From scope 3 to scope 3+: Scaling innovations to accelerate decarbonization

The window we have to safeguard our society from catastrophic climate disasters is fast closing if we do not act now, as the latest report by the Intergovernmental Panel on Climate Change (IPCC) made clear.

And if we don’t innovate new approaches to expedite greenhouse gas (GHG) emission mitigation in the next seven years, we will lose the battle against climate change.

Companies around the world are increasingly alert to the climate emergency, facing calls from a growing range of stakeholders to take responsibility for the environmental impact of their activities, with reducing GHG emissions being the top priority.

Corporate carbon emissions are categorized into three groups or “scopes” by the most widely used international accounting standard, the Greenhouse Gas (GHG) Protocol.

Scope 1 covers direct emissions from owned or controlled sources, scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting company and scope 3 includes all other indirect emissions that occur in a company’s value chain.

According to the World Economic Forum’s report Net Zero Challenge: The Supply Chain Opportunity (2021), food, construction, fashion, fast-moving consumer goods, electronics, automotive, professional services and freight supply chains account for more than 50% of global emissions. That is to say, the largest innovations are the ones that are aimed towards the value chains.

The measuring and controlling of scope 3 emissions involves tracking activities across the entire value chain – from suppliers to end users. It is needed to take sustained and holistic collective action across the industries.

Many corporates find it difficult to generate solutions and undergo business transformation for deep decarbonization, as it needs innovative ideas, technology, talents and, perhaps most importantly, capital, to address major gaps in necessary information and capabilities. In addition, not all efforts or the value of these solutions have been well recognized and credited.

Various attempts have been made to innovate and incentivize more innovations. Alibaba, for example, proposed scope 3+, an additional category of emissions generated by a wider range of stakeholders within a company’s business ecosystem, in its Scope 3+ Emissions Reduction Methodology Report.

Scope 3+ emissions reduction could be achieved through two types of activities – enablement and engagement. Enablement means a company provides a substitute solution (i.e. product or service) that enables the same function to be performed with less emissions, while engagement means a company intervenes through engaging (e.g. match-making, technical assistance, incentives) with stakeholders to help them reduce emissions.

Scope 3+ decarbonization, by definition, is equivalent to what was broadly defined as avoided emissions, a concept that has been discussed for a decade by leading professional organizations, such as WRI and WBCSD who set up the GHG Protocol.

The role of scope 3+ decarbonization used to be primarily defined in digital solutions. Innovative technologies within the information and communications technology (ICT) sector, for instance, can help other industries to reduce more carbon emissions, avoiding 20% of the global emissions by 2030 compared to 2015, according to the Global e-Sustainability Initiative (GeSI) research.

Cloud computing is among a new generation of emerging ICT technologies that can aggregate computing resources to achieve higher energy efficiency than traditional internal data centres.

For example, compared with other data centres with more low-utilization servers operating at the same time, Alibaba Cloud could run fewer high-utilization servers while meeting the same needs.

Cloud customers in China can avoid 85.5% of their computing emissions by moving to Alibaba Cloud from on-premise equivalents and in the 2023 fiscal year Alibaba Cloud enabled more than 6 million tons of scope 3+ reduction.

Business model innovation, such as linear economy to circular economy, is an essential part of catalysation. Idle fish, the largest recommence platform for trading recycled, refurbished and secondhand items in China, has put many efforts to encourage public participation in climate action. This type of platform has the potential to help reduce millions of tons of carbon emissions on an annual basis.

Financial sectors are also acting. Asset management company Mirova & Robeco recently led an initiative to develop global database of avoided emissions factors to quantify company-level avoided emissions.

A Framework for Avoided Emissions Analysis, which was published by GIC (Government of Singapore Investment Corp) & Schroders, calls to take avoided emissions analysis as a pivotal step to evaluate investment value of companies.

In November 2021, the People's Bank of China created a carbon-reduction supporting tool to provide low-cost loans for financial institutions, which were guided to provide loans to corporates in key carbon-reduction fields, including clean energy, energy saving and carbon reduction technology.

More social funds were leveraged to participate in the low-carbon economy. By the end of April 2023, the tool has supported financial institutions to issue loans of approximately CNY 670 billion, driving carbon emission reductions of more than 150 million tons.

Championing companies like Alibaba are accelerating the development innovative solutions to incentivize the wider ecosystem decarbonization. A strengthened partnership will be playing a vital role in this journey.

Towards the carbon goals set by China and across the international community, partnerships and innovations always sit at the very centre. This ambition needs to be constantly raised to ensure we’re seizing the seven-year window left in this critical decade.

Including scope 3+ emissions is a crucial way of achieving this. But, even more importantly, such bold ideas need to be translated into concrete actions by fostering consensus and stronger cooperation to tackle the impact of climate change.

A version of this article was also published on the Yicai Global website.