The Challenges of Conducting Net-Zero Due Diligence Without Reliable Data

In the realm of investment, due diligence is a well-trodden path, meticulously followed to uncover the strengths and weaknesses of potential acquisitions. Yet, as the world grapples with the imperatives of climate change, the scope of due diligence has expanded to include a new dimension: assessing a company’s pathway to net-zero carbon emissions. This task, while crucial, is fraught with challenges, particularly when reliable data is scarce. Investors find themselves navigating a labyrinth of incomplete or inconsistent emissions data, attempting to quantify scope 1, 2, and 3 emissions without the solid foundation traditionally required for such analyses. The temptation, in these circumstances, is to bypass or omit certain emissions categories—an approach that is as risky as it is convenient.

The first challenge lies in the inherent complexity of carbon accounting. Scope 1 emissions, those directly generated by a company’s operations, are often the easiest to track. However, scope 2 emissions, which stem from the energy a company purchases, and scope 3 emissions, which encompass the full breadth of its value chain, present far more daunting challenges. Many companies lack the infrastructure or expertise to measure these accurately, particularly in regions where regulatory frameworks are still evolving. This absence of reliable data makes it difficult for investors to gain a true picture of the carbon liabilities they might be inheriting.

Furthermore, the dynamic nature of climate-related risks exacerbates the problem. As global warming accelerates, so too does the pace of regulatory and market changes. Policies that seem distant today could become enforceable mandates tomorrow, compelling companies to disclose and reduce emissions that were previously overlooked. Investors who fail to consider these future liabilities—perhaps because the current data is too sparse or challenging to obtain—may find themselves unprepared for the financial repercussions of these shifts.

Lastly, market and consumer expectations are evolving at a rapid pace. Companies are increasingly judged not only by their current carbon footprint but also by their commitments to future reductions. A company that has ignored or downplayed its scope 3 emissions, for example, may struggle to maintain its valuation as stakeholders demand greater transparency and accountability. The risk of holding an asset that is perceived as environmentally negligent is real, and it is growing.

Given these challenges, it is perilous for investors to simply ignore or exclude certain emissions sources or categories from their due diligence process. What might seem like a minor omission today could become a major liability in five years when stricter regulations and heightened market scrutiny make comprehensive emissions reporting non-negotiable. The prudent approach, therefore, is to use available benchmarks to fill in the gaps. While these benchmarks may not be perfect, they provide a starting point that can be refined over time. Tools like Viable Pathway offer investors a way to assess potential acquisitions using robust, industry-specific benchmarks, enabling them to make informed decisions even in the face of data scarcity.

In conclusion, conducting net-zero due diligence without reliable data is a formidable challenge, but it is not an excuse for inaction. Ignoring emissions categories or sources is a dangerous gamble that could leave investors exposed to significant risks in the future. Instead, leveraging benchmark data, even if imperfect, allows investors to navigate the complexities of carbon accounting with greater confidence, ensuring they are better positioned to meet the demands of tomorrow’s regulatory and market environment.