The Institutional Investors Group on Climate Change (IIGCC) has argued that information on the scope 3 emissions is "vital" for investors looking to credibly decarbonise, despite ongoing measurement and aggregation challenges.

In its latest discussion paper, the IIGCC noted that the regulatory direction of travel is towards more clarity around scope 3 disclosure, which is increasing the urgency for companies and investors to familiarise themselves with it and prepare to calculate and disclose.

Scope 3 represents emissions from a companies’ value chain, covering both the upstream supply chain and downstream customer activity.

However, the working group acknowledged that there are practical challenges with reporting, estimation and calculation of scope 3 data, which has led to a fragmented data landscape that lacks coverage and quality across the investable universe.

IIGCC also noted that while the data is improving, it is unlikely to be consistent and credible across investors’ whole portfolios in a timeframe consistent with the urgent need to address climate change issues and manage climate-related risks.

Beyond practical data and calculation concerns, the IIGCC admitted that there are several inherent challenges that arise when looking at scope 3 from an investment portfolio level.

In particular, the report warned that aggregation of multiple companies’ scope 3 can lead to meaningless metrics that would incentivise undesirable outcomes and therefore cannot be used to underpin decision-making or track progress.

This is because purpose of measuring scope 3 emissions is not to assign emissions ownership but to assess one entity’s carbon exposure.

Despite these challenges, the IIGCC argued that, without recognising the scope 3 emissions of a company, it is not possible to fully understand and assess its contribution to climate change.

The report stated: “Scope 3 emissions are an essential part of understanding an individual company’s impact on climate change.

“Whilst aggregation of scope 3 emissions at portfolio level leads to perverse outcomes, it is clear that asset-level engagement is an important lever that investors can use to understand and address these emissions within their portfolios.

“By understanding the value chain emissions of portfolio companies, investors can better identify and prioritise engagement on decarbonisation.

“Whilst improvements to practical measures such as reported data and third-party estimations are needed over time, investors can start to deploy asset-level engagement on scope 3 emissions in material sectors and categories.

“However, there is a lack of comprehensive guidance on how best to approach scope 3 materiality assessment within portfolios.”

In light of these concerns, the IIGCC confirmed that it will reconvene for a second phase of work during the first half of 2024 to address the challenges outlined in the report, building on existing work by both investors and industry groups to date.

This will include an exploration of the materiality of scope 3 categories to different sectors and guidance on how investors can approach scope 3 emissions within their portfolios.

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