Corporate carbon emissions data is increasingly used by investors to measure and report on 'climate risk' and to inform portfolio construction, often systematically. However, 'passive' use of this data can lead to unintended consequences and a misunderstanding of climate risk exposures.
As climate reporting regulations for investors increasingly require 'Scope 3' data, we look at the consequences of using this data in portfolio construction. We find that climate solutions companies are the largest sources of scope 3 emissions in our portfolio. We use the example of heat pumps to explain the concept of 'Scope 4', or avoided emissions, and illustrate why it would not make sense for us to systematically reduce our scope 3 emissions to achieve 'Paris alignment'.
The use of carbon emissions data by Scope and sector requires nuance and specialist oversight and a failure to consider Scope 4 emissions at a top level can prevent investments in climate positive solutions. A discerning view of emissions data, and oversight by a climate specialist portfolio manager allows us to spot these unintended consequences that might occur in ’passively’ managed solutions such as climate indices.
Read the white paper here: