Introduction
Introduction
Scope 3 GHG emissions are the indirect value chain emissions of a company that are not covered as a part of Scope 1 and Scope 2 emissions and include both upstream and downstream emissions. These emissions are outside the operational control of the company that reports them and are the most difficult to accurately measure or estimate. Leveraging ESG research services can help organizations navigate these complexities by providing robust methodologies for assessing and mitigating such emissions. These emissions are further classified into 15 categories covering both upstream and downstream value chain emissions.
Why Scope 3 GHG Emissions Matter for Financial Institutions
A CDP technical note titled Relevance of Scope 3 Categories by Sector highlights the importance of Scope 3 emissions, as across all sectors considered for the analysis, Scope 3 emissions account on average for 75% of the total Scope 1+2+3 emissions in the sample. It is important to note that not all Scope 3 GHG emissions categories are applicable or relevant to all companies and industries. However, in most companies and industries, total Scope 3 emissions are considered to be important, as they are likely to constitute a major proportion of the total emissions, particularly when considering the diverse Scope 3 GHG emissions categories that span both upstream and downstream activities.
Key Challenges in Scope 3 Emissions Reporting and Measurement
Complex multi-layered supply chains: Considering the complex nature of global supply chains and the large number of businesses operating within and across multiple levels, it is challenging for businesses to monitor and control Scope 3 emissions. This makes it increasingly harder for investors to estimate the financial risk associated with carbon emissions and their exposure to climate related regulations.
Estimation: Emissions from the supply chain are also challenging to measure, particularly since they take place beyond tier-1 and -2 suppliers where businesses have limited influence over the practices that suppliers implement. From an investor’s perspective, considering the same emissions multiple times within a single investment portfolio means investors having stakes in multiple companies within the same value chain, which leads to practical challenges regarding data quality and coverage, inconsistencies in methodology and aggregation.
Inconsistency: There is a lack of consistent methods across industries for calculating Scope 3 emissions, which hampers comparison between companies and appropriate categorisation. Also, companies often start reporting Scope 3 emissions by focusing on the most relevant categories and those with the easily available data. Over time, data and methodologies improve, leading to restatements, as companies include more categories. Overall, Scope 3 emissions increase, making year-on-year comparison difficult.
Evolving frameworks: Currently, frameworks are continually evolving, creating market uncertainty and increasing the risk of incorrect claims on the Scope 3 emissions, which might impact organisation credibility
Strategies for Scope 3 Emissions Reduction in Investment Portfolios
Engage with suppliers: Collaborate with suppliers to assess and control Scope 3 emissions to the extent possible. Some important actions in this area may involve assisting suppliers in setting up specific metrics to gauge emissions accurately and aiding them in identifying their possible return on investment for decarbonisation.
Engage with companies: Investors can engage with their portfolio companies to encourage cooperation with suppliers, promote emission reduction initiatives across the supply chain and find low-carbon opportunities. Investors can engage with companies through multiple channels, including ongoing calls, meetings and proxy voting.
Identify and measure emissions: Companies can conduct a thorough analysis to identify and measure emissions across the entire lifecycle of their products and aim to pinpoint high-emission areas and seek out significant reduction opportunities.
Collaborative associations or initiatives: In order to reach decarbonisation throughout the global value chains, companies will need to work closely with their suppliers and various stakeholders to support the monitoring, measuring, target establishment and progress reporting, all of which are essential for attaining net-zero objectives and restricting global temperature rise to 1.5°C by 2050. Investors can evaluate the targets as a component of ESG assessment and fund management. Several associations and forums are available for investors and asset managers to work towards reducing emissions.
Portfolio based target setting: Double counting is inherent in the three-scope emissions accounting model when assessing multiple companies in a portfolio, particularly for Scope 3 emissions. So, setting portfolio net zero targets on Scope 3 could incentivise unintended outcomes. For example, investing in one company with a more integrated value chain to reduce the instances of double counting and therefore, the overall emissions of the portfolio.
Mandatory reporting: A growing number of climate disclosure regulations in various jurisdictions are transitioning to mandatory disclosure of Scope 3 emissions from voluntary reporting. Requiring the reporting of emissions throughout the supply chain will enhance transparency regarding climate risks and foster increased accountability for the effects and management of climate-related risks.
About the Authors
I have been with Acuity Knowledge Partners working as Delivery Manager in the ESG team for 2.5+ years with an overall experience of 8+ years. I have worked on and supervised various ESG deliverables including climate transition maturity assessment, ESG maturity assessment, ESG fund level quarterly reporting and developed a methodology for calculating Scope 3 emissions for auto financiers and key analytics to be used in an online platform. Prior to joining Acuity Knowledge Partners, I have worked at Wells Fargo in the Investment Banking team and Australia New Zealand Bank in the Client Insights and Solutions team. I..Show More
I have been working as an Analyst in the ESG team at Acuity Knowledge Partners for over 2.5 years. My experience includes ESG Benchmarking and analysis, EU Taxonomy, climate change assessment, and supporting clients in preparing quarterly ESG reports. Additionally, I have also handled diverse data and report requests from various stakeholders for an ESG engagement and also actively managed the engagement log process quarterly. I hold a postgraduate diploma in management with a specialization in finance from Jagdish Sheth School of Management, Bengaluru.
Thank you for sharing your details
Share this on
