Many businesses still underestimate the challenge of managing climate risk from Scope 3 emissions. Scope 3 emissions – emissions generated across a company’s value chain, such as by its suppliers – can account for most of its total carbon footprint. Yet, as asset manager Union Bancaire Privée (UBP) outlined in its 2023 Impact Report, Scope 3 remains one of the most difficult areas to assess.
The hardest emissions to measure
Unlike Scope 1 and 2 emissions, which are relatively easier to quantify as they originate directly from a company’s activities or purchased energy, Scope 3 includes a wide range of indirect emissions. These include emissions from suppliers, business travel and transportation and downstream emissions from product use and disposal.
A 2024 survey of 300 large public companies by consultancy firm Deloitte found that while three-quarters disclose their Scope 1 emissions and around half disclose Scope 2, the figure falls to 15% for Scope 3.
According to UBP, differing figures from various data providers can make it difficult, if not impossible for a fund to reliably meet a targeted sustainability outcome. “Such an outcome may or may not be reached depending on which provider is chosen,” shares UBP.
Historically, the correlation between Scope 3 data from different providers was close to zero across its portfolios, says the asset manager. In recent years, greater corporate disclosure and more alignment among data vendors have helped improve consistency. “With increased reporting by companies and a visible convergence in methodology, the correlation has increased significantly,” UBP says. Still, large discrepancies remain in specific data points, making investment decisions more complex.
Traditional methods of estimating corporate carbon emissions are dramatically underperforming when it comes to Scope 3 emissions, according to a study by UK-based climate intelligence firm Carbon Responsible. The company’s research shows that commonly used Environmentally Extended Input Output (EEIO) models can overstate Scope 3 emissions by as much as 2,480% compared to verified data. The findings, based on a benchmarking analysis of 2023 verified emissions data from FTSE 100 companies, highlight the limitations of EEIO models and the need for more accurate solutions. Ada, Carbon Responsible’s AI-powered emissions engine, reduced inaccuracies to just 80%—making it 30 times more accurate than traditional models and achieving a 97% improvement in precision. COO Matthew Paver said, “When you’re 97% more accurate than the industry standard, you’re no longer in the realm of estimation – you’re capturing investment-grade data.”
Scope 3 emissions overestimated by 2,480%, AI study finds
Technological advances, such as satellite imaging, have supported more accurate estimations in areas like fugitive emissions (emissions released by accident), though UBP believes that the real progress has come from the growing standardisation of methods across the industry.
On the role of technology, it’s up to companies and data providers to leverage the best tools available when calculating emissions, according to UBP. Asset managers, the firm stresses, should avoid making their own estimates and instead rely on reliable external data. “If we want emissions data to be comparable across investment strategies – or between companies within the same sector – we need the improved reliability offered by technology to be accessible to all investors.”
Standardisation is critical
Deborah Ng, head of ESG and sustainability at investment manager GMO, says: “Tracking emissions across a value chain is complex and most companies lack the systems, expertise, or incentives to measure and report indirect emissions comprehensively.” Global supply chains require tracing and gathering emissions data from multiple tiers of suppliers, leading to significant data gaps.
Ng points to the Greenhouse Gas (GHG) Protocol, the global standard for carbon accounting, which identifies 15 categories of Scope 3 emissions. However, companies are not required to report on all of them. This flexibility leads to inconsistent and often incomplete disclosures, making it difficult for investors to compare emissions between companies or sectors reliably.
“Asset managers rely heavily on third-party data providers for Scope 3 estimates,” she explains. “These providers often use company-reported data where available and industry averages where it’s not. This significantly limits our ability to distinguish leaders from laggards.”
This lack of comparability impacts everything from portfolio construction to emissions risk management. “Without a standardised approach to Scope 3 measurement, it becomes harder to align investments with long-term decarbonisation goals and manage transition risk effectively,” she adds.
60% of companies in the MSCI ACWI Index report Scope 3 emissions. This compares to 80% for Scope 1 and 2. Source: Clarity AI
Tackling the “double counting” challenge
While Scope 1 and Scope 2 focus on a company’s direct emissions, Scope 3 encompasses upstream emissions from suppliers and downstream emissions from product use and disposal, increasing the risk of double-counting. Pierre-Olivier Haye, CTO and co-founder of ESG data provider Iceberg Data Lab, highlights how emissions from one company’s operations can appear on another’s balance sheet if their supply chains overlap.
He illustrates this using the example of Alphabet (Google’s parent company) and Intel. Alphabet’s Scope 3 emissions from using data centre services may overlap with Scope 1 emissions from the data centre operator. Meanwhile, Intel’s downstream emissions reflect Alphabet’s use of its chips.
“Without careful data modelling, these emissions could be counted twice,” Haye says. New tools, such as AI-driven ESG chatbots like Iceberg’s Barbatus, may prove helpful. These technologies can process vast amounts of unstructured ESG data to deliver actionable insights and performance assessments across portfolios.
“AI is becoming indispensable for asset managers in ESG,” says Haye. Solutions exist that help mitigate double-counting risk. A more accurate picture of Scope 3 emissions emerges by attributing emissions to the final consumer.
Blockchain is another emerging tool, with the potential to increase transparency in emissions tracking, especially within complex supply chains. However, Haye notes that energy-intensive proof-of-work systems still pose limitations. “The promise is there, but scalability and sustainability must be addressed,” he adds.
Ng too points out that advanced modelling is essential to accurately account for Scope 3 emissions. GMO’s approach relies on using only direct emissions as inputs and then modelling how those emissions flow through the economy. “We combine top-down country-sector information with bottom-up company-specific data on supply chains and revenue streams to distribute emissions exposure accurately,” she adds.
Many other models lack the necessary granularity to reflect companies’ true emissions exposure. Without detailed company-level data, some tools could risk oversimplifying emissions and potentially misallocating capital within portfolios, says Ng.
She also references a newer approach that treats emissions as a good or tax transferred to customers. However, it would require implementation across all companies – “a fundamental overhaul that is unlikely to scale in the near term”.
Ultimately, Ng believes that double counting isn’t the core issue. “The focus should be on improving the accuracy, consistency and comparability of emissions attribution to enable better portfolio decision-making and risk management.”
Scope 3 emissions overestimated by 2,480%, AI study finds
The global picture
Despite improvements in Scope 3 disclosure, a global gap remains. According to Clarity AI, while 80% of companies in the MSCI ACWI Index report Scope 1 and 2 emissions, 60% disclose Scope 3. The disparities are particularly stark in emerging markets. Only 41% of Asian companies report Scope 3 emissions, compared to nearly 90% in Europe and Japan. As regulatory demands and investor expectations increase, the pressure is growing for more consistent, accurate and comparable Scope 3 data.
Ng, for instance, believes that a revisit of the GHG Protocol could help address the issue. “It’s been effective for Scope 1, but Scope 3 demands a more standardised and practical framework if we’re serious about meeting climate targets.”
Even with progress in technology, corporate transparency and data systems, measuring Scope 3 emissions remains inconsistent – a roadblock for climate-focused investing.
