January 25, 2024

Scope for improvement: Solving the Scope 3 conundrum

Scope 3 greenhouse gas emissions on average make up over 80% of corporate carbon footprints. Accounting for these emissions is critical for investors to analyse transition risks associated with their investments and to comply with Net Zero commitments and evolving regulatory standards. However, data quality issues and gaps hinder investors' ability to systematically evaluate Scope 3 emissions and integrate them into investment processes and reporting.

This report addresses ten key questions about Scope 3 emissions and proposes solutions to enhance data quality, improve data reliability, and make Scope 3 data more accessible and user-friendly.

What our research means for investors

Scope 3 emissions present one of the most vexing problems in climate finance. There is broad agreement that consideration of Scope 3 emissions is indispensable to a clear-eyed assessment of climate risks for companies. However, practical integration in portfolio analysis and investment decisions is often hobbled by the complexity of Scope 3 accounting, low disclosure rates, variable data quality, high volatility, and poor comparability. The lack of consensus on which categories should be regarded as material is key to the Scope 3 Conundrum. We address this issue by proposing a new approach based on empirical data to identify the most material Scope 3 categories in each sector.

In line with this methodology, we recommend investors focus on systematically identifying and examining the most material Scope 3 categories in available data to enhance robustness and comparability consistency over time and remain mindful of the inherent data limitations.

Points of differentiation:

  • To address the lack of consensus on which categories should be regarded as material, we propose a new, streamlined approach based on empirical data to identify the most material Scope 3 categories in each sector. This methodology will simplify reporting for companies, enhance the quality and comparability of both reported and estimated Scope 3 data, and enable more informed investment decisions.
  • We focus on a set of ten key questions on Scope 3 that are frequently asked within the institutional investment community, particularly those investors and other finance sector professionals that are looking to better understand and use Scope 3 data. In addition, this information supports a broader set of stakeholders, including disclosing companies, academics, standard setters, and policy makers.
  • In our recommendations to companies, investors, and regulators, we emphasise the need to systematically focus on the most material Scope 3 categories in each sector to reduce reporting burdens and improve quality and comparability of Scope 3 data.