Carbon emissions to consider when investing

Why a company’s carbon footprint may not reflect the full picture.

Did you know that 6 million electric cars are expected to be shipped globally this year alone? The figure is a significant increase of 2 million from 2021 as society becomes more environmentally conscious. Such shifts apply not only to the type of cars people choose but also to their investment strategies.

Have you ever heard of the term sustainable investing? While it is not a new concept, it has gained steam due to sustainability efforts taking centre stage for the past few years. It occurs when people factor a business’ impact on the environment in their investment considerations.

The carbon emissions conundrum

A sustainable investment comes hand in hand with lower carbon emissions. The more carbon emissions a business emits, the less likely it will be considered by investors keen on sustainable investments.

So, how can one calculate their business carbon emissions? There are three scopes available. Scopes 1 and 2 are relatively easy to measure as they refer to the direct and indirect emissions; in contrast, Scope 3 is not as straightforward. It is harder to quantify since it includes the total emissions produced during the entire value chain process.

Imagine you own a garment factory. The carbon emissions you would produce under Scope 1 and Scope 2 are either directly or indirectly related to the number of garments produced, i.e. the electricity used and purchased. The more garments made, the more carbon emissions you would produce. However, Scope 3 is less quantifiable; it would be related to the process through which you acquire the raw materials used — the upstream supply chain. This ranges from planting and harvesting the material, producing cloth, to shipping it to your factory.

That’s why Scope 3 is rarely included in a company’s carbon footprint report. But it is an important factor that should not be overlooked since the report may not reflect the full picture of the company’s carbon footprint. It is thus crucial for companies to be transparent on the scope of emissions and whether the figures are accurate or just an estimation.

As Scope 3 is harder to quantify, it is more practical for investors to set a target with a buffer, not an exact and rigid figure. For example, instead of setting a 50% carbon reduction target, set a range, such as 40-60%. Such an approach will help investors make an informed decision and achieve a realistic low-carbon portfolio.

To learn more about carbon emissions, read our full article “Not all carbon emissions are equal”

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