A Complete Guide to Corporate Carbon Emissions and ESG Reporting

When companies begin their ESG journey, one of the first technical questions they encounter is:

What are Scope 1, Scope 2 and Scope 3 emissions?

Understanding these three categories is essential for measuring a company’s greenhouse-gas footprint, setting climate targets, preparing sustainability disclosures and identifying opportunities to reduce emissions.

The GHG Protocol provides the widely used framework for corporate greenhouse-gas accounting. It categorises emissions into Scope 1, Scope 2 and Scope 3 based on where the emissions occur and their relationship with the reporting company’s activities.

1. What Are Scope 1, 2 and 3 Emissions?

Corporate greenhouse-gas emissions are generally divided into three categories:

Scope 1 – Direct Emissions

Emissions from sources that are owned or controlled by the company.

Scope 2 – Purchased Energy Emissions

Indirect emissions associated with the generation of purchased or acquired electricity, steam, heating or cooling consumed by the company.

Scope 3 – Other Value-Chain Emissions

All other indirect emissions occurring throughout the company’s value chain that are not included in Scope 2.

A simple way to remember them is:

Scope 1 = What we directly emit

Scope 2 = What our purchased energy causes

Scope 3 = What happens across our value chain

2. What Is Scope 1?

Scope 1 represents direct greenhouse-gas emissions from sources owned or controlled by the reporting organisation.

Typical examples include:

• Fuel burned in company-owned boilers
• Diesel used in company-owned vehicles
• Petrol used in company-owned cars
• Natural gas consumed in manufacturing equipment
• Emissions from industrial processes
• Fugitive emissions from refrigeration systems
• Fuel used in generators

For example, if a manufacturing company operates a diesel generator and burns diesel at its own facility, the resulting direct emissions generally fall under Scope 1.

Similarly, emissions from a company’s owned fleet can be Scope 1.

3. What Is Scope 2?

Scope 2 covers indirect emissions associated with the generation of energy purchased or acquired by the company.

The GHG Protocol specifically identifies purchased or acquired:

• Electricity
• Steam
• Heating
• Cooling

as Scope 2 sources.

For example, imagine that an office consumes electricity purchased from the electricity grid.

The office itself may not physically generate the electricity. However, emissions may occur at the power plant producing that electricity.

Those emissions are generally accounted for by the electricity consumer as Scope 2.

Example

A company consumes:

1,000,000 kWh of purchased electricity

The company can use an appropriate emission factor to estimate the associated greenhouse-gas emissions.

This becomes part of its Scope 2 inventory.

4. What Is Scope 3?

Scope 3 is generally the most extensive and challenging category.

It includes other indirect emissions occurring in a company’s value chain that are not included in Scope 2.

Scope 3 can include emissions associated with:

• Purchased goods
• Purchased services
• Capital goods
• Fuel- and energy-related activities
• Transportation
• Business travel
• Employee commuting
• Waste
• Leased assets
• Distribution
• Processing of sold products
• Use of sold products
• End-of-life treatment
• Investments

The GHG Protocol Scope 3 framework divides value-chain emissions into 15 categories.

5. Scope 3 Upstream and Downstream Emissions

Scope 3 is generally considered across two broad parts of the value chain.

Upstream

Emissions associated with activities before the company’s operations.

Examples include:

• Purchased raw materials
• Supplier manufacturing
• Transportation of purchased goods
• Business travel
• Employee commuting

Downstream

Emissions associated with activities after the company’s operations.

Examples include:

• Distribution
• Customer use of products
• Product disposal
• Investments
• Processing of sold products

This value-chain perspective is particularly important for companies whose largest climate impacts occur outside their own facilities.

6. Example: Automobile Manufacturer

Consider an automobile manufacturer.

Scope 1

• Natural gas used in factory boilers
• Diesel used in company-owned vehicles
• Fuel used in manufacturing equipment

Scope 2

• Electricity purchased from the grid
• Purchased heating or cooling

Scope 3

• Steel purchased from suppliers
• Aluminium production
• Transportation of raw materials
• Employee travel
• Supplier emissions
• Distribution of vehicles
• Customer use of vehicles
• End-of-life treatment

This example demonstrates why ESG carbon accounting must go beyond the company’s own factory.

7. Why Is Scope 3 So Important?

Scope 3 can be difficult because it requires information from outside the organisation.

Companies may need to engage with:

• Suppliers
• Logistics providers
• Customers
• Distributors
• Employees
• Financial institutions
• Waste-management companies

The GHG Protocol specifically provides a Scope 3 standard to help organisations assess emissions throughout their value chains and identify where reduction efforts should be focused.

For many companies, Scope 3 can represent a significant portion of their overall emissions.

8. Scope 1 vs Scope 2 vs Scope 3

9. How Are Emissions Measured?

Companies generally collect activity data and apply appropriate emission factors.

A simplified formula is:

GHG Emissions = Activity Data × Emission Factor

For example:

Fuel consumed × emission factor = estimated emissions

The resulting emissions are generally expressed as:

kg CO₂e or tonnes CO₂e

CO₂e means carbon dioxide equivalent and provides a common unit for expressing different greenhouse gases.

The GHG Protocol Corporate Standard covers seven greenhouse gases under the Kyoto Protocol framework, including CO₂, methane and nitrous oxide.

10. What Data Should Companies Collect?

A company beginning its carbon inventory should identify relevant activity data.

Scope 1 data

• Petrol consumption
• Diesel consumption
• Natural gas
• LPG
• Refrigerant leakage
• Industrial processes
• Company-owned vehicles

Scope 2 data

• Electricity consumption
• Purchased steam
• Purchased heating
• Purchased cooling

Scope 3 data

• Raw-material purchases
• Supplier information
• Transportation
• Business travel
• Employee commuting
• Waste
• Capital goods
• Product use
• Product disposal
• Investments

Good ESG reporting depends heavily on reliable underlying data.

11. What Is an Emission Factor?

An emission factor is a factor used to estimate the amount of greenhouse gases associated with a particular unit of activity.

For example, a company may calculate emissions based on:

Litres of fuel × relevant emission factor

or:

kWh of electricity × relevant electricity emission factor

The GHG Protocol provides calculation tools and guidance for selecting and applying emission factors.

Companies should document the source and methodology used for their emission factors.

12. What Is the Difference Between Location-Based and Market-Based Scope 2?

Scope 2 accounting can involve different approaches, particularly the location-based and market-based methods.

A location-based approach reflects the average emissions intensity of the electricity grid where consumption occurs.

A market-based approach considers contractual arrangements or instruments through which a company purchases electricity or attributes specific electricity generation characteristics to its consumption.

The GHG Protocol’s Scope 2 Guidance addresses accounting for purchased or acquired electricity, steam, heating and cooling and includes requirements relating to contractual instruments.

13. Scope 3 and Supply-Chain Management

Scope 3 makes ESG a supply-chain issue.

A large company may need to ask suppliers for information about:

• Energy consumption
• GHG emissions
• Renewable energy
• Production processes
• Transportation
• Waste
• Labour practices

This means even companies that are not directly subject to sophisticated ESG disclosure requirements may increasingly receive ESG questionnaires from customers.

For Indian MSMEs, this is particularly important when supplying multinational companies or large listed enterprises.

14. Scope 3 and MSMEs

An MSME may not have a dedicated sustainability department.

Nevertheless, it can start preparing by maintaining records of:

• Electricity consumption
• Fuel consumption
• Business travel
• Purchased materials
• Transportation
• Waste
• Employee commuting

The first objective should not necessarily be perfect data.

The objective should be to establish a consistent baseline and gradually improve data quality.

15. Scope 1, 2 and 3 Under ESG Reporting

Carbon emissions are becoming increasingly important in sustainability reporting.

For example, IFRS S2 requires disclosure of greenhouse-gas emissions classified into Scope 1, Scope 2 and Scope 3, measured in accordance with the GHG Protocol framework.

However, companies should always determine the exact requirements applicable to them under the regulations or reporting framework governing their jurisdiction.

16. Why Finance Professionals Should Understand Carbon Accounting

Carbon accounting is no longer purely an environmental function.

It can affect:

• Operating costs
• Capital expenditure
• Product pricing
• Supply-chain decisions
• Investment decisions
• Risk management
• Financing
• Business valuation
• Regulatory compliance

This makes carbon accounting increasingly relevant to:

CFOs, Chartered Accountants, Cost Accountants, management accountants, auditors and financial analysts.

17. Role of CA and CMA Professionals

Finance professionals can contribute to corporate emissions management by developing:

1. Data controls

Ensuring that ESG data is complete and accurate.

2. Carbon-cost analysis

Understanding the financial impact of emissions.

3. ESG budgeting

Including sustainability investments in budgets.

4. Internal controls

Creating processes for ESG data collection and verification.

5. Performance measurement

Linking emissions with operational and financial KPIs.

6. Assurance readiness

Maintaining evidence supporting reported ESG figures.

This creates a significant opportunity for finance professionals to expand into ESG advisory and sustainability accounting.

18. How Can a Company Reduce Scope 1, 2 and 3?

Different scopes require different strategies.

Scope 1 reduction

• Energy-efficient equipment
• Electrification
• Cleaner fuels
• Renewable fuels
• Fleet optimisation
• Process improvements

Scope 2 reduction

• Renewable electricity
• Energy efficiency
• On-site solar
• Electricity procurement strategies
• Improved building efficiency

Scope 3 reduction

• Sustainable procurement
• Supplier engagement
• Low-carbon logistics
• Product redesign
• Circular economy
• Reduced business travel
• Product-use efficiency
• Better waste management

19. Important Development in Global Carbon Accounting

The GHG Protocol is currently working with the International Organization for Standardization (ISO) toward a consolidated corporate greenhouse-gas accounting standard.

In 2026, the organisations announced work toward a harmonised global corporate standard covering Scope 1, Scope 2, Scope 3 and related areas. The work is still under development, so companies should distinguish current standards from proposals and future revisions.

This development is important because businesses increasingly need carbon information that is consistent across jurisdictions and reporting frameworks.

20. Five Common Mistakes in Scope Accounting

Companies should avoid these common mistakes:

Mistake 1: Counting only Scope 1

A company’s carbon footprint does not necessarily end at its factory.

Mistake 2: Ignoring suppliers

Purchased goods and services can be significant sources of Scope 3 emissions.

Mistake 3: Using unsupported estimates

Estimates may be necessary, but the methodology should be documented.

Mistake 4: Changing methodologies without explanation

Consistency is important for meaningful year-on-year comparisons.

Mistake 5: Treating carbon accounting as only an ESG department responsibility

Operations, procurement, finance, HR, IT and supply-chain teams may all hold relevant data.

Conclusion

Scope 1, Scope 2 and Scope 3 provide a practical framework for understanding a company’s greenhouse-gas emissions.

Scope 1 measures direct emissions.

Scope 2 measures indirect emissions from purchased energy.

Scope 3 captures other indirect emissions throughout the value chain.

For companies beginning their ESG journey, carbon accounting should be treated as a management process rather than merely a reporting requirement.

The next generation of ESG management will increasingly connect carbon data with finance, procurement, operations, risk management and business strategy.

For CFOs, Chartered Accountants, Cost Accountants and management accountants, understanding Scope 1, 2 and 3 is therefore becoming an essential part of modern corporate reporting and sustainable business management.