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The Three-Dimensional Conundrum: Financial Scope 3

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Scope 3 Emissions Featured Image Scaled.jpg

Scope 3 disclosures are complex, and category 15 (investments) is an opaque segment that is intended to cover emissions resulting from one company investing in another (i.e. financial transactions).1For most companies, this is little more than a so-called footnote in their overall emissions profile. Indeed, given the set of conceptual and data challenges that Category 15 poses, it is no coincidence that it sits at the very back of the Scope 3 catalogue.

However, for financial institutions, financial transactions are teeth For companies, category 15 emissions are an important component of their overall emissions disclosure.

Emissions from funding and promotion

Three key challenges

Financial institutions need to overcome three key challenges in disclosing the emissions they fund and facilitate to improve corporate reporting rates.

First, in contrast to the other categories in Scope 3, the rulebook for reporting financed and facilitated emissions is still in its infancy and incomplete in many respects. Accounting rules for financed emissions were finalized by the PCAF in 2020 and endorsed by the Greenhouse Gas (GHG) Protocol, the global standard-setting body for greenhouse gas (GHG) accounting.Five These codify accounting rules for banks, asset managers, asset owners and insurance companies. Rules on accelerated emissions will come into force in 2023.6covering large investment banks and securities firms; one for reinsurance portfolios is currently awaiting GHG Protocol approval.7However, regulations for many other types of financial institutions (particularly exchanges and data providers like us) do not currently exist.

Appendix 1.

Image of Scope 3 emissions

Source: LSEG, CDP. Materials and other Scope 3 reporting vs. non-reporting companies, by industry, FTSE All-World Index 2022

Appendix 2. Characteristics of PCAF financing and accelerated emission standards5,6

Scope 3 Emissions Image 2

The third is the complexity around attribution: for financing emissions, this is the ratio of the investment amount and/or outstanding loan balance to the client’s enterprise value, however market fluctuations in stock prices complicate this picture and can result in fluctuations in financing emissions that are not related to the client company’s actual emissions profile.8

Next steps?

Given these complexities and the significant reporting burden, sponsored and facilitated emissions are likely to remain a headache for reporting companies, investors and regulators for some time to come.

resource

FTSE Russell room for improvement report It answers 10 key questions about your Scope 3 emissions and suggests solutions to improve your data quality.

Climate data in the investment process reportCFA Institute’s Research and Policy Center explains how regulations to increase transparency are evolving and offers suggestions for how investors can effectively use the data available to them.


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