ESG funds could be left holding major emitters as Big Tech faces up to Scope 3, warns investor

Tech companies will replace energy producers on CA100+ as indirect emissions are factored into broader disclosure rules and analysis, says KBI portfolio manager

Big tech holdings will soon be identified as some of the world’s biggest carbon emitters as Scope 3 emissions begin to be factored into assessments, a senior portfolio manager at KBI Global Investors has warned. 

The sector has become popular with green investors because of the low direct emissions of tech companies and their celebrated commitments to decarbonisation and renewable energy. However, David Hogarty, KBI’s Head of Strategy Development told RI that, with an increasing emphasis on companies’ indirect emissions – which includes those generated during the use of products and services – this is likely to change dramatically in coming years. 

“Big tech stocks in the US are the singular industry group that's likely to be most impacted by [the inclusion of] Scope 3,” he said. “We think it is a big contingent liability that a lot of ESG investors may not be aware of yet. The market is naïvely overweight to the risk we are discussing.”

Indirect emissions would cover all emissions generated when consumers use devices such as phones and computers, or related software and platforms. Some estimates put the carbon footprint of such activities at the same levels as the airline industry, with predictions it will double over the next few years. 

“People don’t realise the Cloud creates carbon because of the way they experience it,” said Hogarty, referring to on-demand data storage and computer power. “The more we stream and demand greater speed, the bigger the data ‘push’ required before we receive it – and that needs energy.”

Investors and regulators are increasingly expecting companies to address their Scope 3 emissions as part of their public disclosures and decarbonisation plans. The Taskforce on Climate-related Financial Disclosures – whose latest backers include the G7 and G20 – recommends the inclusion of Scope 3 in climate reports. 

Technology companies currently tend to underreport on indirect emissions, in part because they are difficult to quantify.  

“Risk is okay as long as it’s built into the price you pay, and you’re being compensated for it by way of a discount, but big tech companies are priced for perfection and trading on some of the biggest valuation multiples in history,” explained Hogarty. “There has been no margin for error or unforeseen risks.”

He added that the trend could change the shape of Climate Action 100+ (CA100+) – the world’s biggest shareholder engagement initiative, which has identified more than 100 ‘systemically important carbon emitters’ for investors to steer towards Net Zero. 

“CA100+ is the top 100 polluters, so if what I'm talking about materialises over the next five or 10 years, you may find a lot of the big energy companies fall off the CA100+ and get replaced with tech companies.”