Investors must avoid “unintended consequences” when pushing companies to disclose their Scope 3 emissions, Faith Ward, chief responsible investment officer of Brunel Pension Partnership, has warned.
Ward, who is also chair of the Institutional Investors Group on Climate Change (IIGCC), pointed out that firms taking a leadership position on the disclosure of Scope 3 data could end up looking like bigger emitters.
“Those companies who grab the proverbial nettle, and start disclosing, are likely to look worse in the short term,” said Ward during a webinar on Monday. “We need to be really careful about not demonising or misallocating capital because somebody’s actually doing exactly what we’re asking them to do.”
Scope 3 emissions, which have become one of the most controversial areas of sustainable finance over the past year, are the greenhouse gases generated by an entity’s value chain, rather than by its directly-owned operations or energy consumption.
Earlier this month, the US Securities and Exchange Commission confirmed that it would not ask companies to provide information about their Scope 3 emissions in its new climate disclosure rules.
Speaking on the same webinar, Michael Jantzi, a member of the International Sustainability Standards Board (ISSB) and founder of Sustainalytics, said he was “disappointed” about the SEC’s decision, but not alarmed.
“If the SEC had come out with these rules two years ago, I’d be much more concerned about the carving out of Scope 3, because I think it would have set a precedent,” he said. “But the fact is, the train has left the station […] the market is demanding [Scope 3 data].”
According to FTSE, which hosted Monday’s session, Scope 3 emissions represent more than 80% of corporate carbon footprints, on average.
“Only operating with 20% of the necessary information is quite unnerving if you’re an investor – particularly if you’re an asset owner or pension fund,” said Ward, adding that widely diversified investors would not be able to avoid climate risks associated with indirect emissions.
She said asset managers running money on behalf of such investors must push companies to disclose their Scope 3 data, but that – in order to be helpful for asset allocation and engagement – the information needs to be viewed in context. Managers should therefore have “extra insights as to what’s going on within the companies”.
The IIGCC advises investors to identify Scope 3 ‘hotspots’ within their portfolios.
While Brunel has been pushing the oil and gas industry on Scope 3 for years, Ward said the fund had more recently identified consumer staples, consumer discretionary and IT as three hotspots that were “perhaps are not as obvious”.
Its managers are now engaging with those sectors, with a focus on getting robust disclosures.
Brunel is “going through the process” of establishing Scope 3 targets for its portfolio companies, Ward said, adding: “We’re still trying to work out quite how fast and how far to push it.”
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