IIGCC Specifies Approach to Scope 3 Materiality
New resource recommends asset-based, as opposed portfolio-based, method for emissions assessments, urging investors to proactively overcome barriers.
Supplementary guidance from the Institutional Investors Group on Climate Change (IIGCC) on assessing and reporting Scope 3 emissions across portfolios has encouraged investors to be targeted and pragmatic.
Following the investor approaches to Scope 3 discussion paper published by the IIGCC in January, the document focuses on emissions associated with the operation of investments – including equity, debt and project finance – not already accounted for in Scopes 1 or 2. These are outlined in Category 15 of the Greenhouse Gas (GHG) Protocol.
The IIGCC is an investor network focused on mobilising the industry towards net zero and a climate-resilient future by 2030, with members including a broad range of asset owners and managers and some of the largest global institutional investors.
Although the guidance – which builds on concepts included in the Net Zero Investment Framework (NZIF) 2.0 – was shared with IIGCC members on 18 July, it was only made public last week.
“Though the GHG Protocol provides clear guidance for asset-level reporting, the approach is flexible to accommodate different business models – leading to inconsistent reporting that is not designed to be comparable – or summable – between multiple entities,” said Ella Sexton, Senior Investor Strategies Programme Manager at the IIGCC.
This also creates issues for investors who may wish to evaluate the climate metrics of multiple companies, or aggregate them to indicate the emissions of an entire fund or portfolio, she added.
Focused message
Informed by exchanges with asset owners and managers through an IIGCC working group, the guidance develops three key messages.
First, investor climate change strategies should consider Scope 3 as a vital part of understanding the impact of a portfolio and the transition risks it is exposed to.
Second, a number of “valid” challenges faced by investors mean it isn’t initially easy to address these emissions – with total portfolio Scope 3 data likely to be a “misleading metric”.
“The resource stresses that Scope 3 data is not straightforward: for example, high emissions do not always equate to a worse climate impact,” said Sexton. “Climate solutions providers – such as companies that contribute to grid flexibility and balancing improvements – can appear to have high Scope 3. Seen in isolation, these investments could be seen as misaligned with decarbonisation targets, despite the significant contribution of these companies to real-economy decarbonisation.”
The third element is a recommendation that investors concentrate their assessments on the parts of their portfolio most likely to have material exposure, and then conduct targeted sector- and category- level analysis.
“Scope 3 emissions represent around 80% of emissions in high-emitting sectors and are an enormous challenge to analyse – yet, are a key aspect of climate transition risk assessments,” the guidance reads. “With Scope 3 reporting not currently compulsory for the majority of the investible universe, accessing data on all 15 categories for every asset would be a huge undertaking for investors. Many typically rely on third-party estimates, with varying degrees of success.”
While Scope 3 ‘hotspots’ vary depending on asset class and sector coverage, investors can leverage a table of recommended priority sectors and corresponding categories included in the IIGCC guidance, before considering their wider portfolio materiality assessment. They can also refer to an illustrative approximation of annual absolute Scope 3 emissions by category for various high-impact sectors.
“Getting data on Scope 3 emissions data can be difficult, but not all of it is equally important: the variation in importance can be massive between different sectors, assets and activity categories,” Sexton told ESG Investor. “Each investor needs to understand what is most relevant to their own portfolio. This will look different for everyone, so we recommend conducting a Scope 3 materiality assessment as the first step, to then focus gather and validate the data where it is most useful to them.”
Reaching net zero
The guidance draws on the Net Zero Investment Framework (NZIF) 2.0, offering practical advice on how to interpret the Scope 3 recommendations it contains.
“In the first version of the NZIF, it was recommended that Scope 3 be phased in to portfolio-level emissions reduction targets and monitoring over time, but set and reported on separately,” said Sexton. “At the time, the industry understood that measuring Scope 3 was complex and that aggregation could be misleading. But it was unclear how investors should best proceed in integrating it into their portfolio approaches to net zero.”
In contrast, the new guidance provides a detailed explanation of how the phase-in can be addressed – including general principles, of which the materiality-based approach to Scope 3 is a key component, in line with recommendations under the International Sustainability Standards Board’s (ISSB) S1 and S2 Standards.
“We’ve also given further guidance on potential approaches investors could employ to assess Scope 3 materiality, initially just for corporate assets,” Sexton added.
The document lists several data sources available to investors to support materiality assessments – such as the Climate Action 100+ Disclosure Framework and the IIGCC’s sector-based Net Zero Standards.
The IIGCC working group warned of the issues arising from broad aggregation of Scope 3 emissions to the portfolio level, arguing that doing so is usually inconsistent with mitigating climate change and associated risks in the real economy.
“[We] recommend using qualitative and quantitative data: taking a sector- and company-specific approach where possible; being transparent; and staying up-to-date with evolving market practices and regulations,” the paper read.
The IIGCC said it would continue to work with its members on how to approach the topic “as thinking evolves” – insisting however that the value of Scope 3 emissions reporting in material areas should not be overshadowed by the challenges it poses.
“It’s important to recognise that despite the difficulty for investors, this is a problem they are actively trying to solve – as opposed to treating it as an issue on the horizon,” said Sexton. “Missing out Scope 3 would mean missing out a large part of the picture of how their portfolio impacts – and is exposed to – climate change. So, despite the complexity surrounding it, it needs to be inherently considered as a part of climate strategies.”
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