A manufacturing company measures its Scope 1 and Scope 2 emissions (direct emissions from its own operations and indirect emissions from purchased energy) and reports a credible emissions reduction trajectory. The BRSR Core disclosure shows declining emissions intensity. The investor presentation describes progress toward decarbonisation targets.
But 70% of the company’s total carbon footprint sits in Scope 3: the emissions embedded in the raw materials it purchases, the logistics that transport its inputs and outputs, the energy consumed by its customers using the product and the end-of-life treatment of the product after use.
The company has reduced the emissions it controls. It has not addressed the emissions it causes. And the regulatory, customer and investor pressure is moving inexorably toward Scope 3.
Why Scope 3 Matters Now
BRSR Core value-chain disclosure
For India’s top 250 listed companies, SEBI’s BRSR Core framework extends disclosure obligations to value-chain partners representing 75% or more of total procurement or sales value. The company must report not only its own emissions but the emissions of its major suppliers and customers. This requires obtaining verified emissions data from entities the company does not control.
Customer Scope 3 requirements
Global manufacturers are embedding Scope 3 emission requirements into their procurement specifications. An Indian auto component supplier whose customer (a European OEM) has committed to net-zero Scope 3 emissions by 2040 faces a requirement to measure, report and reduce the emissions embedded in its products. The OEM’s Scope 3 is the supplier’s Scope 1 and 2. The pressure cascades down the supply chain.
CBAM expansion potential
CBAM currently covers direct emissions (Scope 1) embedded in steel, aluminium, cement, fertiliser and hydrogen exported to the EU. The regulatory trajectory suggests expansion to include indirect emissions (Scope 2) and, eventually, embedded supply-chain emissions. A company that has addressed only its direct emissions may find that future CBAM iterations impose costs on emissions it does not currently measure.
Investor portfolio carbon accounting
Institutional investors measuring the carbon intensity of their portfolios increasingly include Scope 3 emissions in their assessments. A company with low Scope 1 and 2 emissions but high Scope 3 emissions may score poorly in portfolio carbon assessments, affecting its inclusion in ESG-focused investment mandates and its weighting in sustainability-screened indices.
Where Supply-Chain Carbon Hides
Purchased materials
For manufacturing companies, the largest Scope 3 category is typically purchased goods and services: the emissions embedded in the steel, chemicals, plastics, components, packaging and other materials that enter the production process. A company that buys Rs 200 crore of steel per year is responsible for the emissions that the steel mill generated in producing that steel, even though those emissions occurred at someone else’s facility.
The measurement challenge: the company must either obtain facility-level emissions data from each supplier (which most Indian suppliers are not yet equipped to provide) or use emission factors (industry-average emissions per unit of material) that provide an estimate but not a verified measurement.
Logistics and transportation
Freight transport, warehousing, distribution and last-mile delivery generate emissions proportional to the weight transported, the distance covered, the mode of transport and the fuel used. A company with a national distribution network using diesel-powered trucks may find that logistics emissions exceed manufacturing emissions.
Product use phase
For companies whose products consume energy during use (vehicles, appliances, electronics, industrial equipment), the use-phase emissions over the product’s lifetime can dwarf the manufacturing emissions. An automobile manufacturer’s use-phase emissions (the fuel consumed by every vehicle over its lifetime) are typically 10x to 20x the manufacturing emissions.
End-of-life treatment
The emissions from disposing of, recycling or incinerating the product after use are Scope 3 emissions attributable to the manufacturer. A packaging company whose products are predominantly landfilled rather than recycled carries end-of-life emissions that the company does not currently measure or manage.
The Supply-Chain Carbon Diagnostic
In Northrop Management Private Limited’s ESG and financial advisory work, the Supply-Chain Carbon Diagnostic maps the company’s Scope 3 exposure across its value chain.
Step 1: Category screening. Identify the Scope 3 categories relevant to the company’s operations: purchased goods and services, capital goods, fuel and energy-related activities, upstream transportation, waste, business travel, employee commuting, downstream transportation, processing of sold products, use of sold products, end-of-life treatment, leased assets, franchises, investments.
Step 2: Materiality assessment. For each category, estimate the emissions using available data (supplier declarations, industry emission factors, logistics records, product specifications). Identify the three to five categories that contribute the largest share of total Scope 3 emissions.
Step 3: Supplier engagement. For the largest Scope 3 contributors (typically purchased materials and logistics), engage with the top 20 suppliers representing 80% of procurement value. Request facility-level emissions data. Where data is unavailable, use industry emission factors and flag the measurement gap.
Step 4: Hotspot identification. Identify the specific materials, suppliers, routes or product characteristics that drive the highest Scope 3 emissions. A single raw material purchased from a single supplier may account for 30% of total Scope 3 emissions. That supplier is the decarbonisation hotspot: addressing that single source produces a disproportionate reduction in the company’s total carbon footprint.
Step 5: Reduction roadmap. For each hotspot, evaluate the available interventions: switching to a lower-emission supplier, substituting the material with a lower-carbon alternative, optimising logistics routes and modes, redesigning the product for lower use-phase energy consumption, designing for recyclability to reduce end-of-life emissions. Each intervention is evaluated on carbon-adjusted incremental ROIC using the same framework applied to Scope 1 and 2 decarbonisation investments.
Step 6: Data infrastructure. Build the systems required to collect, verify and report Scope 3 emissions data at the granularity that BRSR Core, CBAM and customer requirements demand. This includes supplier data management platforms, emission factor databases, calculation methodologies and assurance-ready documentation.
Ashish Chaudhary, frames the exposure directly: “Operational boundaries do not necessarily match economic exposure. A company that has decarbonised its own operations but purchases Rs 200 crore of high-emission steel, ships its products on diesel trucks and sells a product that consumes energy for 15 years has addressed 30% of its carbon footprint and ignored 70%. The regulations, the customers and the investors are moving toward the 70%. The companies that engage with their supply-chain carbon now will be positioned when the requirements arrive. The ones that wait will scramble, and the scramble will be more expensive than the preparation.”
Questions for the Boardroom
- What percentage of our total carbon footprint is Scope 3, and have we measured it?
- Which three to five Scope 3 categories contribute the largest share of our total emissions?
- Can our top 20 suppliers provide facility-level emissions data, and if not, what is our plan to obtain it before BRSR Core value-chain disclosure obligations take effect?
- Have we identified the supply-chain hotspots (specific materials, suppliers, routes) that drive disproportionate Scope 3 emissions?
- If a customer required verified Scope 3 emissions data for our products within 12 months, could we provide it?
Closing Implication
A company’s largest climate exposure almost certainly sits outside its own operations. The materials it buys, the logistics it uses, the energy its customers consume using the product and the waste generated at end-of-life typically account for 60% to 80% of the total carbon footprint.
The supply-chain carbon problem cannot be solved by the company alone. It requires supplier engagement, material substitution, logistics optimisation, product redesign and data infrastructure that extends beyond the company’s operational boundaries. But the financial consequences of not addressing it, lost market access, CBAM expansion, customer procurement requirements, investor portfolio screening, regulatory disclosure obligations, fall on the company, regardless of where the emissions were generated.
The companies that engage with their supply-chain carbon now are building the data, the supplier relationships and the reduction capabilities that will be required within the next three to five years. The ones that wait will face the requirements without the infrastructure, and the cost of building the infrastructure under compliance pressure is always higher than the cost of building it with foresight.
