For example, if an oil and gas company sells all of its fuel to a mining company, and this mining company uses only this company’s products to run its mine, the downstream Scope 3 emissions of the oil and gas company should essentially be equivalent to the mining company’s Scope 1 emissions. Some investors have been concerned about the possibility of double counting if they were to incorporate Scope 3 emissions into their portfolio carbon footprinting. The exhibit below highlights the exposure of each sector Global Industry Classification Standard (GICS® 2) sector to each category of Scope 3 emissions, providing insights into the potential risks facing each sector and the location of these risks within their upstream or downstream value chain.Įstimated Scope 3 Emissions Per Category for Each GICS Sector To tackle the Scope 3 disclosure challenge, we developed a model to estimate these emissions across each of the 15 categories using a combination of revenue estimates and production data. Source: MSCI ESG Research LLC, MSCI ACWI IMI constituents as of March 31, 2020 For example, “business travel” (category 6) is upstream and “use of sold products” (category 11) is downstream. Scope 3 emissions contain 15 categories, to cover specific upstream and downstream value-chain activities. Share of Companies Reporting Emissions in Each Scope 3 Category We find even lower percentages of Scope 3 reporting when we look at the individual Scope 3 categories. As of March 2020, only 18% of constituents of the MSCI ACWI IMI reported Scope 3 emissions. Corporate reporting on Scope 3 emissions remains sparse, incomplete and at times highly volatile, posing challenges for institutional investors who aim to consider broader value-chain climate risks in their climate-related risk management and portfolio-construction practices. Understanding Scope 3 emissions is more complex than comprehending Scope 1 and 2. WACI measures the carbon intensity (”Scope 1 + 2 emissions” / USD 1 million sales) for each portfolio company multiplied by its portfolio weight. Weighted average carbon intensity (WACI) of the MSCI ACWI Investable Market Index (IMI), as of July 10, 2020. Scope 3 Carbon Emission Intensity for MSCI ACWI IMI In the exhibit below, we can see that the total Scope 3 average intensity was almost three times greater than the combined Scope 1 and 2 intensity as of July 2020.Īverage Scope 1 & 2 vs. This may be true for the carbon footprint of an investment portfolio as well. For example, the Scope 3 emissions of the integrated oil and gas industry (measured by the constituents of the MSCI ACWI Index) are more than six times the level of its Scope 1 and 2 emissions. These risks may come from new regulation of a company’s high-emission products and shifts in end-product market demand driven by climate concerns.įor some companies and industries, Scope 3 emissions dominate the overall carbon footprint. With businesses, governments and investors increasingly focused on a net-zero transition, Scope 3 investment risks are mounting. Investors concerned about climate change have traditionally focused on Scope 1 and Scope 2 emissions - e.g., the direct emissions from an oil- and gas-refining operation (Scope 1) and the emissions from the electricity utility needed to run the refinery (Scope 2). What Are Scope 3 Emissions and Why Are They So Important? In this blog post, we explain what these emissions are, why they are so important and what action investors can take to manage such risks. One gap in their knowledge is how to tackle emissions from the value chain of the companies in which they invest. Global investors are increasingly looking to identify opportunities to mitigate climate risks and support the transition to a world of net-zero emissions. A big enough dataset makes it possible to alleviate concerns about possible “double counting” of emissions across an investment portfolio.A detailed estimation model can help highlight potential climate-transition risks for investors in companies’ upstream and downstream in the value chain. The state of Scope 3 reporting is poor.Regulators are increasingly focusing on Scope 3. A company’s Scope 3 carbon emissions include everything beyond its direct operations and electricity use, including supply-chain operations and end-product usage by customers.
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