Activity-Based vs Spend-Based: Choosing a Scope 3 calculation method

Calculating your Scope 1, 2 and 3 greenhouse gas (GHG) emissions is an integral step in understanding your company’s environmental impact and sustainability performance. The results help steer your emission reduction strategy,  kick-start your emission reduction activities, and support reporting under frameworks such as the Corporate Sustainability Reporting Directive (CSRD) and the Science Based Target initiative (SBTi).

The theory behind the GHG Protocol for calculating your Scope 1, 2 and 3 GHG emissions is straightforward: multiply the quantity of an activity by its emission factor.

As Scope 1 and 2 emissions are under your direct control, the required data is usually available from internal systems. Scope 3 is more complex, as it involves identifying and collecting data from upstream and downstream value-chain activities that sit outside your direct control. It is also important to assign emissions to the correct Scope 3 category (15 in total).

There are two primary methods to calculate Scope 3 emissions. These are the activity-based approach vs. the spend-based approach. The choice of method depends on data availability and the type of value-chain activity involved. Both methods comply with the GHG Protocol, but they differ in data needs and suitability across the 15 Scope 3 categories.

The activity-based approach calculates emissions based on the actual activities or processes in the value chain. This is a detailed approach that requires extensive data collection on all activities in your value chain. This can include:

• The volume of purchased raw materials
• Up- and downstream transportation modes and distances
• Waste streams and waste processing
• The end-of-life treatment of your sold product(s).

This approach gives you a highly detailed breakdown of your Scope 3 emissions sources and provides detailed insights into the environmental impacts of your value chain. Since this is a precise approach, it is suitable for industries or businesses with complex value chains.

The challenge of the activity-based approach lies in collecting all the relevant data points throughout the value chain, but once the data is collected and the emissions are calculated the outcome is highly accurate.

The spend-based approach estimates emissions using financial spend on goods or services, rather than emissions from specific activities. This reduces the burden of data collection as spend data can usually be obtained from internal procurement or supplier data systems. This approach offers an outcome when activity-based data is difficult or impossible to obtain from suppliers.

The outcome of a spend-based Scope 3 calculation offers a high-level overview of your emissions, which is useful for identifying environmental hotspots.

There are three considerations regarding the emission factors for the spend-based approach that you should keep in mind:

1. The emissions factors are based on market averages. The outcome of the calculations will not reflect the specific characteristics of your products or company.
2. The spend-based emissions factors are subject to inflation and exchange rates. This creates complexity when you have suppliers from different countries with a variety of currencies and inflation rates.
3. If prices increase because your suppliers increase their prices (outside of inflation), your spending will go up, resulting in higher emissions. This logic also applies the other way around, if you find a supplier that offers a lower price, on paper your environmental impact will decrease, while the actual environmental impact of your product has not changed considering all other factors being equal.

The table below details the key differences between the activity-based and spend-based approach to calculating Scope 3 emissions.

Activity-based calculations generally take more time and budget, but provide a more accurate calculation of emissions. Spend-based calculations are quicker and are valuable for an initial assessment of your environmental hotspots.

A key consideration between approaches is the efforts required for data collection. When using the spend-based approach, data points are in-house in procurement or supplier data systems. However, the activity-based approach requires engagement with actors in your value chain to obtain relevant data. This gives you more precise data but costs you more time and effort. If you aim to accurately calculate your Scope 3 emissions, but you realise that activity-based data is challenging to obtain, the GHG protocol allows you to mix methods.

To combine the spend-based and the activity-based methods, the most suitable calculation approach should be selected for all material scope 3 categories. Some categories can be assessed both with an activity-based and a spend-based approach. For other categories, only one specific type of calculation approach can be applied.

Activity-based vs spend-based methods both enable compliant Scope 3 reporting, but the choice between them depends on the specific needs, data availability, resources, and objectives of your company. While activity-based calculations offer a granular and accurate perspective, spend-based calculations provide a simplified and indirect estimation.

Many companies use a combination of both methods to achieve a comprehensive understanding of their environmental impact and make informed decisions to reduce their carbon footprint throughout the value chain.

If you have any questions or are interested in a conversation about the practicalities of Scope 3 calculations, Ecomatters is happy to support and is open for a sustainable collaboration. Get in contact with us for more information.