Tackling Scope 3 Emissions: A Critical Step Towards Carbon Neutrality
Advanced technology can help sourcing Scope 3 emissions data, as organizations are still failing to disclose this data
Time is running out for governments and businesses to achieve carbon neutrality by 2050. In the financial sector, climate initiatives, such as the GFANZ alliances or the IIGCC Net Zero Investment Framework, have been launched to encourage commitments, measure, and report on progress. Informing investment decisions with accurate, reliable data is paramount to fighting climate change. But still, questions and gaps persist on how to measure indirect emissions known as Scope 3 emissions. Despite companies not being directly in control of these emissions, they account on average for 80% of their total carbon emissions, making them an essential target in the journey towards the decarbonization of our economy.
What Are Scope 3 Emissions?
Scope 3 emissions are greenhouse gas emissions that result from activities in a company’s value chain that are not directly performed through its own operations. They are divided into 15 categories (see chart below) and include for example emissions coming from the company’s providers or the ones released through the use of their products.
While companies do not directly release Scope 3 emissions, they are responsible for them through their sourcing, product design and investment decisions. Failing to include them in decarbonization objectives is failing to effectively address the issue at hand.
Where is the Gap?
Scope 3 emissions are adding complexity to the current conversation around sustainability data. Because these emissions happen outside of their own operations, it is harder for companies to access exhaustive and reliable data. Not having direct visibility over the carbon emissions from upstream and downstream activities requires additional efforts from companies to:
– Gather emissions data from their providers and control its quality,
– Rely on estimates and modeling capabilities for data that cannot be sourced.
So this leaves us with the question:
How well are companies coping with these challenges?
To find answers, we have looked at organizations that report data to CDP, the main non-profit sustainability disclosure platform. Data shows that only 54% of organizations in sectors with material Scope 3 emissions disclose comprehensive information on Scope 3 emissions (1). 18% of organizations in those sectors do not disclose this information and additionally, 28% report incomplete data and openly acknowledge that they are missing one or more Scope 3 categories relevant to their industry, which can potentially account for the majority of their emissions.
Reporting data is certainly a step in the right direction toward higher transparency and accountability in organizations but the decarbonization of our economy requires more than just making data available. Decarbonization requires setting realistic and science-based targets to accelerate the change and allow tracking progress.
However, out of the companies that comprehensively report their Scope 3 data, 82% do not have reduction targets for these carbon emissions. That results in less than 10% of those CDP-reporting companies disclosing Scope 3 emissions and targets for sectors with material Scope 3 emissions. This clearly shows the road ahead to make corporations accountable for their Scope 3 emissions and to ensure the climate problem is addressed in its entirety.
This lack of data and commitment from companies also has a direct impact on institutional investors, who are increasingly feeling pressure from regulators to disclose how sustainable their investments are and to what extent they are considering ESG criteria in their investment strategies.
This is especially true in the European Union, with the Sustainable Finance Disclosure Regulation (SFDR) and the new requirements for 2023. Asset managers must now provide product-level disclosures for the funds they market as “sustainable,” also known as Article 9 funds.
The Case of the EU: Deep Dive into Article 9 Funds
Clarity AI’s research team found that 20% of funds marketed as being Paris-aligned do not consider Scope 3 carbon emissions in their investment strategy (2), even when half of them have more than 40% of their holdings in sectors with material Scope 3 (3).
This data, sourced from the European ESG Templates (EETs) and submitted by the fund managers, suggests that Scope 3 emissions are also being overlooked by investors in climate-related products, despite being material.
How Can Advanced Technology Help Sourcing Scope 3 Data
Scope 3 emissions are at the far end of the overarching concerns around sustainability data accuracy and completeness. However, companies and financial market participants must play their part in decarbonizing the economy and work with the data available, on a best-effort basis, which must include Scope 3. One way of doing this is by leveraging advanced modeling capabilities and being fully transparent in how these emissions are calculated.
Clarity AI has developed a proprietary Scope 3 estimation methodology leveraging a combination of Environmentally Extended Input-Output (EEIO) models (4) and state-of-the-art Machine Learning models trained on more than 11.000 reported data points. This unique approach leverages the macroeconomic insights on global trade flows from the EEIO models while capturing the heterogeneity at the company level that the Machine Learning approach offers, based on business activities, geographies, financials, number of employees, or industry-relevance of Scope 3 categories.
This allows us to estimate emissions with greater accuracy than traditional techniques, for more than 35.000 companies and at Scope 3 category-level.
Contact us to learn more about our methodology and to get a demo of our climate solutions.
(1) As defined by the Climate Action 100+ disclosure framework
(2) Paris- aligned funds have their total greenhouse gas emissions aligned with the long-term global warming target of the Paris Climate Agreement, therefore indicating that the financial product has the objective of reducing carbon emissions
(3) The research has been conducted on a sample of 830 EETs submitted by Article 9 funds. Out of those, 67 claim to be aligned with the Paris Agreement, but 13 (20%) admit they are not considering Scope 3 data
(4) Environmentally Extended Input-Output (EEIO) models are used in environmental accounting to model transactions and associated greenhouse gas emissions between industries and across countries (Source: European Commission)