An IIGCC working group co-chaired by Robeco and HSBC Asset Management has warned of “perverse outcomes” from trying to address portfolio-level Scope 3 emissions.
The group, which has more than 20 members, is starting work on guidance for investors on how to tackle Scope 3 emissions in their investment portfolio.
It also aims to produce sector-by-sector guidance on how to determine materiality for the different categories of Scope 3, as well as sector “complicity” – the responsibility for and influence over each category that a sector has.
The IIGCC published a discussion paper on Thursday looking at the challenges faced by investors. One of the issues it notes is the “perverse outcomes” that can arise when trying to cut portfolio Scope 3 emissions.
The example given in the paper is that investing in a firm with a more integrated value chain would reduce portfolio emissions without any real-world effect on emissions levels.
“Scope 3 accounting and target-setting at portfolio or fund level may not lead to real-world outcomes that help to reduce climate change, but it is important to understand these emissions at asset-level,” the paper says.
Lucian Peppelenbos, climate and biodiversity strategist at Robeco, told Responsible Investor that climate solutions providers can also have higher Scope 3 emissions due to methodological issues.
An example commonly used at Robeco is a lightbulb manufacturer whose products only last two years instead of 20 years for an LED, thus giving them a smaller footprint.
“The fact that Scope 3 is so huge compared to Scope 1 and 2 can create a very skewed outcome where the investment in one single climate solution provider already blows up your total carbon footprint,” said Peppelenbos.
He added that investors are dealing with multiple problems when it comes to Scope 3. These include low reporting disclosure levels, poor consistency between data providers and double-counting when investors aggregate Scope 3 emissions at the portfolio level.
“I was really struck by the level of consensus that we have among the group members of both the importance and the complexities of Scope 3 in a portfolio context and recognising that everybody is struggling with this.
“When you read the Greenhouse Gas Protocol, Scope 3 was never intended to compare companies, let alone to aggregate them. It was designed to compare a single company over time. Back in 2001, they didn’t foresee that we’d be aggregating those numbers in an investment portfolio.”