24 Apr 2023 3 min read

Scope 3: Omission impossible

By Nick Stansbury , Toby MacKean , Charlie Miller

Measuring decarbonisation throughout the economy requires a logical and systematic approach. Including Scope 3 emissions is vital. Yet a significant improvement in dataset quality is required to derive meaningful long-term investment insights.


For investors with diversified long-term portfolios, climate risk poses a substantial investment risk. As fiduciaries of our clients’ assets, we have a responsibility to advocate on their behalf and mitigate financial risks. Measuring the risk is a crucial first step to allow investors to price climate risks.

In our view carbon emissions largely remain an under-priced risk for investors. Yet measuring corporate emissions is challenging. They are defined in three scopes:

  • Scope 1 covers direct emissions from operations
  • Scope 2 includes the indirect emissions from the generation of purchased energy to run those operations
  • Scope 3 covers all the other indirect emissions across a company’s value chain

Estimates suggest that Scope 3 accounts for over 80% of total emissions in the median MSCI World company[1].

The challenge is in the details

We therefore believe that Scope 3 is a vital tool for measuring decarbonisation progress at a systems level and inadequate disclosure may blind stakeholders to efficient decarbonisation options and transition risk. Yet today’s data quality makes the use of Scope 3 challenging for investors.

In particular, there are a number of complex challenges around Scope 3 emissions that require careful handling. For instance:

  • There is no fully developed and agreed methodology
  • Not all Scope 3 emissions are within a company’s control
  • Existing calculation approaches do not deliver consistent results
  • Many categories of emissions are not directly comparable
  • Reporting oil & gas industry emissions is fraught with complexity

The path forward

 We are advocating for improved and standardised Scope 3 disclosure to facilitate comparisons between similar companies, and the same company across time, allowing for meaningful insights to be drawn.

 In summary, we believe that:

  1. Despite the complexity, companies should report on, and regulators support the disclosure of, accurate and standardised Scope 3 emissions data
  2. Investors should only incorporate currently available Scope 3 data into investment decisions with careful consideration of inaccuracy, estimation bias, and methodology constraints
  3. Investors should treat Scope 3 emissions separately from Scopes 1 and 2 – and ideally should separate upstream from downstream emissions within Scope 3, which are very clearly distinct

Inadequate disclosure of Scope 3 emissions presents material risks

Scope 3 emissions are far too important to ignore. Including them in corporate disclosures is fundamentally a question of investment risk and return; we can see no good reason for regulators to stand in the way of disclosure by listed companies. In fact, we think not disclosing Scope 3 emissions will lead to market inefficiencies and the potential undercalculation of the financial risks created by the energy transition.

The energy transition is and will continue to be complicated – but its complexity is not a reason to ignore it. Scope 3 emissions need more, not less, attention if climate risks are to be properly priced and both companies and investors are to be ready to take the actions required to protect themselves.

For more information, please read our full research paper on Scope 3 emissions.


[1] Source: ISS, Carbon Disclosure Project (CDP), LGIM analysis. Carbon data as at 31/12/2021


Nick Stansbury

Head of Climate Solutions

Nick is the Head of Climate Solutions at LGIM. Previously, he was Head of Commodity Research. Nick joined in 2013 as a Fund Manager in LGIM’s Global Equity team, focused on energy and natural resources. Prior to joining LGIM he was an Investment Director for Developed Asia and Global Emerging Markets at Standard Life Investments. He previously worked for an emerging market focused hedge fund investing in equities, convertible bonds and distressed debt. He has also worked in a corporate advisory role and as a software developer. Nick has a law degree (LLB.) and a Master’s in jurisprudence (MJur.), focused on securities law, from the University of Durham.

Nick Stansbury

Toby MacKean

Global ESG Analyst

Toby is responsible for LGIM stewardship activities across a range of ESG topics with a specific focus on both climate and nature-related topics, whilst leading on the teams Natural Capital Management theme. He works closely with the Investment team to integrate Stewardship and ESG into investment processes. Toby joined LGIM in February 2022 from Ernst & Young (EY) where he was a Manager in their Climate Change and Sustainability Services team. Whilst there, he worked with a range of clients on various decarbonisation strategy, TCFD and climate target setting projects, provided non-financial assurance and corporate reporting services, as well as led the integration of climate risks into EY’s audit methodologies. Prior to that, he trained as an ICAEW (ACA) chartered accountant working in EY’s products and services department. Toby graduated from Durham University and holds a BSc (Hons) in Geography where his studies focused on climate change and environmental processes. 

Toby MacKean

Charlie Miller

Climate Strategist, Climate / Investments

Charlie is responsible for integrating climate analysis into LGIM's investment process through metrics and research. Charlie joined LGIM in 2021 having previously worked in Legal &General Retirement as an investment analyst where he delivered projects on ESG integration in the annuity portfolio and gained experience in the TCFD reporting process. He began his career at Mercer specialising in insurance investment. Charlie graduated with an MSc in Earth Sciences from University of Oxford in 2015.

Charlie Miller