Scope 3 emissions: the next big test for corporate climate action

Why Scope 3 is moving up the agenda

For many companies, the largest share of greenhouse gas emissions does not come from their own operations but from their up- and downstream supply chains. These Scope 3 emissions - distinct from Scope 1 (direct emissions from owned/controlled sources) and Scope 2 (purchased electricity and heat) - include everything from purchased goods and raw materials to product use and end-of-life disposal. CDP research shows that among their global disclosers, reported upstream Scope 3 emissions can be up to 26x greater than operational emissions (Scope 1 and 2) in sectors like retail, manufacturing and materials.

While the gap between current Scope 3 reduction achievements and future reduction needs is significant, so are opportunities. This gap is increasingly being addressed by regulation (Corporate Sustainability Reporting Directive, CSRD), target setting standards (Science Based Targets initiative, SBTi) and carbon pricing (EU Emissions Trading System, ETS, and Carbon Border Adjustment Mechanism, CBAM). The CSRD required Nordic companies to report Scope 3 emissions starting in 2024, with listed SMEs following from 2026 onwards. The CBAM introduces direct costs on importing carbon-intensive materials such as steel, aluminium, cement and fertilisers. Finally, investors are increasingly incorporating Scope 3 performance into their assessments of firm risks, growth outlook and cost of capital.

Early movers have significant opportunities that extend well beyond compliance – from uncovering inefficiencies, risks and cost exposures to identifying new revenue. BCG and EcoVadis find that supply chain decarbonisation delivers a 3-6x return on investment, primarily through avoided future carbon costs, risk reduction and operational efficiencies. By 2030, corporates could face over $500 billion in potential annual cost exposure from Scope 3 emissions under projected global carbon pricing scenarios.

Where companies stand: a view from Nordea’s client base

Analysis of Scope 3 target setting across 23 sectors within Nordea’s corporate client base reveals that fewer than half of companies in most sectors have set any form of Scope 3 target (see Table 1).

Table 1: Share of target setting per sector, Nordea portfolio

* Target counted if Scope (S) is net-zero supply chain, S1+2+3, S1+3, or S3. Source: Nordea 

Utilities and wholesale trade clients lead the way, with 53% setting Scope 3 targets, likely reflecting their exposure to the EU ETS or high Scope 3 emissions. Mining (20%) and air transportation (30%) lag behind, partly because a larger share of their emissions falls within Scope 1 and 2. Corporate size also plays a role: smaller companies are less likely to set Scope 3 targets, potentially due to delayed regulatory and market pressures.

However, Scope 3 is not only relevant for companies directly subject to CSRD. Since CSRD-covered companies require data from their suppliers, many of whom fall below the CSRD thresholds, the directive’s reach extends well beyond its formal scope. Companies throughout the supply chain are increasingly likely to face data requests from customers, lenders and investors, regardless of whether they are required to report themselves.

What drives Scope 3 and why it differs across sectors

Four factors typically shape a company’s main Scope 3 footprint:

• The volume of purchases
   
• Emission intensity of purchases
   
• Transportation distances involved
   
• Emissions from the usage of sold products

These emission factors affect sectors differently. An apparel company’s Scope 3 emissions are typically dominated by raw material volumes and associated agricultural land use. A Nordic machinery manufacturer is more exposed to the energy and emission intensity of producing steel and aluminium components. All companies are affected by the grid emission factor of the region where their supply chains operate. On the positive side, relatively clean Nordic electricity grids provide an emissions advantage over purchases from markets with coal-heavy electricity grids.

Companies that calculate emissions based on actual purchased materials, energy sources, and transport distances – rather than using average emission factors – are finding that geographic sourcing choices directly impact their Scope 3 profiles. While average emission factors provide a useful starting point, calculations can be distorted by inflation and pricing factors. As firms mature in their approach, calculating actual emissions is advisable as this method accounts for real emission reductions and enhances supply chain resilience.

What leading companies are doing

Analysis of Nordea’s leading customers reveals a common approach: They set a science-based target to reduce Scope 3 emissions in the near-term, alongside a net-zero target. Reaching the Scope 3 target often requires extending emissions engagement beyond first-tier suppliers and mapping the carbon embedded in purchases and materials sourced across multiple geographies. This work produces not only an emissions baseline, but a clearer picture of supply chain structures, costs and risks. Companies leverage these insights to reduce Scope 3 emissions and to build more resilient supply chains. 

CDP research confirms two key success factors: i) companies with active supplier engagement programmes are nearly 7x more likely to have a 1.5°C-aligned transition plan, and ii) boards with clear climate-accountability are 5x more likely to have approved a Scope 3 target in the first place. This demonstrates that a strong governance commitment is a prerequisite for effective operational implementation.

Getting started

Despite limited visibility beyond first-tier suppliers, uneven data quality, and challenges in influencing downstream emissions, companies are beginning to work on Scope 3 to capture benefits, including better risk management, lower costs and competitive advantage. Fortunately, the threshold to start is often lower than expected. ESRS (see chapter 5.2) permits estimates and proxy data where primary data is unavailable, with the expectation that quality improves over time. Even a spend-based screening can reveal that the majority of supply chain emissions are concentrated among a small number of suppliers or geographies, a finding with both sustainability and commercial relevance.

Companies that approach Scope 3 as an opportunity to understand their supply chains more deeply, rather than solely as a reporting requirement, are well-positioned to meet regulatory obligations while capturing operational and strategic benefits. 

Nordea supports the climate transition of Nordic and European companies through sustainability advisory, financing and analytical services for large as well as small and medium-sized corporate customers. We are happy to discuss how Scope 3 fits into your company’s sustainability and growth journey.