Investors With $9.5 Trillion Seek Mandatory Scope 3 Disclosures

An influential coalition of pension funds and insurance companies holding a combined $9.5 trillion of assets called on regulators to mandate corporate disclosures of so-called Scope 3 emissions.

The Net-Zero Asset Owner Alliance said in a report published on Wednesday that requiring disclosures of carbon pollution produced by companies’ customers and supply chains would increase data credibility and comparability. Regulators also should provide guidance to address data and methodology problems that have thwarted the finance sector’s efforts to grapple with their value chain emissions, the group said.

Scope 3 emissions typically account for more than 70% of a company’s carbon footprint making them impossible to ignore for any business that’s pledged to address their environmental impacts. Still, the structural issues and data problems attached to Scope 3 are widely known, leading to paralysis among investors.

NZAOA said its report, entitled “Tackling Hidden Emissions for a Net-Zero Transition,” represents an attempt to open “a meaningful discussion” with policymakers, companies and asset owners about how to overcome the many challenges posed by Scope 3 emissions. The group, which includes Allianz SE and the California Public Employees’ Retirement System, said while it’s critical for signatories to consider Scope 3 pollution, integrating those emissions into carbon accounting and target setting “is highly challenging” due to a lack of a standardized methodology, an overreliance on models for estimating emissions and limited availability of data.

Even so, it’s time for investors to stop making excuses and face up to this most vexing of problems, said Udo Riese, global head of sustainable investing at Allianz Investment Management and co-lead of the monitoring, reporting and verification workstream at NZAOA.

“Everyone is complaining about how difficult it is, and the conclusion usually is I can’t do anything,” Riese said in an interview. “We need to move on from saying yes we should do it, but we can’t do it.”

Failure to solve the Scope 3 conundrum will impede necessary climate action, according to the NZAOA, which added that a few jurisdictions have announced Scope 3 disclosure requirements, including the European Union and Japan. The group said asset owners should take several immediate steps to address the problem, including engaging with data vendors to improve estimation models, promoting voluntary disclosure enhancements and explaining the data quality and limitations of their Scope 3 disclosures.

For investors that have committed to net zero, an understanding of carbon accounting is essential. Scope 1 covers direct emissions from sources owned or controlled by a company, like a fleet of cars or a power plant, while Scope 2 covers emissions from the generation of energy the company buys, such as electricity. Scope 3 is everything else linked to the company: It represents an aggregate of 15 different categories of emissions sources from purchased goods and services to business travel.

While the Scope 3 construct is complex and even a little abstract, it offers useful insights into how companies and emissions are interconnected, Riese said.

“Scope 3 emissions describe how companies are interacting with each other and with users and customers in the value chain,” he said. “And everyone knows that for systemic change, if you are connected in the value chain, you cannot solve your emission problems alone.”

An understanding about the different Scope 3 dynamics in various sectors is critical for investors, according to NZAOA. In the finance industry, the group found “substantial underreporting” of Scope 3 emissions by banks, indicating some financial companies “aren’t transparent” about their emissions profile.

“As an owner looking at that state of disclosures, you can’t set targets on disclosed emissions in some sectors because it’s a pure guess,” Riese said. “As long as the difference between what’s disclosed and what’s estimated is so huge, then target setting is really difficult.”

NZAOA members are required to independently set interim decarbonization targets on their financed emissions, otherwise known as Scope 3 Category 15 emissions. The group’s guidelines currently cover only the Scope 1 and 2 emissions of their portfolio companies, though NZAOA said on Wednesday that “it’s crucial for asset owners to consider the Scope 3 emissions of their invested companies in their portfolio steering and overall climate strategy.”

The NZAOA is one of the member alliances of the Glasgow Financial Alliance for Net Zero. GFANZ is co-chaired by Mark Carney, the chair of Bloomberg Inc. and a former Bank of England governor, and Michael R. Bloomberg, the founder of Bloomberg News parent Bloomberg LP.

Top photo: The business class cabin inside a Commercial Aircraft Corp of China Ltd. (Comac) C919 aircraft operated by China Eastern Airlines Corp. during the Singapore Airshow in Singapore, on Wednesday, Feb. 21, 2024. The Singapore Airshow is Asia’s most influential aerospace and defense exhibition.