Thought Leadership

Why scope-free emissions don’t stack up

30 May 2023

Data quality and potential double-counting of emissions are common challenges cited by investors aiming to measure and/or reduce their value-chain (or ‘Scope 3’) emissions associated with investments. We argue that investors should focus less on the problems with the data, and more on the problems the data is for, which is to identify the sectors and industries where Scope 3 emissions are an essential measure of carbon risk.

This means recognising:

  • that Scope 3 emissions are qualitatively different from Scope 1 and 2;

A carbon price affects all companies’ Scope 1+2 emissions in broadly the same way. But the effects on the broader value chain vary as a function of pass-through costs and demand elasticity. Investors should apply caution when aggregating all three ‘scopes’ into a single emissions metric – or even avoid this altogether.

  • that judgments are necessary and unavoidable;

Two companies can have the same Scope 3 footprint, but very different carbon risk. More accurate, standardised reporting and data collection cannot supplant the role of judgment and analysis in establishing materiality.

  • that double-counting of emissions can be a ‘feature, not a bug’

As the same source of emissions can be material for multiple companies, the challenge of double-counting largely dissipates when Scope 3 emissions are seen from the perspective of risk, rather than responsibility.


Companies’ greenhouse gas emissions are usually classed into operational emissions (comprising the direct emissions from facilities (‘Scope 1’) and the indirect emissions from purchased energy (‘Scope 2’)) and value-chain or ‘Scope 3’ (comprising upstream emissions, such as from a company’s suppliers, or downstream emissions, e.g. from a company’s customers).

Figure 1: GHG emissions by ‘scope’

Source: GHG Protocol

In jurisdictions where carbon pricing mechanisms are in operation¹, relevant companies usually pay a tax and/or purchase traded emission credits in some proportion to their operational emissions. Intuitively, companies have a higher degree of control over and responsibility for their direct emissions and choice of energy suppliers. Quantitatively, a given increase in the cost of carbon translates linearly in increased operational costs. The first key point, then, is that Scope 1 and 2 emissions can be considered a proxy for potential carbon-related operational costs. 

Yet there are sectors where one should look beyond operational emissions, so as not to ignore key drivers of environmental risk. In the oil and gas industry, the emissions resulting from burning fossil fuels by consumers (Scope 3 ‘use of sold products’ in the above) are around three times larger than the emissions from extracting, processing and transporting them². For food manufacturers, the upstream emissions associated with deforestation (e.g. when clearing land for beef production; Scope 3 ‘purchased goods and services’ in the above) are many times higher than those from food processing and packaging. 

In both of these cases, there are significant carbon-related risks associated not with the companies’ direct operations, but with their value chain – for example, governments imposing bans on internal combustion engines, penalties on automakers whose vehicle fleet exceeds certain limits, or fines on companies whose products contribute to deforestation. The challenge is how to quantify such risks.

Currently, capturing Scope 3 emissions is almost impossible without resorting to estimations. An oil and gas company may be ultimately servicing millions of drivers; a food manufacturer may purchase meat from thousands of farmers. Unsurprisingly, across listed companies in all sectors, the share of estimated versus reported Scope 3 data is consistently higher compared to Scope 1 and 2³ (chart 1).

Source: Sustainalytics, Bloomberg, Fulcrum Asset Management, as at February 2023. We have illustrated above the companies comprising a major listed global equity index.

For many, the solution lies in standardisation, as many standard-setters and regulators are now recommending the disclosure of Scope 3 emissions. Undoubtedly, more consistency would help investors to navigate a patchwork of disclosures, particularly if companies selectively choose to report some categories of emissions whilst conveniently ignoring others. Banks, notably, often report emissions associated with business travel, but not with their financing activities. Less appreciated, however, is that even perfect information would not in itself answer the question of materiality. Because the real issue at stake with Scope 3 is not what the data is, but what it means.

Other things being equal, a company with higher operational emissions faces higher potential associated costs. If two companies have the same Scope 3 emissions, however, one cannot say anything about which has the higher carbon risk, which is a function of, first, whether companies internalise costs (reflected as a higher cost of goods sold) or pass them through to their consumers (which, dependent on the elasticity of demand, may have second-order impacts on the company’s sales).

This, then, is the second key point: Scope 3 emissions are best seen not as a measure of responsibility, but of risk, which will vary by sector and company. They do not capture the same ‘thing’ as Scope 1 and 2 and should therefore not be aggregated. In the case of Scope 1 and 2 emissions, all companies are affected in the same way: a given increase in carbon costs translates into a higher (marginal) operating cost4. To twist Tolstoy, one could say they are all “unhappy in the same way”, as each additional ton of operational emissions leads to a proportionate increase in carbon costs. Whereas, when it comes to Scope 3, each company is “unhappy in its own way”.

As illustrated in figure 2 below, two companies may have the same emissions, sales and costs, yet be impacted very differently by a given carbon price. Whereas they both pay the same operational carbon costs, Company A may find a business line (e.g. the division producing internal combustion engines) has now disappeared, meaning the entire company is now unprofitable (as sales < costs), whereas Company B may be able to pass through its costs to consumers with an inelastic demand function, with overall impacts thus more muted. Thus, it is more useful to think of Scope 3 emissions as a proxy for potential risks to future sales. They answer a different question than Scope 1 and 2, and reflect an accounting philosophy more than a causal mechanism! (If a company disappeared, its factories would cease emitting, and its power supplier would need to generate less power; operational emissions can thus be attributed to a company in a real and causal sense, unlike Scope 3).  

Figure 2: Impact of a carbon tax on two hypothetical companies

Source: Fulcrum Asset Management

Three conclusions follow. First, there is merit in trying to separate the many ‘apples and oranges’ currently placed in the same ‘Scope 3’ basket.  Unfortunately, the industry faces the temptation to bypass more granular, sectoral investigations in favour of what could be called a ‘drag and drop’ model. Like in an Excel spreadsheet, drag the formula one more column to the right – from Scope 1 + 2 to Scope 3 – and use that total number instead as the main workhorse for emissions or climate-alignment calculations. For example, by no later than 2024, so-called ‘Paris-aligned benchmarks’ are expected to target linear year-on-year reductions in their overall carbon footprint including scope 3. And we have noticed clients and consultants more broadly beginning to ponder portfolio-level Scope 1-3 targets.

However, we would argue there is a subtle, but important difference between taking into account Scope 3 emissions (which allows for multiple techniques, like analysing the profile of an automakers’ Scope 3 footprint implied by their targets for electric vehicles, and comparing it against peers, but not versus companies in other sectors) and accounting for emissions (which invites reconciliation into a single number at the level of a company or portfolio, running roughshod over the issues of aggregation and comparability raised above).

We have written before about the potential unintended consequences of focusing solely on portfolio averages, and the risks of ‘hitting the target and missing the mark’. Investors should not be indifferent to where the emissions reductions are coming from – whether they are rewarding companies achieving genuine decarbonisation and leading their peers in the strength of their policies and targets, or whether the reductions are primarily derived from marginal changes to portfolio weights. By contrast, Fulcrum’s ongoing work on climate-aligned investing is focused on such questions, by incorporating forward-looking metrics, peer comparisons and datapoints beyond just (historical) emissions into an assessment of an issuer’s climate profile.  

Second, in attempting these differentiations, judgments will be both unavoidable and necessary. To go strictly ‘by the numbers’ in Chart 2, the energy sector has a Scope 3 footprint that is five times larger than that of industrials or materials’ companies. It does not follow, however, that the carbon risk is five times larger.  Were global carbon constraints to be significantly ramped up, they would not unilaterally affect just fossil fuel production, but also consumption. The energy sectors’ consumers such as industrials would no longer afford to use gas; airlines would find kerosene has become too expensive and so on. In other words, the dynamics of scope 3 emissions generally play out first at the level of the value chain or economy and only second at the level of the individual company. Yet another reason why Scope 1-3 emissions cannot be easily compared or aggregated.

Source: Sustainalytics, Bloomberg, Fulcrum Asset Management, as at February 2023. We have illustrated above the companies comprising a major listed global equity index. Note – the chart does have data for all sectors, but the axis scale limits their display.

Thirdly, this framing, which is rooted in a company’s exposure to the carbon value chain, allows us to side-step the thorny issue of responsibility, and retain focus on materiality. It helps to dissipate the challenge of double-counting emissions, since it does not matter that the same emissions (e.g. from consumers driving petrol cars) are allocated multiple times as the Scope 3 emissions of the automakers making the car, the suppliers providing vehicle parts, and the oil and gas companies filling up the tank. As government policies on combustion engines tighten, actors across the petrol value chain, from automakers to refiners, stand to lose up to 100% of the revenues associated with that segment of consumer demand, not some hypothetical fraction matching their ‘responsibility’. We thus see that double-counting can be ‘a feature, not a bug’!



We have argued that Scope 3 emissions are qualitatively different from Scope 1 and 2 – they are best seen as a measure of carbon risk (to future sales), rather than a measure of responsibility (for historical emissions, which can translate into higher operational costs). This heterogeneity advises against simplistic aggregations of Scope 1, 2 and 3 into a single metric. We have argued that Scope 3 emissions can illuminate material sources of risk or opportunity in certain sectors, and that by reframing the issue around risk one can defuse the challenge of double-counting emissions. However, uncovering materiality will necessarily and unavoidably require judgment. Investors should focus less on the problems with the data, and more on the problems the data is for.

About the Speaker

  1. Circa 23% of total global GHG emissions are covered by carbon pricing instruments (Source: World Bank 2022).
  2. International Energy Agency (2020) – The Oil and Gas Industry in Energy Transitions, p. 32, available online at
  3. Estimations can also play a significant role in the so-called ‘market-based’ approach to calculating Scope 2 emissions, but we will not explore this in this paper. For more details on this, see p. 3 of
  4. There are, of course, nuances between sectors. Some have hedged carbon allowance exposure years in advance, etc. But the high-level similarity remains.

This content is provided for informational purposes and is directed at professional clients as defined in Directive 2011/61/EU (AIFMD) and Directive 2014/65/EU (MiFID II) Annex II Section I or Section II or an investor with an equivalent status as defined by your local jurisdiction.  Fulcrum Asset Management LLP (“Fulcrum”) does not produce independent Investment Research and any content disseminated is not prepared in accordance with legal requirements designed to promote the independence of investment research and as such should be deemed as marketing communications.  This document is also considered to be a minor non-monetary (‘MNMB’) benefit under Directive 2014/65/EU on Markets in Financial Instruments Directive (‘MiFID II’) which transposed into UK domestic law under the Financial Services and Markets Act 2000 (as amended). Fulcrum defines MNMBs as documentation relating to a financial instrument or an investment service which is generic in nature and may be simultaneously made available to any investment firm wishing to receive it or to the general public. The following information may have been disseminated in conferences, seminars and other training events on the benefits and features of a specific financial instrument or an investment service provided by Fulcrum.Any views and opinions expressed are for informational and/or similarly educational purposes only and are a reflection of the author’s best judgment, based upon information available at the time obtained from sources believed to be reliable and providing information in good faith, but no responsibility is accepted for any errors or omissions. Charts and graphs provided herein are for illustrative purposes only. The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Some of the statements may be forward-looking statements or statements of future expectations based on the currently available information. Accordingly, such statements are subject to risks and uncertainties. For example, factors such as the development of macroeconomic conditions, future market conditions, unusual catastrophic loss events, changes in the capital markets and other circumstances may cause the actual events or results to be materially different from those anticipated by such statements. In no case whatsoever will Fulcrum be liable to anyone for any decision made or action taken in conjunction with the information and/or statements in this press release or for any related damages. Reproduction of this material in whole or in part is strictly prohibited without prior written permission of Fulcrum Copyright © Fulcrum Asset Management LLP 2024. All rights reserved.

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