The standard ESG methodology accounts for Scope 3 emissions in name only. We ran our own supply chain analysis on 200 FTSE companies and found systematic underreporting across industrial and consumer sectors.
Why Scope 3 is systematically undercounted
Scope 3 emissions — those generated upstream in a company's supply chain and downstream in the use of its products — typically account for 70 to 90 percent of a company's total carbon footprint. Yet the standard ESG scoring methodology relies almost entirely on self-reported data that companies are not yet legally required to verify.
What we found
Across 200 FTSE companies analysed, we found that Scope 3 emissions were underreported by an average of 43% compared to our modelled estimates. The gap was largest in industrials, consumer discretionary, and materials — sectors where upstream emissions from raw material extraction are substantial but rarely audited.
The investment implication
For equity analysts, systematically underreported Scope 3 emissions create a hidden liability that is not reflected in current ESG scores. As CSRD enforcement tightens and carbon pricing expands, companies with large unrecognised Scope 3 exposure will face correction risk that their headline ESG ratings do not capture.