Yet, as students in sustainable finance, we cannot ignore the paradox between this growing sophistication and the reality of corporate carbon footprints.
The figures speak for themselves. In many sectors, between 80% and 90% of a company’s emissions fall under Scope 3, i.e., indirect emissions generated across its value chain. Put simply, most of a company’s carbon footprint lies outside direct operations.
Financial markets, however, continue to assess climate performance through the much narrower lens of Scope 1 and 2 emissions. As they are easier to measure and directly controllable, they foster a reassuring sense of progress that does not reflect the actual climate risk.
This article does not attempt to provide solutions, but rather to explore how Scope 3 remains a blind spot in sustainable finance. The efficiency of the financial transition may well depend on our collective willingness to move it from the periphery to the core of financial analysis.
The distinction between Scope 1, 2, and 3 may seem obscure, but it is in fact quite straightforward. The Greenhouse Gas Protocol defines Scope 1 as a company’s direct emissions, and Scope 2 as those related to the purchased energy it consumed. Scope 3 is much broader, and encompasses all indirect emissions in the value chain, both upstream and downstream. In sectors such as retail or automotive, Scope 3 accounts for the vast majority of total emissions.
That disparity is stark at American retailer Walmart. In 2025, the company boasted of progress in its 2024 direct emissions, Scope 1 and 2. These emissions, relative to its stores and internal logistics, amounted to roughly 15.6 million tons of CO2. By contrast, its Scope 3 emissions, which includes the production of goods sold and its suppliers’ agriculture, reached nearly 636.6 million tons.
Highlighting solely Scope 1 and 2 thus validates less than 3% of the company’s climate impact, while overlooking the risk associated with the remaining 97%.
Therefore, a company may display exemplary internal efficiency even if it is dependent on polluting suppliers or carbon-intensive products.
We have come to realize that reluctance to fully integrate Scope 3 does not necessarily stem from a lack of intent. Instead, three structural barriers help explain why it can be so difficult.
First, reducing Scope 3 emissions is both slow and costly because it requires transforming an entire value chain, including negotiating with suppliers or making heavy investments. On the other hand, reducing Scope 1 and 2 emissions is generally faster. Pressures on short-term performance brings companies to highlight immediate progress within their direct operational perimeter.
Compounding this issue is the complexity of Scope 3, which depends on many third parties. It relies on fragmented data that is sometimes estimated or even missing. This uncertainty introduces estimation errors and can render valuation models unreliable for risk pricing.
Lastly, current sustainable finance tools still heavily rely on scoring methodologies. Yet Scope 3 is, by nature, idiosyncratic; the supply chain of a firm like Walmart differs a lot from that of Stellantis. This uniqueness makes scoring demanding, as ESG ratings are designed for direct comparability, which can penalize complexity instead of rewarding genuine effort.
Treating Scope 3 as a secondary metric creates a dangerous blind spot in asset valuation.
Report by Boston Consulting Group (BCG) and environmental disclosure non-profit CDP highlights that climate risks lie in dependencies on carbon-intensive value chains. If these are not properly integrated, markets risk underestimating companies’ real exposure to climate change and leaving them vulnerable to three main risks:
Taken together, these dynamics showcase how strongly Scope 3 shapes companies’ economic exposure to the transition. Valuation models or climate scenarios as NGFS’ that do not include value chains may be hardly reliable.
The growing sophistication of sustainable finance does not necessarily mean that markets integrate the entirety of corporate impact. As long as Scope 3 emissions remain peripheral in financial analysis, a large share of transition risk will continue to elude valuation models.
As we delve into these questions academically, it appears clearly that bringing Scope 3 back to the center of climate assessment is a prerequisite for markets to price risks correctly and allocate capital where it does matter.
Ultimately, shedding light on Scope 3 may be one major step towards a financial system that genuinely carries the low-carbon transition.
We extend our sincere gratitude to Blaine Tesfay and Irène Touahria, Master's students in Economics and Sustainable Finance, for their thoughtful contribution to The EcoLeader Magazine.
