Scope 3 explained: Helping investors take action on the value chain emissions of investments

A new paper from IIGCC highlights the nuance and importance of addressing scope 3 emissions within investment portfolios, as well as the barriers to doing so and the limitations of that data.

Typically, the largest source of emissions within an investment portfolio sits in the value chains of investors’ assets – known as scope 3 emissions under the Greenhouse Gas Protocol.

This third scope is broken down into 15 categories. The most important category for investors at the investor entity level is category 15: 'the emissions of their investments,' namely investee companies and other assets, which presents an enormous challenge to measure and report.

Adding to this complexity, each of those assets in turn have scope 1, 2 and 3 emissions of their own. To date, investors have mostly focused on the scope 1 and 2 emissions of assets held and.

Now, as climate disclosure regulations evolve, our paper aims to help them understand the largest source - the scope 3 of assets. 

Full climate impact

Overlooking the scope 3 of assets is not an option. It includes a broad range of activities which are often very material to a company’s business model, its emissions footprint, the transition risk it faces and the mitigation of climate change globally. Most notably it includes emissions generated from the use of a company's products and services, but also includes activities such as business travel and employee commuting.

In the oil and gas sector alone scope 3 accounts for 80 to 95% of emissions.

The amount and quality of data available to investors on company scope 3 emissions lags far behind what is available on scope 1 and 2, but without it, it is not possible to fully capture the climate impacts of investments. In the oil and gas sector alone, scope 3 accounts for 80 to 95% of emissions.

Investors are well aware of the need to factor these emissions into portfolio decarbonisation decision-making, but the lack of quality data makes it hard for them to do so consistently. Our paper also explains that simply aggregating these emissions into a portfolio-level metric could incentivise the wrong decision-making.

Net zero commitments

Investors committed to net zero initiatives agree to address asset scope 3 emissions as part of their portfolio decarbonisation and Paris-alignment efforts. For Paris Aligned Asset Owners, this includes a requirement to set objectives and targets on scope 1, 2, and 3 emissions associated with portfolios, including an interim target by 2030 or sooner.

Material scope 3 emissions are also included in the Net Zero Asset Manager commitment “to the extent possible” – acknowledging the almost equal importance and difficulty of accounting for the metric.

Both commitments recommend the Net Zero Investment Framework (NZIF) methodology as a means of achieving these targets, the most widely used guidance by investors committed to net zero today. As we upgrade NZIF we are committed to providing investors with guidance to meaningfully address scope 3 emissions in portfolios.

Portfolio risks revealed

The paper goes on to outline a range of challenges facing investors considering scope 3 emissions of their investments, particularly at the portfolio level. A lack of high-quality data, consistency in calculations and approaches, or even one clear approach all hinder accurate aggregation. Underlying companies within a portfolio may be using different methodologies to calculate scope 3 emissions, for example. Nor can companies always influence their scope 3 emissions.

Though scope 3 does not directly equate to climate transition risk, understanding the magnitude of these emissions helps investors to better understand how these risks might be distributed across a portfolio and concentrated in particular investments or business segments.

This, in turn, offers opportunities to prioritise engagement with companies to influence real world decarbonisation – the overarching principle of NZIF. Our discussion paper sets out these challenges as a blueprint for the practical guidance to come later in 2024.

If you’d like to take part in our working groups and help to shape the outputs of our resources, why not speak to our investor relations manager today to find out more about becoming a part of IIGCC?