Scope 3 in New Zealand: When spend-based factors are good enough - and when they will let you down
Spend-based emission factors are the most commonly used method for estimating Scope 3 emissions in New Zealand. They are useful - but they have significant limitations that are not always understood. This guide explains when to use them and when to invest in better data.
Scope 3 emissions - the indirect emissions that occur in your value chain, upstream and downstream of your own operations - are typically the largest share of a company or organisation's total footprint. For a professional services firm, they might be 80–90% of total emissions. For a council with significant procurement and construction activity, the number can be even higher.
Measuring Scope 3 accurately is difficult. Unlike Scope 1 (direct combustion) and Scope 2 (purchased electricity), Scope 3 requires data from third parties - suppliers, contractors, transport providers, customers - who may not measure or share their emissions. The most common workaround is to use spend-based emission factors: you multiply your spend in a category (say, purchased goods and services, or business travel) by an economy-wide factor that converts dollars of spending into estimated tonnes of CO₂e.
This approach is legitimate and widely used. But it is also widely misunderstood. Here is an honest account of its strengths and its limits.
How spend-based estimation works
Spend-based (or Environmentally Extended input-output, EEIO) factors are derived from national economic accounts and may integrate lifecycle assessment data. In New Zealand, the Ministry for the Environment publishes emission factors for use in organisational GHG reporting, in which, they referance the use of spend-based factors published by Auckland Council.
The basic calculation is: Spend (NZD) × Emission factor (kg CO₂e / NZD) = Estimated emissions (kg CO₂e).
The appeal is obvious: most organisations already have financial data by cost category. You do not need supplier data. You do not need activity data. You can generate a Scope 3 figure with the information you already have.
When spend-based is a reasonable starting point
There are four common situations where spend-based factors are a defensible and appropriate choice. Tap each one to expand.
When you are first mapping your indirect (Scope 3) emissions, spend-based estimates help identify which categories are most significant - so you can focus data-collection effort where it matters most. A screening exercise that takes a fortnight in a finance system can save months of misdirected effort chasing immaterial categories.
For minor or peripheral procurement categories - office supplies, small service contracts - spend-based estimates are often proportionate. Investing in supplier-specific data for a $5,000 spend category is rarely cost-effective, and a verifier will not expect you to.
For organisations in their first year of Scope 3 reporting, spend-based figures provide a reasonable baseline from which to improve. The GHG Protocol and MfE guidance both acknowledge their validity as a starting point - provided you also document a roadmap to upgrade material categories in subsequent years.
In some categories, there simply may not be supplier-specific data available. Spend-based may sometimes be the only credible option available to your organisation. The honest answer in that case is to use it, disclose the limitation, and prioritise the data uplift in the following cycle.
When spend-based will let you down
Target-setting and reduction tracking
This is the critical limitation. A spend-based Scope 3 figure will rise when you spend more and fall when you spend less - independent of what is actually happening to emissions in your supply chain. If you set a Scope 3 reduction target based on spend-based data, you may appear to hit it simply by cutting your budget. That is not emissions reduction. It will not stand up to scrutiny from an auditor, a sophisticated investor, or a regulator.
Verification and assurance
GHG assurance practitioners applying NZ SAE 1, ISAE 3410 or ISO 14064-3 will scrutinise your methodology. While spend-based estimates can be verified, verifiers will look at whether you have documented your factor sources, applied current factors, and used accurate spend data reconciled to your finance system. Where spend-based methods are applied to material Scope 3 categories without adequate documentation, this can result in a modified or limited assurance conclusion.
Supplier engagement and procurement decisions
If you are trying to compare two suppliers' emissions profiles, or if you want to make procurement decisions based on emissions data, spend-based estimates won't help you. They tell you how much you spent, not how emissions-intensive the supplier actually is. You need supplier-specific or activity-based data for this purpose.
A practical decision framework
Before deciding which method to use for each Scope 3 category, ask yourself:
- Is this category material? If it represents a small fraction of your total emissions, spend-based is likely enough. If it is large, investigate better data.
- Are you trying to set a reduction target against this category? If yes, spend-based is not suitable. You need activity data or supplier data that can track real-world change.
- Will this figure be assured? If yes, make sure you have documented your factor source and reconciled your spend data. A verifier will ask.
In the current inflation environment, spend-based factors can overestimate your emissions if they aren't adjusted for inflation. If you are using spend-based estimates, check that you are using the most current factors. Apply them consistently across periods. Document which version you used and when. This is one of the most common points of correction in a verification engagement.
Unsure whether your Scope 3 methodology is fit for purpose?
Opportune can review your Scope 3 measurement approach, identify where spend-based estimates are creating risk, and help you build a data improvement roadmap that is proportionate to what you actually need.
Talk to Opportune →