Institutional investors are facing significant barriers to including Scope 3 emissions as part of their disclosure strategy for environmental assets, according to a new report by the United Nations’ Net-Zero Asset Owner Alliance.
It found asset owners need to accommodate Scope 3 emission disclosures as part of their overall strategy to create a meaningful climate-centric approach to investing. However, institutional investors are less likely to include the environmental metric due to limited data quality, inconsistent accounting frameworks and double-counting risks, the report noted.
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The Scope 3 greenhouse gas emissions metric is used to measure the impact caused indirectly by a firm through its value chain, compared to Scope 1 and 2, which are more closely aligned with the direct actions of a corporation.
Emissions measured with the strict environmental metric can account for three-quarters of most companies’ total emissions, the NZAOA said.
The report also noted there’s encouraging enforcement updates surrounding intricate emissions disclosure across the globe, including the European Union, California and Japan.
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It also recommended asset owners tackle their current disclosure efforts by seeking improved emissions disclosures from issuers, including independently verified or audited annual Scope 3 emissions estimates. Investors should also prioritize engagement with companies engaged in sectors where Scope 3 emissions are most significant or where disclosure is lacking.
“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,” said Udo Riese, global head of sustainable investing at Allianz Investment Management, in a press release. “While we’re sending a clear signal to the market that regulatory mandates are needed for systemic progress, asset owners recognize the importance of taking responsibility and demonstrating leadership through actionable strategies now.”