Report: Scope 3 data leading to “irresponsible” portfolio construction

portfolio, research, emissionsUtilising estimates about Scope 3 emissions could result in portfolios that are biased towards low-revenue companies, research by Osmosis Investment Management suggests.

In a paper, The Obstructive Role of Scope 3 Emissions Data in Portfolio Construction, the firm indicated that Scope 3 data - the emissions from the supply chain of companies required to report emissions - leads to portfolios with unappealing investment characteristics and are "irresponsible" on financial and environmental grounds.

The EU is mulling obligatory Scope 3 data integration into future Paris-Aligned Benchmark policies, but Osmosis said there is some way to go to ensure the reliability and usefulness of the data.

Scope 3 emissions account for around 90% of a company's overall emissions across the entirety of its value chain and are of growing interest to regulators and investors alike.

However, a combination of poor disclosure rates, lacklustre data quality and growing market demands have resulted in major data providers, such as Bloomberg and MSCI, using revenue-based models in their in-house estimation processes.

But these approaches are flawed, the whitepaper argues.

Osmosis illustrated this with an example of two clothing manufacturers, one using cotton shipped halfway across the world, the other using sustainably sourced materials. If both companies make the same revenue each year, then, using revenue-based estimation, both companies will receive the same Scope 3 'score', according to the research.

The whitepaper stated: "From an environmental perspective, using estimated Scope 3 data is nigh-on meaningless."

On a live-fund basis, Osmosis analysed BlackRock's iShares MSCI World Paris-Aligned Climate Fund. The data showed that using an estimation-based methodology and after adjusting for size, portfolios minimising scope emissions were also minimising revenue.

In practice, portfolios optimised to limit a Scope 3 footprint steer investors towards companies with low relative revenues and a higher-than-expected share price, the research found.

The paper stated that using revenue-based methodology to estimate Scope 3 data in portfolio construction is "misguided" and any claimed environmental benefits are "unfounded, and from a financial perspective, we would argue it is irresponsible".

Currently, estimations from data houses do not correlate with self-reported values, Osmosis said. Not a single reported datapoint from MSCI World matched its estimated value from MSCI's estimated Scope 3 dataset.

The London-based investment manager said investors should not consider evaluating company performance on Scope 3 data if it is considered immaterial or outside of management's control. To overcome the issues raised in the report, a more granular approach to data is needed alongside further research, the paper noted.

© 2023 funds europe

Thought leadership


This whitepaper outlines key challenges impeding the growth of private markets and explores how technological innovation, when bolstered by the operational experience and global reach of FMIs, can provide solutions to unlock access to private market funds for a growing investor base.


Transporting goods by sea is the lowest carbon way of transporting goods. That said, the shipping sector contribute 3% of global carbon emissions, so we need it to get to net zero. Breakthrough technologies have the power to reshape the industry and drastically reduce its environmental footprint.



We often hear about the challenges related to sustainability data - in particular, the lack of consistency, comparability, and completeness. Update your information puzzle with Essential Sustainability Intelligence.


Discover how investing in real assets with a multi-asset approach can help build resilient portfolios.


Executive Video Interviews

Why fund admin tech is a key competitive advantage

Cian Hyland, Strategic Client Relationship Director at Deep Pool Financial Solutions spoke to us about how technology enables efficient data management, reporting automation and secure data access.

Insights from State Street

Cuan Coulter, Global Head of Asset Managers and Head of UK and Ireland at State Street, discusses how fund managers decide between the two cross-border fund domiciles, namely Ireland and Luxembourg, and why asset managers find managing data so difficult.

Unlocking access to private markets

Vincent Clause, who heads the global funds strategy at Euroclear and David Genn, CEO of Goji, sit down with Funds Europe to explain how technological innovation, bolstered by operational experience and global reach, can provide solutions that unlock access to private markets.

Sustainable investing in the DC world

Claire Felgate, a specialist in UK defined contribution pension schemes at asset manager BlackRock, talks with Funds Europe editor Nick Fitzpatrick about how - and the pace at which - DC pension schemes are adapting to the requirements of sustainable investment.



Join our webinar for a deep dive into the findings of the fresh-off-the-press EU Taxonomy 2023 Insights Report, based on Clarity AI's best-in-class coverage of EU Taxonomy reported data and CDP industry-leading environmental datasets. 

In this webinar, we discuss tools for optimising fund data management and distribution, the role of global fund classifications and ratings, and how technology and automation enhance data integrity and insights.