Not All Carbon Emissions Carry the Same Risk

Carbon footprints can help investors assess portfolio transition risk. But MSCI research suggests that treating every ton of CO₂ equally can overstate some risks and understate others. For corporate leaders, the implication is clear: Investors may focus less on total emissions and more on the emissions most exposed to financial pressure.

The emissions that matter vary by industry

MSCI developed a materiality-weighted carbon footprint that identifies, at the GICS sub-industry level,¹ which emission scopes (operational, upstream or downstream) are most exposed to real business pressure from carbon pricing or technology substitution.² The result is a significantly narrower lens through which to view financial materiality of the issuer’s carbon footprint. Across the MSCI ACWI Index, only 6% of Scope 3 upstream emissions qualified as material, compared to 78% of Scope 1 and 2 and 62% of Scope 3 downstream. For sectors like energy and consumer discretionary, downstream product emissions dominate the risk picture. For consumer staples, upstream supply-chain emissions carry more weight.

Carbon efficiency was associated with stronger earnings growth

Our analysis comparing the most and least carbon-efficient companies within each sector over the past decade found significant performance differences. More carbon-efficient companies outperformed more carbon-intensive peers even after controlling for all other factors. Critically, this gap widened when emissions were materiality-weighted rather than measured in total, suggesting that emissions facing the greatest business pressure may provide a sharper signal of financial risk.

What this could mean for your company

Investors are becoming more precise about which emissions may signal financial risk, with greater focus on the scopes facing the most significant business pressure. Companies may want to consider which parts of their value chain investors view as financially relevant when prioritizing decarbonization and disclosure. Where material emissions are concentrated in Scope 3 downstream (as with energy and auto manufacturers), investor scrutiny may concentrate there.

Data from Dec. 31, 2014, to March 31, 2025. Past performance, whether actual, backtested or simulated, is no indication or guarantee of future performance. Source: MSCI Sustainability & Climate. MSCI Sustainability & Climate products and services are provided by MSCI Solutions LLC in the United States, MSCI Solutions (UK) Limited in the United Kingdom, MSCI Solutions (Deutschland) GmbH in the EU and certain other related entities.

1 GICS is the global industry-classification standard jointly developed by MSCI and S&P Dow Jones Indices.

2 The business-pressure score assesses the level of financially relevant pressure on the company to decarbonize its business based on the expected emissions intensity and commercial adoptability of relevant emissions-mitigation technologies.