Accounting for Climate Change: Scope 3 Emissions and Their Effective Capture

As investors come under increasing pressure to take greenhouse gas emissions and climate change risks into account as part of their portfolio construction, one of the more challenging hurdles to doing so is accurately assessing Scope 3 emissions.

These include all emissions arising from across a business’ value chain. This is a diverse and far-reaching category, in stark contrast to the emissions captured by Scope 1 and Scope 2 which cover, respectively, those produced directly by a company and those created through the purchase of electricity and heating.

The classification process is more than just an intellectual exercise; it is vital for effective decarbonization. A portfolio that focused exclusively on Scope 1 and 2 emissions, for example, would potentially and significantly underestimate exposure to climate risks.

However, unlike Scope 1 and 2 emissions, the scale and variety of Scope 3 emissions has made it difficult to monitor and tabulate them accurately.

This presents a problem for investors looking to mitigate climate risk, especially as Scope 3 emissions often account for the largest share of a company’s carbon footprint.

Sector breakdown

Indeed, within the investible universe, there are certain sectors that produce significantly greater Scope 3 emissions than others.

Companies operating in oil and gas production, diversified mining, steel, automobiles, and other industrials are more likely to be responsible for significant Scope 3 emissions in absolute terms.

And there are several sectors whose Scope 3 emissions are likely to be far higher than the emissions they record relative to what they rack up under Scope 1 or 2. For example, emissions under Scope 3 for the financial sector, which include the emissions of listed equity and corporate bonds, mortgage lending and sovereign debt, far exceed the emissions the sector produces directly.

It is a similar picture in sectors such as real estate, IT, and healthcare, where the levels of Scope 3 emissions are estimated to be orders of magnitude greater than these sectors’ Scope 1 or 2 emissions.

Despite growing pressure from regulators and policymakers to force increased disclosure, there are good reasons why it remains challenging for investors and companies alike to assess Scope 3 emissions.

Most obviously, data availability is a serious impediment; most emissions lie outside of a company’s direct control and often require estimates from a supplier or approximations of customer use.

A consumer goods company making electronic goods, for example, must estimate energy efficiency and user habits over the lifetime of a product. It is likely that assessments involving longer time horizons may be inaccurate given consumer usage trends and habits can be prone to change.

Emissions emanating from supply chains may also be harder to capture as they are frequently comprised of SMEs who may not record their own Scope 1 or 2 emissions.

EXHIBIT 1: SCOPE 3 Categories

Source: Northern Trust Asset Management, Macrobond, U.S. Bureau of Economic Analysis (BEA). Q = quarter; GDP = Gross Domestic Product. Data as of 6/30/2025. Historical trends are not predictive of future results.

Accounting for complexity

In short, for many listed companies, there is much uncertainty and guesswork involved in performing the calculations needed to meet increasingly onerous disclosure requirements. For investors, this lack of accuracy presents an additional layer of difficulty in terms of obtaining consistent information across a portfolio and making informed comparisons between regions, particularly when comparing sectors within emerging and developed markets.

The complexity inherent in compiling Scope 3 data can also lead to under-reporting and an overfocus on information that is easier to record. It has become relatively commonplace for companies to report emissions related to business travel and employee commuting to work, for example, as these are relatively straightforward to calculate, but they may not be the most material contributing factors. More complex categories, such as purchased goods and services or use of sold products, are often omitted from disclosures given the difficulty in producing meaningful data.

Investors also need to understand the risk of double-counting — where the Scope 1 or 2 emissions of one company are the Scope 3 emissions of another company in the same portfolio.

A number of information emissions data providers are trying to overcome these challenges through carefully modeled emission estimates. Each provider has their own framework for compiling data while an additional layer of complexity is added by the competing methodologies they use to estimate Scope 3 emissions when such figures are not made available by the companies in question. These methodologies can vary by model (e.g. top-down versus bottom-up), emissions factor sources or the treatment of missing data. Differences are compounded by a lack of comparability due to different publishing schedules between providers.

EXHIBIT 2: DATA PROVIDER DISCREPANCY

Comparing MSCI, ISS and Truscost Scope 3 emissions estimates, MSCI World Index (left) and MSCI EM Index (right)

Source: Northern Trust Asset Management, Macrobond, U.S. Bureau of Economic Analysis (BEA). Q = quarter; GDP = Gross Domestic Product. Data as of 6/30/2025. Historical trends are not predictive of future results.

Despite these methodological differences, the estimation challenges and the data inconsistencies, the strategic importance of understanding the full emissions profile of portfolio companies should not be underestimated. Scope 3 emissions, particularly, represent a complex but increasingly relevant dimension of climate-aware investing.

Ultimately, deeper analysis of Scope 3 emissions offers the potential to improve risk management, anticipate regulatory shifts, and align more effectively with long-term climate objectives. For many investors, this represents not just a reporting obligation, but an emerging investment lens through which both portfolio risks and opportunities can be more clearly understood.

As regulatory requirements evolve and data quality improves, the integration of Scope 3 data is likely to become more standardized and, consequently, better reported.

That all said, while Scope 3 emissions may be a critical component of understanding a company’s climate impact, they are far from being the only element that matters.

Investors can also benefit from the analysis and measurement of vital metrics such as forward-looking indicators, climate targets, and the alignment of company revenues and capital expenditure with a low-carbon future.

Investors have a role to play, too, in improving data accuracy. Through active engagement with the companies they back, shareholders can encourage more robust Scope 3 disclosure as well as supporting tangible efforts to reduce these emissions.