World’s biggest pension fund publishes analysis of portfolio’s Scope 3 emissions

Industrials, Energy, and Consumer Discretionary sectors show high CO2 increase when use/consumption numbers included

The largest pension fund in the world, Japan’s Government Pension Investment Fund (GPIF), has identified a “shockingly large gap” between its reported carbon emissions over the past two years, after including its Scope 3 emissions in its latest analysis

The scheme, which manages more than $1.5tn, has published details of its entire greenhouse gas emissions supply chain – including difficult to measure Scope 3 emissions, which are those generated by the consumption and use of goods and services sold – for the first time.  

The report is significant because critics of carbon footprinting by investors often point to the lack of credible assessment of Scope 3 emissions. 

In its latest ESG Report, covering 2020, GPIF said that – for 7 of the 11 sectors in its equity portfolio – including “downstream Scope 3” emissions in the analysis contributed at least an additional 50% to total emissions, when compared to the previous year. 

Breaking down the emissions by sector and scope, GPIF said the Scope 3 emissions accounted for high weightings within companies in the Industrials, Energy, and Consumer Discretionary sectors of its portfolio. 

“It is possible that companies within these sectors can be significantly more competitive by reducing their GHG emissions across the entire supply chain,” it added.  

The analysis noted that the same trend could be seen broadly in its bond portfolio, but that including Scope 3 emissions in the analysis of the portfolio's carbon footprint raised the possibility of duplicate GHG emissions where Scope 1 emissions of one company are included in the Scope 3 emissions of another.

In the Industrials sector, which includes industrial and construction machinery, and the Consumer Discretionary Sector, which includes automobiles and home appliances, GPIF noted that the emissions from consuming products and services are greater than those from the manufacturing process. It said the trend was clearer still in the Energy sector, where Scope 1 and 2 emissions for oil, coal and gas, such as drilling and refining, are relatively small, whereas GHG emissions from the product and services used accounts for more than 80% of the total. 

As a result, it noted that investment portfolios with a higher weight of Industrials, Energy, and Consumer Discretionary sectors show dramatic CO2 rises if Scope 3 is included in the calculation.

Looking at total CO2 emissions by asset class, GPIF said its domestic equities portfolios had the highest level of emissions, followed by international equities, international corporate bonds, and then domestic corporate bonds. 

Significantly, GPIF said that a breakdown of its total carbon footprint showed that the combined emissions of Scopes 3 Upstream and Downstream for assets excluding domestic bonds accounted for about 80% of its total emissions (the amount is 65% for domestic bonds). 

Consequently, the Japanese giant said that calculating emissions across the entire supply chain and enhancing the transparency of these emissions and the potential for reducing them was “crucial for companies to take efficient emission reduction measures”.

GPIF report also includes GHG analysis of alternative assets including domestic real estate, as well as an assessment of the inter-industry transfer of risks and opportunities that are considered to be inherent in the transition to a low-carbon economy.