Scope 1, Scope 2 and Scope 3 - Meaning In Sustainability

Since the 1950s, air pollution has increased significantly worldwide. Deteriorating trends have led to international efforts to protect clean air. The European Union's goal of achieving climate neutrality by 2050 has been increased from the original 40% reduction in greenhouse gas emissions by 2030 to 55%. It is proposed to reduce net greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.

In the context of climate change mitigation and compliance with decarbonisation rules, effective measurement and monitoring of greenhouse gas emissions is essential. In order for a company to develop an effective emission reduction strategy, it is necessary to know the three categories of greenhouse gas reporting, which cover both direct and indirect emissions associated with the organization.

Greenhouse gas emissions are divided into three categories (Scope 1, 2, 3). Scope 1 and 2 emissions are mandatory to report, while Scope 3 is voluntary and harder to follow.

Scope 1: Direct emissions - direct emissions from sources owned and controlled by a company in four subcategories:

• stationary combustion (e.g. fuels)
• mobile combustion (e.g. company vehicles)
• fugitive emissions (e.g. leaks from refrigeration and air-conditioning equipment)
• process emissions (e.g. industrial processes)

Scope 2: Indirect emissions - emissions from the production of energy (electricity, steam and heat) purchased from a utility company.

Scope 3: Non-proprietary indirect emissions- all indirect emissions related to a company's operations that are not covered by Scope 2, including upstream and downstream emissions. Examples:

• Upstream activities: business travel, waste disposal, purchased goods and services
• Downstream activities: investments, franchises, leased assets, products sold
• Transport and distribution: land, sea and air transport, third-party warehousing
• Capital goods: emissions from the production and use of buildings, vehicles, machinery

Monitoring and reducing not only Scope 1 and 2 mandatory emissions, but also Scope 3 emissions can increase transparency in its operations, increase customer trust, and build brand reputation and support.
The Corporate Sustainability Reporting Directive (CSRD) significantly expands both the required level of detail in reporting and the range of businesses involved.

CSRD: Corporate Sustainability Reporting Directive

CSRD will have to be applied from 1 January 2024 by large companies currently covered by the NFRD listed on EU regulated markets with more than 500 employees. For them, reporting is due in 2025.
As of 1 January 2025, the CSRD will affect large companies currently not covered by the NFRD (i.e. companies with more than 250 employees and/or a turnover of EUR 40 million and/or assets of EUR 20 million), for whom the first mandatory reporting is due in 2026.
From 1 January 2026, listed SMEs and other undertakings should start applying, with reports due in 2027. However, SMEs will be exempted from the mandatory application of the Directive until 2028 if justified.

We wrote about sustainability in Microsoft Dynamics 365 Business Central in this article: Sustainability in Microsoft Business Central