Navigating scope 3 emissions: Four key categories for real estate

As companies become comfortable with scope 1 and 2 emissions, many are turning their attention to scope 3 emissions. Scope 3 emissions cover emissions from a company’s value chain and usually make up the majority of a company’s overall footprint. Although these emissions are critical, they can be difficult to calculate for two reasons:

For the real estate sector, scope 3 emissions are crucial for calculating “whole building carbon” and understanding the full impact of a business’s supply chain. Unfortunately, understanding which scope 3 categories are relevant can be challenging. Both the Science-based Target initiative (SBTi) and the UK Green Building Council (UKGBC) have issued real estate-specific guidance based on the GHG Protocol to help clarify which categories should be considered and how to calculate scope 3 emissions.

However, for companies calculating scope 3 emissions for the first time, these guidance documents can still feel overwhelming. To keep things simple, we have identified four key scope 3 categories real estate companies should focus on.

Before we dive in: The categories highlighted are typically the most material (i.e., significant and relevant) for this industry, but materiality depends on a company’s specific business model. All companies planning to calculate scope 3 emissions should first perform a screening to identify which categories are material to their company.

Category 1: Purchased goods and services

What this category covers: Upstream (extraction, production, and transportation) emissions from goods or services purchased by a company (excluding items reported elsewhere). For real estate companies, this could include goods and third-party services such as:

Why this category is relevant: All companies procure goods and services from others, making this category almost always relevant. The materiality of the category can be estimated based on the magnitude of a company’s yearly spend.

What data is needed: At a minimum, companies should collect annual spend data on goods and services, broken down by procurement category and/or supplier. This data, combined with spend-based emissions factors, can be used to estimate Category 1 emissions.

Common challenges: Using spend-based calculations means that emissions will increase as spend increases. Thus, a company adopting more sustainable procurement practices (such as buying lower emission paint for its buildings), which can sometimes be more expensive, may not necessarily see lower emissions reflected in its inventory. In addition, moving beyond spend-based calculations can be challenging, as most suppliers today do not generate supplier-specific emissions factors, and product-specific emissions factors are scarce. Working with key suppliers early to gather the data needed for supplier-specific emissions factors can help set companies up for success.

Category 2: Capital goods (“embodied carbon”)

What this category covers: Upstream emissions from capital goods purchased or acquired by a company. For real estate companies, this is known as “embodied carbon” and includes building materials and construction processes associated with development (i.e., the lifecycle stages A1-A5, per SBTi’s draft building guidance). Companies are expected to account for this embodied carbon if they 1) develop the building themselves or 2) acquire a new building from another party (as the first owner).

Why this category is relevant: Many real estate companies develop or acquire new buildings as part of their business strategy. For developers or companies with frequent acquisitions, this may be one of the highest categories of emissions in their inventory.

What data is needed: Industry best practice and most accurate embodied carbon data come from a building lifecycle assessment (LCA), an analysis of upfront emissions for the building based on the materials and construction processes used. Companies can also use an embodied carbon emissions factor per area of a building (see Ramboll’s CO2mpare tool). A common but less specific method is to use capital cost spend data – similar to the approach described in Category 1. Hybrid approaches of each of these methods can also be used.

Common challenges: Conducting LCAs as part of the building development process can add cost (if outsourcing), so building a business case for the value of this analysis can be key to making it standard practice. Companies using more generic emissions factors (such as per square foot or by spend) will encounter similar issues as described in category 1, where more sustainable development choices may not be properly reflected in the emissions calculation.

Category 11: Use of Sold Products

What this category covers: Lifetime emissions from the use of goods and services sold by the reporting company (i.e., the scope 1 and 2 emissions of end users). For real estate companies, this includes operational emissions from buildings developed and sold in the reporting year and may also include property management or other services offered to others.

Why this category is relevant: For developers, this category is typically among the largest sources of scope 3 emissions. Buildings are assumed to have a 60-year lifetime, and all lifetime operational emissions must be accounted for in the year of sale, so these emissions add up quickly. The operational emissions of buildings to which real estate companies offer services (e.g., property management) may also be significant.

What data is needed: Where possible, developers should create an energy model during development to forecast energy usage for any buildings sold in the reporting year. Alternatively, they can estimate the lifetime energy usage by using industry benchmarks (such as the CBECs data from the EIA) or representative surrogate data (e.g., other similar buildings in the portfolio).

Common challenges: Unless a developer has a consistent development pipeline, these emissions can vary widely from year to year, making it difficult to understand trends or target progress. Breaking out this category when analyzing emissions or setting targets can help isolate this variability. For property management or other service providers, obtaining accurate operational data to calculate emissions can be challenging because they may not have control over billing or insight into tenant energy use. Where possible, engaging with tenants early can help close these data gaps.

Category 13: Downstream leased assets

What this category covers: Emissions from the operation of assets that are leased to others (and are not included in scope 1 and 2). For real estate companies, this includes tenant emissions (including energy usage and fugitive emissions).

Why this category is relevant: For real estate companies who set operational control boundaries, tenant emissions typically will not be covered in scope 1 and 2 (as leases allow the tenant to take operational control of the space). For companies that manage and own assets, particularly those with large portfolios, this can be one of the largest sources of scope 3 emissions.

What data is needed: Ideally, companies should collect energy usage and refrigerant usage data from all tenants. They can also estimate this energy usage based on similar properties where data is available or by using available industry benchmarks (e.g., CBECs).

Common challenges: Collecting data from individual tenants can be challenging and time-consuming. Companies may need to work closely with certain tenants to collect data. Data management tools can help close gaps and automate data collection to streamline calculations in the future.

Other categories

Real estate companies may need to report on several other scope 3 categories, which are typically less significant than the ones above:

What should companies do next?

For companies just getting started with scope 3, understanding which categories of emissions are relevant is an important first step. Companies should also begin focusing on data collection and building out capabilities where data is not available today. Key data includes:

Companies should first focus on collecting data for their own operations, as this also supports scope 1 and 2 calculations, and then work with tenants to close data gaps as much as possible.

If you are looking to get started with scope 3 but are unsure where to begin, reach out to our Ramboll experts below for help with your specific situation. We have deep expertise in calculating scope 3 inventories, particularly in the real estate sector, and can help you get started today!