Calculating your scope 3 emissions using spend data is an effective and efficient way to assess your company’s indirect emissions before delving deeper.
However, not all expenditures captured in your ERP or accounting systems contribute to your carbon footprint. Identifying and excluding these irrelevant expenditures ensures the accuracy of your emissions reporting.
This article outlines key categories of expenditures to exclude from your emissions calculations.
Expenditures to be excluded
The following categories of expenditure should be excluded when collecting data for your scope 3 spend-based reporting:
Electricity and Energy-Related Upstream Emissions: These are already calculated using activity data when accounting for your scope 1 and 2 emissions. Excluding these prevents double counting and enhances accuracy.
Depreciation and Amortization: These non-cash expenditures do not equate to a direct purchase of goods or services. Organizations must account for the full price of the capital good in the first year of purchase.
Payments on behalf of others: If payments are made on behalf of others and with their money, they can be excluded. At no point does the reporting company have ownership and it has no impact in their financials.
The following financial transactions, because they do not directly contribute to the physical production or consumption processes that emit greenhouse gases:
Zero entries: If expenditures are zero, spend-based emissions will be zero as well
False Bookings: booking errors
Employee Compensation: Salaries, wages, and bonuses
Intercompany Transfers, Bank Fees, and Inventory Adjustments.
Penalties, Fines, and Donations.
Equity Transactions: Exclude the transaction, but include the financial services related to equity transactions
Loan Repayments and Rent/Leasing
Taxes
Licenses: payments for the use of patents, trademarks, copyrights, or other intellectual property rights. However, this rule does not apply to cloud services, which should be accounted under purchase goods and services.
Refunds
A refund itself is not associated with emissions. However, it may or may not change the emissions of another related purchase. If the refund is a price correction, it is justified to subtract it from the original price. For example, a good or service is paid in advance but ultimately not delivered and so a partial or full refund is given. Hence, the net price is a better basis for a spend-based assessment.
If a refund does not change the underlying activity e.g., a reimbursement for a delayed flight that still took place or a partial refund for a product that did not meet expectations, the product/service for which the refund was given should be accounted for with the original price.