Understanding the Importance of Scope 3 Emissions and the Implications of Data Limitations

Proper incorporation of climate change issues into portfolio management requires attention to firm-level greenhouse gas emissions. Since value chain emissions make up the largest share of emissions for most firms, their consideration appears natural for both impact- and risk-management motivated investors. However, the reporting of these emissions remains voluntary in most jurisdictions and is sparse. Furthermore, reporting standards are not intended to support comparisons among firms. While data providers offer value chain emissions estimates, these typically take insufficient consideration of firm-level circumstances to support intra-sector comparisons. Investors should thus treat the integration of value chain considerations into asset selection with extreme caution. Value chain emissions may be used to guide overall policy, implement sector allocation, or initiate engagement with firms. Value chain considerations still may be included into asset selection or weighting via specific, firm-level performance metrics and/or commitments to decarbonize. Investors also should advocate for value chain emissions disclosure in their policy and issuer engagements. TOPICS:ESG investing, information providers/credit ratings, portfolio construction, performance measurement Key Findings ▪ Value chain emissions represent a material source of emissions that companies can be incentivized to reduce, and their consideration can improve the assessment of transition risks and opportunities. ▪ However, the reporting of these indirect emissions remains voluntary in most jurisdictions and is sparse. While pull and push factors suggest increased data availability in the medium term, reporting standards are not intended to support cross-company comparisons. ▪ Data providers offer value chain emissions estimates but these typically take insufficient consideration of corporate circumstances to support intra-sector comparisons. ▪ Investors should treat the integration of value chain considerations into asset selection with extreme caution lest they encourage greenwashing. Value chain emissions may be used to guide overall policy, implement sector allocation, or initiate engagement with companies. Value chain considerations still may be included into asset selection via specific, security-level performance metrics and/or corporate commitment to decarbonization. Investors also should advocate for value chain emissions disclosure in their policy and issuer engagements.