When asset managers first committed to aligning their portfolios with net-zero emissions, they largely avoided the thorny issue of Scope 3.
After three years, that is no longer possible. A wave of regulation and public scrutiny has left investors facing what a division of the London Stock Exchange Group calls “one of the most vexing problems in climate finance.”
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Scope 3 emissions are emissions generated by a company's customers and supply chain. They typically account for more than 80% of a company's carbon footprint. In the most polluting industries, such as oil and gas, that number can be even higher.
While this concept is not new, there is a renewed urgency among investors to understand the impact on the companies they invest in and their own climate change efforts. The urgency is growing as regulators in the European Union, Japan, the UK and elsewhere have signaled that mandatory Scope 3 disclosures for companies are imminent. The U.S. Securities and Exchange Commission is also debating whether to require large emitters to disclose their Scope 3 emissions.
The Institutional Investor Group on Climate Change succinctly explains why it matters. “Unless we are aware of a company's Scope 3 emissions, we cannot fully understand and assess a company's contribution to climate change.” However, the IIGCC states that to properly report and calculate Scope 3 numbers, There are a number of “real challenges” and these are obstacles that need to be overcome, he added.
This is what FTSE Russell, the index and benchmark arm of LSEG, calls the “Scope 3 conundrum.” Incorporating value chain emissions is “essential for companies to clearly assess climate risk,” but integrating scope 3 data with portfolio analysis and investment decisions is a major challenge to the complexities of scope 3 accounting. “often hindered” by According to the report, this complexity is due to low disclosure rates, uneven data quality, and low comparability.
“On the one hand, it's very important. “We need this data, we need to understand it and we need to build this into our investment process. Above all, these Scope 3 emissions have real business risks. and regulatory risks,” said Jaako Kooroshy, global head of sustainable investment research at FTSE Russell. “But on the other hand, we don't really have a mature dataset to do this with.”
FTSE Russell research shows that of the 4,000 medium- to large-sized publicly traded companies included in the FTSE All-World Index, only 45% disclose Scope 3 data Less than half of the categories with the highest volume are disclosed.
And even if the data exists, using it for investment purposes is another matter entirely, says Lucien, climate strategist at Dutch asset manager Robeco and co-chair of the IIGCC's Scope 3 working group. Peperenbos says.
One problem is that the GHG Protocol, the most widely used voluntary emissions reporting standard, was not originally designed with investors in mind. (The protocol, which he devised in the early 2000s, divides Scope 3 into 15 categories, ranging from emissions resulting from purchased goods and services to business travel and processing of products sold.)
Unlike Scope 1 and 2 emissions, which come from a company's own activities and purchased energy, Scope 3 is much more difficult to assess accurately.
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Investors participating in the Net Zero Asset Manager initiative will take Scope 3 emissions into account “to the extent possible” when setting targets to align their portfolios with net zero emissions by 2050. It may not be surprising that only one is required. Many of the asset managers participating in the $57 trillion initiative say they intend to add Scope 3 as the availability and quality of emissions data improves.
Ella Sexton, senior climate strategy implementation manager at the IIGCC, said a working group co-chaired by Robeco and HSBC Asset Management will soon “address how and where Scope 3 emissions should be used in reports and targets. “We hope that this will provide some clarity on the issue.” It's a way to encourage real action on climate change, not just on paper. ”
Peperenbos said the group was working to “reconceptualize” Scope 3 by “defining the materiality and level of collusion by sector.” Specifically, it means defining which of the 15 Scope 3 categories are most important to a company and therefore should receive the most attention from investors.
Investors should focus on the two Scope 3 categories that are most important to the industry, according to recent research from FTSE Russell. This is because these two categories account for an average of 81% of the sector's total Scope 3 emissions. In the energy industry, for example, the use of goods purchased and sold accounts for 88% of Scope 3 emissions intensity, according to FTSE Russell.
Simplifying and targeting the problem in this way “allows us to cover a large portion of the problem,” Coulosi said.
Overview of sustainable finance
The best defense against Republican attacks on ESG is to convince opponents that their investment strategies can actually contribute to financial performance, according to Man Group's chief investment officer for responsible investing. The world's largest publicly traded hedge funds screen for environmental, social and governance risks “just to try to make the world a better place,” said Rob Fardak, chief investment officer for ESG assets at Man Group. No, he said. “We do it because we think it improves our investment process.” Furdak said it's also important to remember where financial assets are located in the United States. “There is a perception outside the United States that the United States is incredibly anti-ESG, but it seems to be a very vocal minority that is making headlines,” he said. “In fact, pro-ESG states have more assets than anti-ESG states.”
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