When private equity firms talk about carbon footprints, they usually start with Scope 1 and Scope 2: emissions from direct operations and purchased energy. For most businesses, however, the bulk of climate impact sits in Scope 3: emissions across the value chain, from purchased goods and logistics to product use and end of life. For investment managers looking to future-proof their portfolios, Scope 3 is the next frontier. This article provides a step-by-step roadmap for launching a Scope 3 programme in a manageable, useful way.
Curious how this connects to returns? See how private equity firms turn ESG compliance into profit.
Why Scope 3 matters
Scope 3 covers emissions outside a company's direct control, and it is usually the largest part of the footprint. According to a June 2024 report by CDP and Boston Consulting Group, the supply chain emissions of companies disclosing to CDP were on average 26 times greater than their operational emissions. Ignoring these upstream and downstream effects means:
- Underestimating risk: climate exposure in the supply chain can lead to disruption, cost increases and reputational damage.
- Missing opportunities: cutting Scope 3 can open new markets and strengthen relationships with customers that have their own targets.
- Falling behind on disclosure: companies in scope of the EU's CSRD report Scope 3 under ESRS E1; California's SB 253 phases in Scope 3 from 2027 for companies with over 1 billion dollars in revenue doing business in the state; and IFRS S2 includes Scope 3 wherever the ISSB standards are adopted.
For a fund, there is a further reason: under the GHG Protocol, the emissions of portfolio companies are the GP's own Scope 3 (category 15, investments), and the PCAF standard for financed emissions sets out how to account for them. LPs asking for fund-level emissions are effectively asking for portfolio companies' Scope 1, 2 and 3.
Step 1: map your value chain
Begin by identifying the key business activities, from raw material extraction to product disposal. In a consumer goods company, for example, you may track emissions tied to packaging, transport and customer use.
- Categorise emissions: the GHG Protocol divides Scope 3 into 15 categories, such as purchased goods and services, waste, business travel and use of sold products. Focus on the categories most relevant to each portfolio company.
Step 2: gather preliminary data
Once the value chain is mapped, collect data from suppliers, partners and internal departments. Start with what already exists, such as purchase ledgers, logistics records and waste disposal logs, and use spend-based estimates where activity data is missing. Improve data quality by:
- Defining KPIs and units: standard metrics and units for consistency across companies.
- Using the right tools: see our guide to modernising ESG data management for options that simplify collection, and how AI helps overcome the supplier data barrier in Scope 3.
Step 3: prioritise hotspots
Scope 3 can feel overwhelming. Pinpoint the biggest emitters using screening estimates, life cycle assessment or supplier engagement. A food manufacturer, for instance, may find that agricultural sourcing accounts for most of its emissions, making farm-level interventions the priority.
- Materiality: focus on the categories that significantly affect the overall footprint, as explained in our guide to ESG materiality for portfolio companies.
Step 4: engage stakeholders
Reducing Scope 3 emissions almost always involves external partners. Engage suppliers, logistics providers and even end users to set shared goals and workable plans. This might include:
- Supplier codes of conduct: requiring emissions data, lower-carbon practices or renewable materials.
- Incentives: rewarding suppliers that measure and cut their footprint, for example with longer contracts.
Step 5: implement reduction strategies
Depending on the hotspots identified, you might pursue:
- Lower-carbon inputs: switching to recycled or certified materials.
- Eco-design: redesigning products for efficiency, less waste or longer life.
- Efficient logistics: consolidating shipments, optimising routes or shifting modes.
- Customer engagement: helping end users lower emissions in the use and disposal phases.
Step 6: track, report and refine
Set up a transparent system for monitoring Scope 3 over time. This may involve annual recalculation, internal checkpoints or continuous data feeds into ESG dashboards. Replace estimates with supplier-specific data year by year.
- Reporting: keep LPs and stakeholders informed of progress, as discussed in our article on sharing live ESG data with LPs.
Overcoming common pitfalls
- Unreliable data: start small, gather data gradually and improve quality over time. An estimate with a documented method beats a blank.
- Supplier pushback: show the business case, from cost savings to preferred supplier status.
- Limited resources: if budget or expertise is tight, begin with the one or two categories that dominate the footprint.
A glimpse into the future
Scope 3 will only intensify as disclosure rules mature and LPs push for full value chain data. Private equity firms that get ahead of the curve gain a competitive advantage; those that do not risk losing investor confidence and paying more for it in financing and operations. Learn how emissions performance can improve credit terms in our article on the ESG ratchet in lending agreements.
Starting a Scope 3 programme can feel daunting, but breaking it into steps makes it feasible. Map the value chain, gather data, identify hotspots, involve stakeholders and refine continuously. This approach positions portfolio companies for long-term resilience and investor appeal. Manglai's carbon footprint software calculates Scope 1, 2 and 3 emissions with the GHG Protocol methodology, reads the invoices and supplier data behind them and keeps every portfolio company on the same standard.
