Activity-Based vs Spend-Based Emission Methods

Want to measure your organisation's carbon emissions but not sure where to start? Here's a quick breakdown of the two main methods: Activity-Based and Spend-Based. Each has its strengths and weaknesses, and the right choice depends on your goals, data availability, and resources.

Key Differences:

• Activity-Based Method: Tracks specific activities (e.g., energy use, transport) with precise operational data for highly accurate results. Ideal for detailed reporting but requires significant resources and supplier collaboration.

• Spend-Based Method: Estimates emissions using financial expenditure data and industry averages. Easier to implement and great for a quick start, but less accurate and lacks detailed insights.

Quick Comparison:

When to Use Each:

• Choose Activity-Based if you need precision for compliance (e.g., CSRD) or have robust data collection systems in place.

• Choose Spend-Based if you're starting out, have limited resources, or want a broad overview of emissions.

• Hybrid Approach: Combine both for a balance of accuracy and practicality, especially for Scope 3 emissions.

Next Steps: Start with what you can manage - spend-based for hotspots, activity-based for precision. Over time, build systems to improve accuracy and align with reporting standards like SECR or ISSB. Measuring emissions today is better than waiting for perfection.

Activity-Based Emission Calculation Method

What Activity-Based Method Requires

The activity-based method calculates emissions by tracking specific operational activities like kilometres travelled, kilowatt-hours used, or tonnes of materials processed. This approach pinpoints key processes that generate emissions, estimates their scale, and applies appropriate emission factors to determine greenhouse gas emissions. Essentially, it multiplies activity data by the relevant emission factors.

To make this method work, companies need to collect precise physical data across their entire value chain. This data is often expressed in terms of mass, distance, or production units. It includes information on manufacturing activities, energy consumption, transportation, and material usage.

Once this activity data is gathered, emissions are calculated by applying the corresponding emission factors for each activity. However, collecting accurate and complete data from all relevant sources is no small feat. The method’s precision relies heavily on this detailed data collection process.

Activity-Based Method Benefits

The activity-based method is known for its accuracy. According to the United States Environmental Protection Agency, it can improve accuracy by up to 90% compared to other approaches. This is because it uses actual operational data rather than relying on industry averages. Its detailed approach aligns well with science-based targets, making it particularly useful for companies aiming to meet Science-Based Targets initiative (SBTi) compliance or CSRD reporting standards.

One of the standout advantages of this method is its ability to reflect sustainability improvements in real time. For instance, if a company switches to renewable energy or optimises transportation routes, the method captures these changes immediately. This enables businesses to manage their carbon reduction efforts more effectively, supporting both regulatory compliance and stakeholder confidence.

The method also allows companies to map emissions and create targeted reduction strategies. For example, Amazon adopted activity-based emission factors for its delivery fleet in 2021. This helped the company identify specific areas for improvement, contributing to its goal of achieving net-zero carbon emissions by 2040. Similarly, IKEA used this approach to identify the most emissions-intensive parts of its supply chain, leading to changes like adopting renewable energy and improving transportation efficiency.

Activity-Based Method Drawbacks

While the activity-based method is precise, it’s also complex and resource-intensive. One major challenge is the high cost of implementation. For example, the European Union estimates that applying activity-based emission factors in road transport could increase administrative costs by up to 40%.

Data collection is another significant hurdle. According to the GHG Protocol, 83% of companies struggle to obtain accurate emissions data. This issue becomes even more pronounced when tracking Scope 3 emissions, which involve suppliers. A CDP report revealed that only 56% of suppliers provide emissions data to their corporate clients. Some suppliers are reluctant to share this data due to confidentiality concerns or competitive reasons.

In many cases, organisations encounter data gaps and inconsistencies, especially when relying on third-party suppliers. The lack of standardised systems for emissions tracking among suppliers further complicates matters, leading to unreliable data.

Experts suggest several strategies to address these challenges. These include engaging suppliers to promote transparency, automating data collection processes, integrating emissions tracking into existing ERP systems, and using hybrid methods that combine activity-based data with spend-based data to fill gaps. Companies may also benefit from consulting carbon accounting specialists to ensure their data is accurate and transparent.

Despite its challenges, the activity-based method remains the preferred choice for organisations committed to precise emissions measurement and reduction. Its benefits often outweigh the complexities involved.

Spend-Based Emission Calculation Method

What Spend-Based Method Requires

The spend-based method translates financial spending into carbon emissions. Instead of tracking physical activities, this approach uses spending data and multiplies it by specific emissions factors to estimate the carbon footprint. Essentially, it’s about converting pounds spent into kilograms of CO₂ equivalent.

This process depends on financial records from accounting and procurement teams. Companies need well-organised data, such as purchase records, invoices, and spending breakdowns. Emission factors - expressed as kilograms of CO₂ equivalent per pound spent - are applied to categories like transport, furniture, or professional services.

These factors are based on industry averages and are updated regularly. Since they can vary significantly by region, businesses must match factors to the correct country. Adjustments for inflation are also necessary when comparing recent spending data to older Input-Output Tables. This method is especially helpful for estimating Scope 3 emissions when detailed activity data isn’t available.

Scope 3 emissions, which often account for over 70% of a company’s total carbon footprint, are particularly well-suited to this method. For businesses with complex supply chains, spend-based calculations provide a practical starting point when supplier-specific data is hard to gather.

Spend-Based Method Benefits

The spend-based approach is practical and straightforward, especially for organisations with limited resources or intricate supply chains. Since companies are already structured around costs, their accounting departments typically have a good understanding of what’s purchased and how much is spent.

One of its biggest advantages is how quickly it can be implemented. Unlike activity-based methods, the spend-based approach requires less detailed data collection, making it faster and more cost-effective to roll out. This makes it particularly appealing for small and medium-sized enterprises that may not have the resources for extensive data collection.

"Spend-based emission factors have a bad reputation. But by keeping the limitations in mind, they can be an easy and powerful starting point to measure Scope 3 emissions." - Anastasia Lobanova, Climatiq

Another benefit is its broad coverage. It can assess emissions across a wide range of procurement categories without requiring in-depth supplier collaboration. Leading frameworks like the GHG Protocol, PCAF, and TCFD recommend using spend-based methods when activity data is unavailable or difficult to obtain. This regulatory endorsement makes it a reliable choice for organisations just beginning their emissions tracking.

Real-world examples highlight its usefulness. In 2020, Walmart used spend-based emission factors to identify suppliers with lower emissions intensity, aligning this with their renewable energy investments as part of their regenerative company initiative. Marriott also adopted this method to help achieve its goal of cutting emissions by 38% by 2025, combining it with renewable energy and efficiency measures.

Additionally, the spend-based method can serve as a foundation for deeper analysis. By identifying emission-heavy spending categories, companies can focus on these areas and refine their calculations with more specific data or supplier insights.

Spend-Based Method Drawbacks

Despite its advantages, the spend-based method has some clear limitations. Its biggest drawback is its lower accuracy compared to activity-based approaches. Since it relies on industry averages, it assumes that all goods and services within a category have the same emissions intensity.

This lack of detail makes it harder to create targeted reduction strategies. For instance, two suppliers in the same category - like furniture - could have vastly different emissions, but the spend-based method would treat them as identical based solely on the amount spent.

The method also doesn’t account for the unique characteristics of individual suppliers or organisations. While it can highlight high-spending areas that contribute to emissions, it doesn’t offer much guidance on specific actions to reduce them. Without understanding the activities driving these emissions, companies may struggle to develop effective mitigation plans.

Data quality and consistency are other challenges. Emission factors don’t always align neatly with procurement categories, requiring judgement calls about which factors to use. Additionally, currency fluctuations and inflation can complicate comparisons over time, requiring careful adjustments to maintain accuracy.

For organisations pursuing advanced reporting standards like ISSB reporting, the spend-based method might fall short. It doesn’t provide the level of detail required for comprehensive disclosures, making it better suited as a starting point rather than a complete solution for managing emissions.

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Activity-Based vs Spend-Based: Direct Comparison

Tracking emissions accurately is the backbone of effective ESG reporting, especially in today’s strict regulatory landscape. Knowing how activity-based and spend-based methods differ is key to making informed choices. The activity-based approach, which relies on detailed operational data, can boost accuracy by up to 90%. On the other hand, spend-based methods offer a faster and less resource-intensive way to assess emissions. To make it easier, here’s a side-by-side comparison of these methods.

That said, precision comes at a price. Activity-based calculations typically demand more time and resources to gather and analyse data. Spend-based methods, while less accurate, provide a quick snapshot of environmental hotspots, making them a useful starting point.

"Activity-based emission factors are a precise and accurate approach to measuring GHG emissions associated with specific activities, such as transportation or energy production." - United States Environmental Protection Agency

This higher accuracy stems from using specific operational data instead of broad industry averages.

Method Comparison Table

The choice between these methods depends largely on your organisation’s reporting goals and maturity. For instance, over 90% of Fortune 500 companies use the GHG Protocol, which allows the use of industry averages and proxies for Scope 3 emissions. For UK businesses navigating regulations like SECR and ESOS, the spend-based method offers an accessible entry point. But as frameworks like CSRD and ESRS demand detailed reporting of both direct and indirect emissions across the value chain, many organisations are shifting towards the more precise activity-based approach.

Interestingly, a hybrid approach is becoming popular. By combining supplier-specific activity data with secondary data, organisations can strike a balance between accuracy and practicality. This is especially important since Scope 3 emissions often make up over 85% of total emissions. Ultimately, this comparison provides a roadmap to help you align your emissions tracking method with your sustainability goals.

How to Choose the Right Method

Selecting the right emission calculation method depends on your data availability, compliance needs, and sustainability goals. Key considerations include the type of data required, the complexity of implementation, the relevance to your operations, and how it aligns with regulatory requirements like the UK's CSRD and SECR frameworks. Tailoring your approach ensures you're meeting these obligations effectively.

Many organisations begin with spend-based methods to pinpoint emission hotspots and then gradually adopt activity-based methods for their most critical sources. This phased strategy strikes a balance between practicality and precision while allowing your team to build expertise over time. Below, we explore when each method - or a combination of both - might be the best fit for your organisation.

When to Use Activity-Based Methods

Activity-based methods are ideal when your organisation has strong data collection systems and direct control over energy use, transport, or production processes. By relying on detailed operational data, this method offers the highest level of precision for ESG reporting.

Large organisations with dedicated sustainability teams often benefit most from this approach. These companies typically have the resources to implement advanced tracking systems and collaborate with suppliers to gather primary data. Activity-based methods are especially useful for meeting stringent compliance requirements, such as those under CSRD or ISSB reporting frameworks.

For example, IKEA has successfully used activity-based methods to identify the most emissions-intensive parts of its supply chain. This enabled the company to make impactful changes, such as switching to renewable energy and optimising transportation routes.

Consider activity-based methods if:

• You have direct control over operations and access to granular data.

• Regulatory frameworks demand high accuracy (e.g., CSRD compliance).

• Your goal is to develop targeted reduction strategies.

• Your organisation has the resources for in-depth supplier engagement.

It’s worth noting that activity-based methods can increase administrative costs by up to 40%. While this investment enhances accuracy and provides actionable insights, careful planning is necessary to manage resources effectively.

When to Use Spend-Based Methods

Spend-based methods are a good starting point for organisations that are new to ESG reporting or have limited resources. This approach relies on financial data to estimate emissions, making it accessible and relatively quick to implement.

This method is particularly effective for organisations with complex supply chains where collecting detailed activity data from every supplier isn’t feasible. Since spend-based methods are well-suited for estimating indirect and Scope 3 emissions, they’re an excellent tool for getting a broad overview of your value chain’s impact.

In practice, companies have used spend-based methods to identify suppliers with lower emissions and to guide investments in renewable energy and other sustainability initiatives.

Consider spend-based methods if:

• You’re just starting your carbon accounting efforts.

• Detailed data collection resources are limited.

• You need a quick setup using existing financial data.

• Your priority is broad Scope 3 coverage over detailed insights.

Combining Both Methods

A hybrid approach combines the strengths of both methods, offering a flexible and scalable solution. According to the Greenhouse Gas Protocol, organisations should use all available activity-based data and supplement it with spend-based methods to estimate the remaining emissions.

This approach is particularly valuable because value chain emissions often make up around 92% of a business’s carbon footprint, yet fewer than 10% of companies measure their Scope 3 emissions comprehensively. By starting with spend-based data to identify key areas and then applying activity-based methods for deeper analysis, businesses can create effective action plans.

Modern tools like neoeco streamline this hybrid strategy by integrating both methodologies into a single platform. For example, neoeco’s FiS Ledger incorporates over 90 ESG impact factors, allowing businesses to transition smoothly from spend-based to activity-based calculations. This ensures audit-grade accuracy while building robust ESG reporting capabilities across multiple frameworks.

A hybrid approach is ideal if:

• You need to balance precision with resource limitations.

• Your organisation is moving from basic to advanced ESG reporting.

• Comprehensive Scope 3 coverage is a priority, but you also need targeted precision for key areas.

• You’re focused on developing long-term sustainability management capabilities.

Ultimately, the method you choose should align with your data collection capabilities and organisational systems. While transitioning to activity-based methods can improve accuracy over time, it doesn’t have to be an all-or-nothing shift. A hybrid approach offers a practical way to grow your sustainability efforts alongside your organisation's evolving needs.

Conclusion

This section ties together the contrasts outlined earlier. Both activity-based and spend-based emission calculation methods play distinct roles in ESG reporting, and knowing how they differ is crucial for accurate carbon accounting. Activity-based methods offer precise results through detailed operational data, while spend-based methods provide quicker, cost-efficient estimates based on financial data. The best approach - whether focusing on one or blending both - depends on your organisation's data availability, resources, and compliance needs.

Main Points Summary

The key difference lies in how data is gathered and the level of precision achieved. Activity-based methods stand out for their accuracy, making them well-suited for organisations with strong data collection systems and direct operational control. These methods are particularly effective for meeting stringent compliance standards like CSRD or ISSB reporting frameworks.

Spend-based methods, on the other hand, are a practical entry point for organisations starting their carbon accounting journey:

"Similar to how calories are a starting point but not the entirety of nutrition, spend-based emissions estimates serve as an initial analysis in carbon accounting. This 'hotspot analysis' helps identify major emission sources based on spending patterns."

For many businesses, a hybrid approach works best, especially given that Scope 3 emissions often make up more than 70% of a company's total carbon footprint. This approach combines the strengths of both methods - using activity-based data where feasible and spend-based estimates where detailed data is harder to obtain. The GHG Protocol supports this flexibility, allowing organisations to mix methods when activity-level data isn't readily available.

Next Steps for Your Organisation

Start by assessing your organisation's current data collection capabilities and ESG goals. If you're just beginning with carbon accounting, spend-based methods can help you identify emission hotspots. Over time, you can transition to activity-based methods for more significant emission sources. This phased approach allows you to build expertise while managing resources effectively.

Carefully review your ESG reporting and compliance requirements. For UK organisations subject to CSRD or aiming for ISSB reporting, the precision of activity-based methods may be necessary. However, it’s important to prioritise progress over perfection - using spend-based calculations is far better than delaying action altogether.

For organisations looking to streamline these processes, modern ESG platforms can simplify data collection and reporting across multiple frameworks. These tools help you balance precision with efficiency, enabling you to build a strong foundation for long-term sustainability management.

Choose the approach that aligns with your current capabilities, and plan to enhance precision over time. Whether you start small or take a more comprehensive route, the key is to begin measuring your emissions today.

FAQs

What are the benefits of using a hybrid approach to calculate emissions for sustainability reporting?

A hybrid method for calculating emissions merges the detailed precision of activity-based approaches with the extensive scope of spend-based techniques. This combination enables organisations to gain a clearer and more thorough understanding of their carbon footprint, even when the availability of data is inconsistent.

By utilising both approaches, businesses can pinpoint areas that need attention, make better use of resources, and gain practical insights to refine their environmental strategies. This adaptable method also supports alignment with changing ESG standards and reporting requirements, ensuring organisations remain compliant while working to minimise their environmental impact.

What challenges come with using an activity-based emission method, and how can they be resolved?

Using the activity-based emission method comes with its fair share of challenges. Its complexity and the amount of detailed data needed can make the process quite demanding. Collecting accurate information from multiple sources takes time, and varying data quality across regions often complicates precise calculations.

To address these hurdles, organisations can take several steps. Investing in robust data management systems, implementing standardised reporting frameworks, and leveraging advanced tools like life cycle assessment platforms can make a big difference. For instance, solutions such as neoeco offer extensive ESG reporting features, making it easier to gather data, improve accuracy, and stay aligned with global standards. These measures can go a long way in making activity-based emission calculations more reliable and efficient.

Why is a spend-based emissions method a practical choice for small and medium-sized enterprises (SMEs)?

A spend-based emissions method works well for SMEs because it’s affordable, easy to use, and doesn’t demand a lot of detailed data. By relying on financial spending as a stand-in for emissions, businesses can quickly estimate their carbon footprint without needing specialised tools or expertise.

Though not as precise as activity-based approaches, this method offers a solid starting point for pinpointing major emission sources and considering areas for improvement. It’s an excellent choice for SMEs wanting to set a baseline and take their first steps towards reducing their environmental impact.

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