The Net-Zero Asset Owner Alliance (the Alliance), an influential coalition of pension funds and insurance companies holding a combined $9.5 trillion in assets, released a report on Wednesday calling on regulators worldwide to mandate and standardize corporate disclosures of Scope 3 emissions, as regulations on these emissions are evolving worldwide.
Members of the UN-convened Alliance have committed to achieve net-zero greenhouse gas (GHG) emissions in their investment portfolios by 2050, consistent with a maximum temperature rise of 1.5°C, and to undertake portfolio decarbonization that can emphasize “GHG emissions reduction outcomes in the real economy.”
The report explains that the Alliance’s current Target-Setting Protocol, which governs how members set their intermediate climate targets, requires members to set targets on their own Scope 3 emissions (their investment portfolios), which include the Scope 1 and 2 emissions of their investee companies. However, because Scope 3 emissions account for on average 75% of a company’s GHG emissions, asset owners must also consider the Scope 3 emissions of their invested companies in their portfolio and overall climate strategy.
The report discusses the challenges asset owners face in integrating portfolio companies’ Scope 3 emissions in their carbon accounting due to the lack of a standardized methodology, an overreliance on estimation models, a limited availability of data across sectors, and the ability of companies to select the emission category that is relevant to their specific business activity, ultimately affecting the inclusion of Scope 3 in the asset owners’ target setting due to changing emission baselines.
Specifically, the report urges regulators to:
- Provide more guidance on Scope 3 material categories for each sector, as well as standardized estimation models and verification of data to increase coverage, credibility, and comparability; and
- Mandate Scope 3 disclosures to increase data credibility and comparability (as has been done in the European Union, Japan, and California).
The report underscores the importance of three key requirements:
- First, reliable emissions data should become available at the company level.
- Second, policies that require transparent disclosures should be established across different jurisdictions.
- Third, asset owners should capitalize on increased data transparency and reliability.