The Greenhouse Gas (GHG) Protocol1 thus distinguishes three “perimeters”2 measuring carbon emissions. THE perimeter 1, or direct emissions from sources controlled by the company. THE perimeter 2, ie indirect emissions related to the energy produced, purchased and then consumed by the company. Finally, perimeter 3namely other indirect emissions linked to the company’s value chain, divided into two categories: upstream and downstream.
Perimeter 2 overlaps with perimeter 1 of companies’ energy suppliers, while perimeter 3 more or less represents perimeters 1 and 2 of players involved in their value chain. These measures must now be included in energy transition strategies, with regulations evolving in this direction.
The following graphs, taken from the Carbon Disclosure Project (CDP), show the official and estimated emissions of 5,364 companies in 2019. Scope 1 emissions represent 13.8 gigatonnes (Gt), or 27.7% of global emissions (49.8 Gt according to the World Resources Institute).
Breakdown of emissions by scope and by sector
Source: CDP 2019: complete corpus of data relating to GHG emissions, AXA IM
Absolute emissions by scope and by sector (in million tonnes of GHG)
Source: CDP 2019: complete corpus of data relating to GHG emissions, AXA IM
Data availability: modeling and calculating
The publication of data relating to scope 3 is not mandatory, even if more and more groups are doing it5. There are therefore disparities in terms of data availability and quality. Scope 1 emissions can be measured: quantification of the tonnes of GHGs produced, measurement of the energy consumed, etc., which makes them generally reliable. But perimeter 3 must often be modelled: downstream emissions, processing of fossil fuels and certain raw materials. However, you have to be careful with data from several companies because they may overlap. The same ton of CO₂ can end up between an oil producer, a refiner, a gas station attendant and a car manufacturer. The degree of multiple counting of a portfolio therefore depends on its diversification. This explains why these Scope 3 emissions are higher than the global emissions in the CDP data.
Scope 3 and energy transition
The emissions produced along the value chain are much greater than those from direct exploitation. Their reduction therefore implies a change in the collective ecosystem, for all stakeholders in all sectors. Investors and asset managers can exert pressure, especially if they have diversified portfolios, and identify common decarbonization levers. Several scenarios thus prove that these levers are interdependent6such as that of the International Energy Agency (IEA in 20217. In theory, if everyone reached “net zero” for their perimeter 1, no more GHGs would be released and perimeter 3 would likewise be equal to zero. However, the IEA estimates that half of the necessary technologies are not yet complete, or even not yet invented.
Inevitable economic disruptions
Investors should understand that a company on its way to Scope 3 net zero will overhaul its entire value chain and the use of its products will change, but also that these may be phased out or withdrawn. Trade. Recourse to carbon sinks will likewise be necessary to compensate for unreduced emissions.
If we take the example of coal, natural gas and refined petroleum products, which account for 74% of GHG emissions8, the “net zero” horizon of their Scope 3 implies that their products are no longer consumed and that the emissions are stored underground or offset. Technologies allowing not to consume or to consume less will then be essential, as well as cars without gasoline. But the whole thing is not without an organizational cost, constituting both opportunities and investment risks.
Roadmaps are needed
Investors must exert their influence between ambition and pragmatism. If the complexity linked to these disruptions is real, it should not lead to complacency. While it is relatively straightforward to play a role in Scopes 1 and 2, with companies directly responsible, Scope 3 requires a more nuanced approach. Companies must make firm commitments as to the share of emissions that they can control or influence, by exerting pressure, for example, on their partners. And for the part that escapes them, it is necessary to be able to explain the situation and present ways of decarbonization, in particular downstream, as well as the possible measures.
Olivier Eugène, Director of Climate Research, AXA IM Core
1What is GHG Protocol? Greenhouse Gas Protocol, February 2023
2There is another category, unofficially called scope 4, which concerns “avoided emissions”. The idea is that a company can be credited with GHG not released due to the use of a given product or service. At this stage, there is no general standard or methodology for Scope 4 emissions.
3Data for 2020 is available, but we have chosen the last year before the pandemic. The CDP, which manages the global environmental data reporting system, is funded by donations, membership fees and public subsidies.
4Historical GHG Emissions, World Resources Institute, accessed February 2023
5Reported Emission Footprints: The Challenge is Real, MSCI, March 2022
6The IEA’s path to net zero, AXA IM, June 2021
7The IEA’s path to net zero, AXA IM, June 2021
8World Greenhouse Gas Emissions in 2019 by Sector, End Use and Gases (static), World Resources Institute, accessed February 2023
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