Asset owners push for mandatory Scope 3 emissions disclosures

Mandating Scope 3 emissions disclosures at the regulatory level would be critical in helping asset owners overcome barriers to portfolio decarbonisation, the Net Zero Asset Owners Alliance (NZAOA) argues in a discussion paper.

The 89 members of the alliance, who together manage US$9.5 trillion of assets, have all committed to achieving net zero emissions in their portfolios by 2050, in line with the Paris Agreement. Achieving this goal will require them to consider investee companies’ Scope 3 emissions, since these make up the majority of a corporate carbon footprint.

But limited data quality, inconsistent accounting frameworks, and double-counting risks make it challenging for investors to integrate their portfolio companies’ supply chain emissions into their own target-setting.

Mandatory Scope 3 disclosures – which have already been adopted in the EU, California and Japan – would help to solve these issues, creating credible and comparable data to support real economy decarbonisation, NZAOA argues.

‘A clear signal to the market’

“While we are sending a clear signal to the market that regulatory mandates are needed for systemic progress, asset owners recognise the importance of taking responsibility and demonstrating leadership through actionable strategies now,” said Udo Riese, Global Head of Sustainable Investing, Allianz Investment Management, and NZAOA Monitoring, Reporting, and Verification Track Lead.

Under NZAOA rules, members are required to set targets on their own Scope 3 emissions, which include the Scope 1 and 2 emissions of their investee companies. But the alliance is now considering including investee companies’ Scope 3 emissions in investor target-setting – which is why it has released the discussion paper.

“On the whole, the aim of the paper is not to set any standards on the inclusion of investee Scope 3 for Alliance members. Rather, the goal is to open a meaningful discussion among policymakers, data providers, corporates, and asset owners on this topic, as well as to provide recommendations on possible next steps,” NZAOA explains.

Scope 3 emissions: Immediate recommendations for investors

As part of the discussion, the alliance recommends five steps asset owners should take to improve their work on Scope 3 emissions – all of which can be “adopted immediately”. These include asking for independently verified annual Scope 3 emissions estimates from issuers, shifting investments towards issuers with approved Scope 3 targets, setting engagement objectives in sectors where Scope 3 disclosures and targets are lacking, and including Scope 3 emissions in sectoral financed emissions reduction targets.

In the case where asset owners may decide to include investees’ Scope 3 emissions in their reduction targets, NZAOA also recommends keeping these separate from established Scope 1 and 2 targets, “to avoid confounding the original measures due to the significant size and varying data quality of Scope 3 emissions”.