back to basics look at the three scopes

First published in 2001, the Greenhouse Gas (GHG) Protocol introduced the concept that GHG emissions fall under one of three categories;

  • Scope 1 – Direct GHG Emissions
  • Scope 2 – Indirect GHG Emissions from Purchased Energy
  • Scope 3 – Other Indirect GHG Emissions

This categorisation primarily relates to the level of control and influence the reporting entity has over the emissions source. For this reason, historically, Scopes 1 and 2 have been prioritised in sustainability reporting and associated strategies, as it is easier to gather data and implement change in these areas. Scope 3 emissions are far harder to accurately track and were defined as an optional reporting category by the GHG Protocol, and have largely been deprioritised as a result.

However, in recent years, the climate crisis has increased Scope 3 disclosure requirements from investors and regulators.  Organisations have also started monitoring and reducing their Scope 3 emissions to manage low carbon transition risks and as market differentiators, including commercial tenants looking to engage with landlords that have better sustainability credentials. But what are these other indirect emissions?

Four important indirect emissions (scope 3) sources for real estate

The coupling of the terms “other” and “indirect” provide an almost infinite boundary with which reporting entities must work. The first challenge therefore lies in the identification of material emissions sources, and in 2013, the GHG Protocol published technical guidance that introduced 15 categories to provide a consistent framework. By definition one entity’s Scope 3 is another entities Scope 1 and 2, driving shared accountability and fostering the need to collaboration in our complex and interconnected world.

In the real estate industry, three emissions sources dominate Scope 3 footprints for direct investments. Financial investments are then accounted for under the a separate category.

Emissions SourceGHG Protocol Scope 3 CategoryDescription
Embodied Carbon1 – Purchased Goods & ServicesAll upstream (cradle to gate) emissions from goods and services purchased or acquired by the reporting company that would be classified as operational expenditure (rather than capital expenditure). For real estate this ranges from repair and maintenance of fabric and plant, through to technical advisory and on-site facilities management services such as cleaning and security.
Embodied Carbon2 – Capital GoodsUpstream emissions from goods that classify under capital expenditure. Typically, in real estate, this captures the embodied emissions associated with production of construction materials and development processes. This source of emissions will vary in intensity depending on the type of project (refurbishment or new development).
Occupier energy use13 – Downstream Leased AssetsEmissions associated with the energy use of occupiers are particularly prominent for commercial portfolios with large quantities of submetering or Tripple Net or FRI leases, where the occupier takes full liability for repair and maintenance as well as taxes, insurance and utilities.   Due to the GHG Protocol definitions of boundaries and levels of control, where the owner manages the asset these emissions only fall within the entity’s Scope 3 if the energy is paid directly or submetered to the tenant. For leases operating on an alternative charging mechanism (e.g. service charge), these emissions fall under the landlord’s Scope 1 and 2.
Financed emissions, including investments and debt15 – InvestmentsEmissions associated with investing in projects and assets on a separate entity’s balance sheet. This is a more nuanced source of emissions that is heavily dependent on the selected consolidation method for GHG accounting and the relationship between the reporting entity and the financed operations. The sophistication of guidance in this area is rapidly evolving in line with market needs for clarity.

The data challenge

As the market has matured over the last decade, and a greater number of organisations have started investigating how best to measure and reduce their Scope 3 emissions, it has become abundantly clear that collecting relevant and high quality data is a major challenge.

One well recognised issue is for an asset manager to access information on an occupier’s utilities, required to calculate their associated emissions, Category 13. Years of precedent in landlord / tenant interactions, with all too often an adversarial relationship and split incentives, has limited landlord visibility on tenant consumption data. This means that the use of benchmarks is often the only way to calculate Category 13 emissions, to identify potential performance improvements and assess assets at greater exposure to transition risk.

Another area that’s only just starting to gain serious traction across the value chain are upstream embodied carbon emissions, Categories 1 and 2. Detailed and validated embodied carbon assessments for evaluating impacts of materials and products are accessible through Environmental Product Declarations (EPDs). However, their availability in the market is still critically low, hampering accurate analysis. Most organisations are currently relying on industry averages and very high level ‘spend factors’ to calculate carbon emissions from financial values, or single intensity values to derive values at the project level.

How to move forward

When uncertainty and ambiguity could simply mean deferment and delay we encourage a straight forward three step approach:

Step 1. Calculate current performance and baseline.

Identify your largest emission sources while understanding data availability and quality. Use available data sets to calculate current performance and a baseline.

Step 2. Take action.

Understand your operational decision points and potential for influence through improving management information, specifications and procurement. The real challenge here is to accept the current market conditions, as we cannot wait for perfect measurement before taking action.

Step 3. Develop a data strategy.

Prioritise your greatest emission sources to increase access and quality of key data. Move up the data quality hierarchy from economic intensity factors, to physical intensity to increasingly specific emission data. This will enable you to build confidence in your carbon accounting over time and target your material emission sources.

These steps are particularly true for purchased goods and services, where suppliers provide generalised data at best and often nothing. It’s simply not practical to require all providers to include detailed embodied carbon data from day one, so it comes down to a strategy of engagement, and then partner and supplier selection over time.

Collaboration and joined-up thinking are essential

As outlined above, tenant data collection remains a challenge to the industry. However, increasing recognition of the importance by occupiers, data sharing clauses in lease agreements and access to the energy industry data bases are starting to a addressing these. While this improves data quality it does nothing to reduce emissions. There may be lots of unintrusive ways to improve operational performance but to make the deep cuts in emissions required organisations operating as landlords will have to build a programme of;

  • Empowering occupiers through tenant engagement programmes,
  • Incentivising with cost and reward sharing, and
  • Enforcing through green leases and potentially even exclusion where occupiers are unwilling to work together.

For organisations heavily involved with development projects; collaboration with partners and the value chain will be crucial for the improvement of data quality and accessibility of EPDs, while supporting innovation at a project level. However, as with so many of these wicked problems, we also need change to be driven at a broader industry level, through collaboration and individual organisational advocacy to ensure widespread transformation in sector-wide practices.

Integrating Scope 3 emissions into your portfolio’s transition (net zero carbon) plan will manage risk and give greater focus on where and how to integrate carbon accounting principles into operations. This will also allow for the identification of crossovers with other sustainability initiatives that may currently be in development as emissions are not the whole picture, particularly when considering your organisation’s indirect impact.

Join our UKREiiF panel session: Tackling Scope 3

To hear more on real life experiences of managing the scope 3 challenge in Real Estate, join our panel session at UKREiiF. Verco’s Head of Real Estate Andries VanDerWalt, will be chairing a panel: Tackling Scope 3.

Date: 23rd May

Time: 13.45-14.45. 

Location: Newsroom Stage at the Royal Armouries.

We will be taking a look at the different aspects fo the scope 3 challege with case studie examples from our expert panel:

Panel member 1: Jennie Coleville, Head of ESG and sustainability, LandSec

Panel member 2: Emma Williamson, Director and Global Lead on Net Zero Carbon Investment, M&G Panel member 1: Jennie Coleville, Head of ESG and sustainability, LandSec

Panel member 3: Ceire Kenny, Sustainable Futures Manager, Lendlease

Panel member 4: Dr Miguel Godfrey, Head of Sustainability, Government Property Agency

. There will be opportunity for questions from the audience.  Please click here to find out more.

Register for our webinar: Solid strategies to conquer scope 3 in real estate.

For an overview of the different scope 3 challenges by investment strategy and detail on how to approach them, join our webinar on 19th June.  Find out more and register here: https://www.vercoglobal.com/latest/webinar-solid-strategies-to-conquer-scope-3-in-real-estate

Authors: Ben Ross and Luke Riseborough