As the global community grapples with the challenges of the 21st century, the imperative to minimize our environmental impact has never been greater. Central to this ambition is the corporate commitment to sustainability, and a crucial part of that commitment is the accurate calculation and tracking of greenhouse gas emissions. Several methodologies exist for calculating emissions, but one approach is finding particular utility for Scope 3 emissions, where direct measurements can be challenging to collect — the Spend-Based Method.
What is the Spend-Based Method for calculating carbon emissions?
The Spend-Based Method is an approach for estimating emissions that hinges on financial data. At the heart of this method lies a straightforward calculation: it involves multiplying the financial value of a purchased good or service by an emission factor. This simple multiplication provides an accessible, quantifiable estimate of the emissions produced.
The Spend-Based Method is commonly used by mature organisation to calculate emissions in certain areas. The reporting of Scope 3 emissions is a particularly popular arena in which businesses choose to rely on spend-based calculation, as it can be difficult to gather the data necessary from suppliers both upstream and downstream in any meaningfully accurate way. As such, businesses will use spend-based emissions calculation as a way to ‘fill the gap’, often while they work to engage with suppliers to get more accurate, higher quality, use- and activity-based data.
The Science Based Target Initiative (commonly referred to as SBTi) recently produced a report in conjunction with the Boston Consulting Group on value-chain decarbonisation – also known as Scope 3. Surveying hundreds of organisations internationally, they found a majority of organisations used spend based approaches in a number of reporting areas.
Source: CATALYZING VALUE CHAIN DECARBONIZATION, Corporate Survey Results, Feb 2023, Science Based Targets Initiative and BCG
Consider the example of taxi travel. Using the Spend-Based Method, one can bypass the need for exact distance or specific fuel consumption data. Instead, the cost of the trip is multiplied by an average emission factor for transportation, providing an efficient and sensible estimate of the emissions. Transportation is just one category, with different emissions factors available for practically every type of emissions source commonly encountered (with some exceptions).
Advantages and disadvantages of the Spend-Based Method.
The Spend-Based Method, like all methodologies, comes with its unique set of advantages and disadvantages.
Advantages of the Spend-Based Method
- Allows for emission calculations when primary data is unavailable or of insufficient quality.
- Is useful for accounting for emissions from minor or ancillary activities.
- Often proves more cost-effective and simpler to collect.
- Helps companies identify emission hot spots, thereby aiding in prioritizing their reduction efforts.
Disadvantages of the Spend-Based Method
- Might generate data that do not accurately reflect a company's specific activities.
- Does not account for operational changes made to reduce emissions by value chain partners.
- Could be challenging when quantifying emission reductions from specific actions.
- May limit the ability to track progress towards emission reduction targets due to its inherent lack of precision.
When to use the Spend-Based Method.
The Greenhouse Gas (GHG) Protocols recommend prioritizing the collection of higher quality data for activities that produce the most significant GHG emissions, offer significant reduction opportunities, and are most relevant to a company's business goals. Given the Spend-Based Method produces data of average quality it’s not the ideal pathway for priority activities.
Nevertheless, the Spend-Based Method has a role to play. It can be particularly useful for:
- Generating a quick overall emissions footprint.
- Initial action planning, providing a starting point while working on improving data accuracy.
- Filling data gaps when other data is lacking or unreliable.
- Calculating emissions for purchased goods and services where it's the most practical method.
Overcoming challenges in deploying the Spend-Based Method.
As with any process, deploying the Spend-Based Method comes with challenges. Depending on how your financial data is structured, it can be very time-consuming to align with the relevant emission factor categories and your overall inventory. It also can be difficulties to finding the appropriate emission factors. The emission factors also need for regular updates to account for inflation and other economic variables.
Some of these challenges can be effectively managed by working with your accounting team to understand the structure of your financial data. Care should be taken to exclude expenditures for emissions calculated through other methods to avoid data duplication.
The use of specialized software tools can streamline the process, increase efficiency, and enhance the accuracy of your emissions calculations. While some businesses do a basic level of carbon accounting with spreadsheet software such as Excel, the reality is that this technology quickly becomes cumbersome – particularly when dealing with the requirements of spend-based emission calculation.
Every category of emission that is using spend-based calculation must have its own separate emission factor calculation. Multiply this out – literally – across the dozens, hundreds, or thousands of emissions sources, and spreadsheet software quickly becomes slow and difficult to control. For those interested in calculating their Scope 3 emissions, where spend-based emissions calculation is common, it’s next to impossible.
This challenge has led to the development of dedicated spend based emission software, explicitly designed to help businesses gather, measure, manage, analyse and report their emissions. ESP’s offering, the appropriately named Spend Based Emissions Module, is a recent release on our larger CarbonHUB platform (our broader enterprise carbon accounting offering).
The Spend Based Module is designed to overcome these key challenges:
- Automated data gathering. While spend-based calculation relies on financial data – something that suppliers typically readily have – it can be a long and laborious process inputting hundreds or even thousands of individual data points into reporting software. The Spend Based Module uses AI to ingest spend data from General Ledger files, guiding the user with a specialised wizard to perform initial mapping.
- Simple data management. Once added to the program, suppliers can be categorised into the appropriate Scopes, matching suppliers with the appropriate Motu factors, removing the need for manual calculation. Should the supplier already be in the system, this entire process is automatic, massively reducing the manual work required.
- Easy organisational reporting. Complex organisational hierarchies are a headache for attributing emissions, but the Spend Based Module makes it easy. The software can support up to 7 sublevels of an organisation, and unlimited individual organisational entities, each with their own inventory and the ability to roll up said inventories into an overarching parent company footprint.
- Expert analysis and reporting. Activity data and emissions are presented in an easy to understand dashboard that provides the most important information at a quick glance, but also allows for deep dives into individual Scopes, sources, suppliers and more, enabling quick identification of reduction opportunities and which suppliers have the most impact on emissions.
The Spend-Based Method is a valuable addition to the corporate sustainability toolkit. While it is not without its challenges, its straightforward approach and practicality make it an effective tool for estimating emissions, particularly in areas where other methodologies may falter. By understanding its strengths and limitations, and by deploying software tools designed to leverage its strengths and mitigate its weaknesses, companies can drive their sustainability efforts forward, confidently navigating the path towards a more sustainable future.
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