Climate and decarbonization: The dilemma of double-counting emissions
Greenhouse gases that companies are responsible for across their entire value chain are typically difficult to calculate. We now propose a new method to set targets for these Scope 3 emissions within an investment universe. Here’s what investors interested in climate and decarbonization should know.
The devil, as so often, is in the details: Decarbonizing portfolios presents significant challenges for investors. This is especially true when dealing with greenhouse gas emissions (CO2e) in the complex Scope 3 category (see info box below).
As a potential solution, we have already introduced influence-based adjustment factors. These reflect the control and responsibility a company has over its Scope 3 emissions - i.e., indirect greenhouse gas emissions arising along its value chain. Scope 3 emissions are particularly significant in the industrial, raw materials, and energy sectors.
In a further step, we now want to introduce an additional factor: the Deduplication Factor. This factor determines the extent to which Scope 3 emissions are reduced overall.
Overview of emission categories
Scope 1: Direct emissions from sources owned or controlled by a company. These include emissions from the combustion of fossil fuels in company-owned facilities and emissions from company-owned vehicles.
Scope 2: Indirect emissions from the consumption of purchased energy. Although these emissions are physically generated by the energy suppliers, they are attributed to the company that uses the energy.
Scope 3: Other indirect emissions that arise along a company's value chain. Examples include the procurement of raw materials, the use and disposal of products, business travel and commuting by employees, and third-party transport services. Scope 3 emissions are often the most extensive and complex to measure, as they encompass a wide range of activities and actors. Accordingly, assumptions often have to be made.
Scope 3 emissions: The scale of the problem
Adding Scope 3 emissions to CO2e intensity – colloquially referred to as a company’s greenhouse gas footprint – creates several challenges. The Scope 3 category is often so extensive that Scope 1 and 2 emissions become almost irrelevant by comparison. For reference, we estimate that the global equity universe of Swisscanto investment solutions in 2022 included Scope 1 emissions of approximately 12 gigatons (Gt) CO2e, Scope 2 emissions of 2 Gt, and Scope 3 emissions of 93 Gt – amounting to a total of 107 Gt CO2e. This figure contrasts with global greenhouse gas emissions of 54 Gt CO2e. This highlights that Scope 3 values are largely theoretical and disconnected from actual emissions.
Additionally, data volatility, changes in estimation models, or double-counting contribute to inflated footprints. Companies offering critical technologies for the energy transition are also disproportionately “penalized” under Scope 3 assessments. We have already detailed these issues extensively.
The starting point is therefore challenging. Nevertheless, we aim to present an approach that allows us to set a fixed target for total Scope 3 emissions within our investment universe. We propose starting with the methodology developed by the U.S. data and index provider MSCI.
An approach to the problem of double-counting emissions
MSCI addresses the issue of double-counting by introducing a “Deduplication Factor” at the macro level of a specific investment universe (see: Overcoming Double Counting in Scope 3 Emissions, MSCI, 2021, and Scope 3 Carbon Emissions Methodology, MSCI ESG Research, 2023). This approach assumes a closed system in which all Scope 3 emissions of one company are the Scope 1 emissions of another. This assumption helps estimate the extent of double-counting. We follow this assumption as it aligns with the same logic used for double-counting agreements between Scope 1 and Scope 2 emissions: a company’s Scope 2 value corresponds to another company’s Scope 1 value.
The formula used by MSCI is as follows:
As of the end of December 2022, the calculation of the Deduplication Factor yielded a value of 0.18. This means that, under this method, only 18% of Scope 3 emissions are additional, while a massive 82% result from double-counting.
Total number of companies (N) |
11,644 |
Sum of Scope 1 emissions (A) |
15,390 MtCO2e / year |
Sum of Scope 3 emissions (B) |
84,783 MtCO2e / year |
Deduplication Factor = A / B |
0.18 |
Source: Scope 3 Carbon Emissions Methodology, MSCI ESG Research, March 2023
Potential addition: Accounting for non-corporate emissions
In our view, this approach is heading in the right direction. Building on MSCI’s de-duplication factor, we extend the model to include additional greenhouse gas emitters. These are actors that cannot be attributed to private-sector companies, such as Individuals and Governments (henceforth I&G). This would address a critical gap in calculating the Deduplication Factor. Significant emission sources from non-corporate actors include the military, fossil fuels for heating, and gasoline for cars.
In this extended model, the target Scope 3 emissions equal the total reported Scope 1 emissions plus the Scope 1 emissions of non-corporate actors.
This leads to a de-duplication factor that accounts for all reported emissions:
How can non-corporate emissions be estimated?
The key question is how many Scope 1 emissions from I&G should be added to the Scope 1 emissions reported by publicly listed companies in our investment universe. According to our calculations, CO2e emissions from cars 1, buses, rail transport, fossil fuels for heating buildings (residential and government, per IEA-ESGAR), and the military total over 10 gigatons (Gt) of CO2e (see chart below).
However, not all of these emissions can be attributed to the Swisscanto investment universe, which includes over 10,000 of the world’s largest companies. Some are already reported by publicly listed companies, while others should be attributed to private companies. Our analysis shows that only about 30%, or 3 Gt CO2e, of these total emissions can be attributed to the publicly listed equity universe. This estimate is based on the share of our equity universe in global emissions from energy-related sources (Scope 1 emissions of 12 Gt CO2e according to ISS data and the Swisscanto equity universe out of a total of 37 Gt.)
Emission Sources from Individuals and Governments
Practical application of the Deduplication Factor in emission accounting
Assuming the Scope 1 emissions of the publicly listed universe amount to 12 Gt CO2e, our adjusted Scope 3 emissions would total 15 Gt CO2e. The Deduplication Factor would then be 16% (15 Gt / 93 Gt) (see table below).
As mentioned, various adjustment factors should be applied to individual companies based on their respective sectors or business segments. This “bottom-up” approach evaluates the influence companies have on their Scope 3 emissions – considering business models, strategies, value chain positions, and operational capabilities to reduce emissions. In our view, this approach better reflects companies’ climate risks.
However, when applying these factors to an entire diversified investment universe, we consider it essential to also set a “top-down” target for the universe’s total Scope 3 emissions. Based on the calculations above, we propose using 16% of the reported Scope 3 emissions of our investment universe as a benchmark. The total adjusted Scope 3 emissions for the universe should amount to 15 Gt. This means that different influence-based factors are applied across sectors, while the overall scaling factor for the universe sums to 16%.
Sum of Scope 1 emissions of all companies (A) |
12 Gt |
Additional Scope 1 emissions from non-corporates (B) |
3 Gt |
Total Scope 1 emissions (C = A + B) = adjusted Scope 3 emissions |
15 Gt |
Sum of Scope 3 emissions of all companies (D) |
93 Gt |
Deduplication Factor (E = C / D) |
0.16 |
Conclusion on Scope 3 emission accounting:
- Current Use of Influence-Based Adjustment Factors: So far, we use our influence-based adjustment factors for Scope 3 as part of our “Do No Significant Harm” criterion. This involves setting maximum thresholds for the total emissions footprint. Companies exceeding this threshold are, in our view, “significantly harmful” in their activities. Our “Sustainable” investment funds exclude such companies under the “Do No Significant Harm” principle. Additionally, in our Luxembourg-based “Committed” funds, these issuers are not counted as sustainable investments.
- Future Reporting and Swiss Climate Scores: In the long term, we aim to use these adjusted footprints for reporting on Swiss Climate Scores and decarbonization pathways. The Swiss Climate Scores working group, organized by the Asset Management Association Switzerland (AMAS) and Swiss Sustainable Finance (SSF), has already begun discussing this idea. The goal is for the Swiss market to improve its integration of Scope 3 emissions – without leading to incomprehensible results.
- Pragmatic Approach for Climate Risk Management: With a pragmatic approach, Scope 3 emission data can become valuable tools for climate risk management, improve stakeholder communication, and position the Swiss market as a key player in combating climate change. Agreement on this “bottom-up” approach to avoid double-counting is, in our view, essential.
How we define influence-based adjustment factors for individual companies will be detailed in our next Swisscanto Insights blog.
1 IEA-EDGAR CO2 (v3), a component of the EDGAR (Emissions Database for Global Atmospheric Research) Community GHG database version EDGAR_2024_GHG (2024) including or based on data from IEA (2023) Greenhouse Gas Emissions from Energy, www.iea.org/statistics, as modified by the Joint Research Centre.
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