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Net-Zero Alliance Investors with Over $9.5 Trillion in Assets are Urging Mandatory Scope 3 Disclosures

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.
“Our paper highlights the need for credible and comparable Scope 3 data, or else we will not see necessary carbon reductions in the real economy. While we are sending a clear signal to the market that regulatory mandates are needed for systemic progress, asset owners recognise the importance of taking responsibility and demonstrating leadership through actionable strategies now.”

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corporate governance, esg & sustainability