The United Nations-convened Net-Zero Asset Owner Alliance (NZAOA) has recently called for mandated scope 3 emissions disclosures, asserting that such mandates are essential to enhance data comparability and quality. The Alliance underscores the significance of scope 3 emissions, which, according to a 2023 analysis by the Carbon Disclosure Project, constitute about 75% of all company emissions across various sectors. Reliable and comparable scope 3 data is seen as crucial for achieving necessary carbon reductions globally, as it enables asset owners to set effective engagement objectives and sector-specific targets. This, in turn, allows for comprehensive assessments of companies’ climate profiles. However, the call for mandated disclosures stems not only from the need for better data but also from the complexities and challenges associated with current carbon accounting practices.
Importance of Scope 3 Emissions Data
The crucial role of scope 3 emissions in the broader context of climate change cannot be overstated. Scope 3 emissions encompass all indirect emissions that occur in a company’s value chain, including both upstream and downstream activities. These emissions are significant because they often represent the largest share of a company’s total greenhouse gas emissions. The NZAOA argues that without an accurate and standardized approach to measuring and reporting these emissions, asset owners cannot fully understand the climate impact of their investments. Reliable scope 3 data enables them to set precise targets and to hold companies accountable for their entire carbon footprint, not just the emissions they directly control.
Furthermore, the Alliance emphasizes that scope 3 data is pivotal for asset owners looking to decarbonize their portfolios. By having access to accurate and comprehensive emissions data, asset owners can make more informed decisions about which companies to invest in and engage with. This ability to assess and compare climate profiles is essential for fostering a market environment where environmental responsibility is both recognized and rewarded. The lack of high-quality scope 3 data currently hinders progress toward these goals, highlighting the urgent need for mandated disclosures.
Regulatory Enforcement and Challenges
The NZAOA has called on market regulators worldwide to enforce corporate scope 3 emissions disclosures, pointing to existing frameworks in California, the European Union, and Japan as examples of how such mandates can be successfully implemented. Regulatory enforcement is deemed critical for the proper execution of asset owners’ climate strategies. However, the road to mandatory disclosures is fraught with challenges, including difficulties with carbon accounting, the risk of double counting, and issues related to data availability, accuracy, and consistency. These obstacles complicate the task of obtaining reliable emissions data and underscore the need for a robust regulatory framework that can address and mitigate these issues.
To tackle these challenges, the NZAOA suggests several immediate actions for asset owners. First, they recommend accounting for scope 3 emissions separately from scope 1 and scope 2 emissions to avoid aggregation at the portfolio level, which can obscure the true carbon footprint. Additionally, the Alliance advocates for enhancing voluntary scope 3 disclosures, promoting data standardization, and engaging with data vendors to improve data quality. Asset owners are also encouraged to disclose any limitations, assumptions, and judgments related to their emissions data to increase transparency and build trust with stakeholders.
Actions for Asset Owners
Udo Riese, the lead for NZAOA’s monitoring, reporting, and verification track, stresses the importance of asset owners demonstrating leadership through actionable strategies, even as they call for regulatory mandates. Among the specific actions recommended, setting scope 3 engagement objectives and sector-specific targets is crucial. These targets help focus efforts on the areas where they can have the most significant impact. Seeking improved emissions disclosures from issuers and obtaining independently verified or audited scope 3 estimates are also essential steps to ensure the accuracy and reliability of the data used for decision-making.
The NZAOA further suggests that asset owners may start to gradually shift their investments toward issuers with approved scope 3 targets. This gradual shift serves to incentivize companies to adopt and commit to robust emissions reduction goals. Over time, this can lead to substantial reductions in scope 3 emissions across portfolios and contribute to the broader goal of achieving a net-zero economy. By aligning investment strategies with climate objectives, asset owners can play a pivotal role in driving systemic change within the financial markets.
Conclusion
The NZAOA has urged global market regulators to enforce corporate scope 3 emissions disclosures, highlighting frameworks in California, the European Union, and Japan as successful examples. Regulatory enforcement is crucial for the effective implementation of climate strategies by asset owners. However, achieving mandatory disclosures involves hurdles such as difficulties in carbon accounting, risks of double counting, and issues with data availability, accuracy, and consistency. These complexities make it challenging to gather reliable emissions data, emphasizing the need for a strong regulatory framework to address and mitigate these issues.
To overcome these challenges, the NZAOA suggests several immediate actions for asset owners. Firstly, they recommend separating scope 3 emissions from scope 1 and scope 2 emissions to avoid aggregation that can obscure a portfolio’s true carbon footprint. Additionally, the Alliance promotes enhancing voluntary scope 3 disclosures, standardizing data, and engaging with data vendors to improve quality. Asset owners should also disclose any limitations, assumptions, and judgments related to their emissions data to increase transparency and build trust with stakeholders.