Scope 3 emissions in investment decision-making: An analysis
As Scope 3 emissions gain prominence in climate discussions, this paper offers an analysis of their current usability for investment decision-making, examining data challenges, regulation, and implications for portfolio construction.
Corporate emissions disclosure is a significant area for many sustainability-focused investors. For instance, a climate survey published by State Street Investment Management in September 2024 indicated that 44% of responding asset owners in Europe, Middle East, and Africa monitor corporate disclosures of Scope 1, 2, and 3 emissions in accordance with Task Force on Climate-related Financial Disclosures (TCFD) principles.
As investors incorporate climate objectives into investment portfolios, determining which emissions metric to use for setting portfolio targets is often a key consideration. While Scope 1 and 2 emissions have been widely used, partly because of higher level of data standardization and availability, Scope 3 emissions have gained attention as disclosures have improved and regulatory requirements have increased. However, significant challenges around the quality, reliability, and consistency of Scope 3 data raise the question: can investors confidently incorporate Scope 3 emissions into their decision-making?
This paper explores the use of Scope 3 emissions data and common normalization factors for portfolio construction, presenting an approach for investors who wish to target an emission-related metric in their portfolios.
To facilitate a comprehensive understanding of Scope 3 emissions data usability, this paper first outlines the presented approach and its rationale. It then provides an in-depth examination of the following research aspects:
- Insights from data providers
- Overview of standards and regulations
- Analysis by asset class: equities and fixed income
- Evaluation of normalization factors: enterprise value including cash (EVIC) and revenues
- Point-in-time analysis in index equity portfolios
Ultimately, the analysis conducted herein, taking into account current data limitations, culminates in an approach for setting reliable climate-related targets that prioritizes Scope 1 and 2 emissions data.