The Net Zero Asset Owner Alliance (NZAOA) said pension funds and insurers should start thinking about investing only in companies with approved Scope 3 targets.
In its latest report, the United Nations-backed body stressed the need for investors to consider the emissions created within the value chains of portfolio companies – by their supply chains and the use of their products, for example – rather than just their direct emissions.
It said regulation was needed to mandate the disclosure of such information to the market in a standardised and comparable way, and called for more policy guidance on the type of Scope 3 emissions that are material to each sector.
Scope 3 disclosures are already required from many companies under European Union law, as well as in Japan, Australia and California.
But it’s a controversial topic. The US Securities and Exchange Commission (SEC) faced backlash when it attempted to introduce reporting rules that would require listed companies to disclose their Scope 3 emissions last year, and it has since shelved the proposals.
Large parts of the industry argue such information is expensive to collect and largely unreliable.
Businesses also say that, even though they usually account for the lion’s share of their overall emissions, they have no control over the emissions generated outside their direct business activities, and therefore shouldn’t be held accountable for them or have to include them in climate targets.
NZAOA’s report advises asset owners to take a series of immediate steps to “make meaningful progress, while driving public discourse and pushing for regulatory change” in the space.
The recommendations, which the paper stresses are not a top-level edict and should be considered by its members on an individual basis, include a call for asset owners to start “relying on corporates with Scope 3 targets” and tilting away from those without them.“
Asset owners may over time and on an individual basis start to shift towards investments in underlying issuers with approved Scope 3 targets,” it continued.
Increasing exposure to such issuers will contribute to better and more timely reductions in Scope 3 emissions, the paper said.
According to a report from environmental disclosure platform CDP and Boston Consulting Group, published earlier this year, just 15% of companies have a quantitative public Scope 3 target.
To help bring that number up, NZAOA advises asset owners to engage with key issuers and sectors.
It also points out that investors’ own Scope 3 reduction targets, which would cover their financed emissions, can be treated separately to direct (Scope 1 and 2) emissions goals.
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