The Scope of Net Zero: The Use of Carbon Emission Data to Achieve Portfolio Goals

To achieve net-zero emissions targets, investors must establish reliable ways to measure the carbon emissions of assets in their portfolios. Succinctly put, effective climate action requires access to accurate emission data to set realistic reduction goals and monitor progress toward net zero. But measuring emissions is complicated by inconsistent data collection methods, data gaps, and variations in methodologies used by third-party vendors.

“The Scope of Net Zero: The Use of Carbon Emission Data to Achieve Portfolio Goals,” delves into the topic of corporate emission data. Co-authored by a team from Man Group, the paper defines the different scopes of greenhouse gases (GHGs), examines their coverage, and compares the quantity of GHG emissions for various sectors and regions. This paper explores the challenges and complexities involved in calculating corporate emissions, focusing on Scope 1, 2, and 3 emissions, with particular emphasis on Scope 3, the most substantial and complex scope to quantify accurately.

Key Takeaways

The paper delivers three basic takeaways:

1. Accurate Emissions Data is Important. Effective climate action requires accurate carbon data to set realistic reduction goals and monitor progress toward net-zero.
2. Carbon Accounting is Complex. Emissions measurement involves various sources and methods, with a high reliance on data from different vendors that use distinct methodologies.
3. Emissions Data Varies Greatly. The absolute levels and intensity (scaled by a metric like sales or per product) of emissions vary greatly by scope, sector and region and it is critical that users of the data understand this nuance.

Scope 1, 2, and 3 Emissions

Emission measurement classifies emissions into three primary scopes (see Exhibit 1). Scope 1 represents emissions from a company’s direct activities, such as company vehicles or on-site fuel combustion. Scope 2 refers to indirect emissions from purchased energy sources, such as electricity. Scope 3 captures the indirect emissions across the company’s value chain. Scope 3 emissions, encompassing both upstream (e.g., emissions from suppliers) and downstream (e.g., emissions from product usage), represent most of a company’s emissions. They are the most challenging to measure accurately, however, facing such issues as data reliability, potential for double-counting, and comparability challenges across companies with different business models.

Exhibit 1. Scope 1, 2, and 3 Emissions

Investment managers must understand Scope 1, 2, and 3 emissions to manage risks, protect reputations, and ensure long-term sustainability. Companies with high emissions face regulatory, cost, and liability risks, while poor emission management can harm their reputation. Proactive emission management often supports financial performance and shareholder value. Absolute emissions measure total GHG output, while emission intensity assesses efficiency relative to business metrics. This paper suggests these insights help investors evaluate risks, predict performance, and align investments with sustainability goals, enhancing decision making.

Interpreting Carbon Emission Data

The availability of carbon emission data and its quality vary widely across sectors and regions. European companies and high-emission sectors, such as utilities, tend to have more comprehensive reporting. These reports often contain outliers, however, affecting both absolute emissions and intensity metrics. This variability, the authors assert, underlines the need for investors to approach data interpretation carefully to account for regional and sector-specific differences.

This paper covers the two main metrics that help investors interpret emission data—absolute emissions and emission intensity. Absolute emissions provide a total GHG measure that reflects a company’s environmental footprint, whereas emission intensity normalizes emissions against business metrics (e.g., emissions per dollar of revenue). This normalized metric allows for easier comparison among companies of varying sizes, while absolute emissions offer a clearer picture of total environmental impact. While emission intensity sheds light on how efficiently a company manages emissions, absolute emission figures provide a more comprehensive environmental assessment.

To fully understand a company’s emissions, it’s essential to account for all sources, including Scope 3 emissions from its value chain. The paper explains that while current analysis emphasizes Scope 1 and 2 emissions, Scope 3 is increasingly recognized as critical due to its significant contribution to overall carbon output. Accounting for Scope 3 emissions is becoming mandatory under many regulations, including European laws and California’s requirements starting in 2025. This paper highlights Scope 3’s importance, examines its differences from Scope 1 and 2, and uses S&P Trucost data for detailed insights.

The paper also covers forward-looking emission data from the Science Based Targets initiative (SBTi), which offers insights into a company’s future emission reduction trajectory. These projections, aligned with the Paris Agreement, enable investors to assess how companies’ projected emissions may evolve in alignment with climate goals. As with historical emission data, however, SBTi projections involve certain biases and limitations that require careful evaluation by investors to ensure a realistic understanding of future emission pathways.

Overall, investors pursuing net-zero goals need to use available emission data to make informed decisions about capital allocation to drive substantial carbon reductions. Despite improvements in emission reporting, current data are far less standardized than traditional financial metrics, creating challenges for interpretation. Investors must, therefore, thoroughly understand emission data, considering limitations in data collection, reporting, and the relationship between different emissions scopes.

By emphasizing a complete view of the emission chain and future emission trajectories, investors can support progress toward net-zero targets, ultimately helping achieve climate goals through transparent, accountable, and effective investments.

The Paper’s Authors

Robert Furdak, CFA, Chief Investment Officer, Responsible Investment, Man Group, Boston

Tracey Nilsen-Ames, Associate Portfolio Manager, Man Numeric, Boston

Anna-Marie Tomm, Data Science Analyst, Man Group, London

Jeremy Wee, CFA, Senior Portfolio Manager, Man Numeric, Boston

Valerie Xiang, CFA, Associate Portfolio Manager, Man Numeric, Boston