California’s Scope 3 reporting law has ESG heads concerned

Heads of ESG at private fund managers and institutional investors are concerned about needing to measure and disclose their Scope 3 carbon emissions under California’s newly-passed Climate Corporate Data Accountability Act.

The law requires companies that do business in California and have annual revenues of over $1 billion to report on their Scopes 1, 2 and 3 carbon emissions. For a fund manager, Scope 3 refers to the direct emissions (Scope 1) of their portfolio companies, pro rated for the ownership stake held by the GP, and the direct emissions of the firm’s suppliers.

The proposed bill was passed by the state senate last week, and needs to be signed into law by California governor Gavin Newsom later this year; Newsom has previously indicated his intention to sign it.

However, institutional investors’ and fund managers’ ESG and sustainability heads are concerned about the Scope 3 reporting requirements.

One investor’s ESG lead expressed scepticism about the value of Scope 3 emissions data, speaking on the sidelines at PEI Group’s Responsible Investment Forum in San Francisco this week. “You’ll always have double-counting for Scope 3 because one person’s Scope 3 is someone else’s Scope 1, so if you get to net zero you’d actually be below zero,” she said. “I can’t control someone else’s emissions.” Asked if she thought switching to less carbon intensive suppliers is a viable option to reduce Scope 3 emissions, she said: “If they need to fly [a product] over here, that’s what they’ve got to do.”

A buyout firm’s ESG head said his firm is starting to collect Scope 3 data where it is available, but “a lot of the time it’s based on estimates and proxies, so only time will tell how accurate that is”. These are particularly unreliable because the estimates often use the publicly available data of larger competitors, and in the fast-moving sustainability world, smaller companies in a supply chain are transitioning more quickly than their larger competitors, he continued. Speaking about ESG data more generally, he added that it is difficult to persuade companies to improve their ESG performance when the data indicating their poor performance is unreliable.

“We go to our companies and they don’t even know what [Scope 3] is or how to go about finding it,” said the head of ESG at another investment firm. She added that it is difficult to ask companies to collect this data because of how resource-intensive the collection process is.

A partner at a venture capital firm echoed this concern. “Some of our companies are just 10 people,” he said. “They’re so busy, there’s so much else to do for ESG.”

Another investor said that, while his organisation appreciates fund managers’ Scope 3 data, it focuses on Scopes 1 and 2 because this is more reliable.