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Scope 3 & Scope 4 emissions
3/7/2023 ~ 4:01:23 PM

Scope 3 emissions make up a large portion of total emissions, yet are under-reported.  

For context, approximately 85% of the largest 2,000 companies we cover disclose their GHG emissions, but of these companies only around 60% disclose a breakdown which also includes scope 3.

Even when reported, there are issues with how complete the scope 3 disclosure is, with some companies only disclosing on a few of the 15 GHG protocol categories. 

Many LPs and investors doubt the value of scope 3, and the two main criticisms arose during the ‘27 years to Net Zero, are we on track?’ panel at the PEI Responsible Investment Forum last week: 

(1) Scope 3 calculations are crude estimates at best – there is no such thing as measured scope 3.

(2) The double, triple, quadruple accounting problem at the fund level. The example given at the conference was a good one; jet fuel emissions.  

These could be counted in the scope 1 of the airline operating the flight, the scope 3 of any company whose employees are taking the flight for business, or the scope 3 of the company who refined the jet fuel.  

The SEC recently signalled they were scaling back their ambitious disclosure requirements on scope 3 [1], however some disclosure will be required under the new IFRS S2 standards [2]. So, there is mixed opinion from standard setters/regulators. 

Scope 4 (measuring avoided emissions) [3] is of growing interest to LPs who take climate investing very seriously; climate funds should invest in companies with technologies/approaches that will reduce global emissions significantly, with the acknowledgement that those companies are often in ‘unattractive’ industries like Steel, or Cement. 

Calculating their Scope 4 will reveal their positive impact - but again, estimations will play a large role in their quantification.

Read our Head of Research Hannah Bennett's thoughts here.

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