How mandatory full-scope emissions disclosure will reshuffle who counts as a carbon leader, and redirect capital accordingly.
Asset managers serving climate-conscious investors rely on carbon-intensity metrics to guide capital allocation within sectors, but until now have compared firms primarily on Scopes 1 and 2 emissions—direct operations and purchased energy—because that data was most available under voluntary reporting. California’s Senate Bill 253 changes that, mandating full-scope emissions disclosure, including Scope 3, for U.S.-incorporated firms with over $1 billion in annual revenue doing business in California.1 Our study in Nature Communications Sustainability shows that adding value-chain emissions fundamentally alters relative carbon performance evaluation, with partial and full sector-peer rankings correlating at just 42%. In sector-neutral carbon-tilted portfolios, full-intensity tilting cuts financed emissions by roughly 45% versus only 6% on partial-intensity data, at comparable returns.2 This synthesis evaluates what these findings mean for asset managers and the climate-conscious investors they serve, arguing that the choice of emissions metric shapes a portfolio’s fundamental and carbon characteristics.
The Data Shift Underway
Asset managers serving climate-conscious investors rely on carbon-intensity metrics — emissions per unit of output, typically measured as emissions per dollar of revenue — to guide capital allocation within sectors. These strategies have typically compared companies on their Scopes 1 and 2 emissions — direct operations and purchased energy — because that data was the most available and reliable under the largely voluntary reporting regimes that prevailed until now. Scope 3 value-chain emissions, though often 80–90% of a company’s total footprint, remained sparse, inconsistent, and vendor-estimated rather than company-reported. California’s Senate Bill 253 (SB 253) changes that, mandating full emissions disclosure, including Scope 3.
What the Law Requires
SB 253 is the most significant mandatory emissions disclosure regime in the United States. It requires U.S.-incorporated public and private firms with over $1 billion in global annual revenue, and doing business in California, to report their full carbon footprint: Scopes 1 and 2 starting in 2026, Scope 3 in 2027. Because the thresholds for “doing business in California” are relatively low, virtually all large U.S.-incorporated firms above the revenue threshold fall within scope. The mandate also ratchets up the credibility of that data over time. Third-party assurance for Scopes 1 and 2 phases in from limited to reasonable assurance, the standard used in financial audits, by 2030, with limited assurance for Scope 3 beginning around the same time. Reported emissions will not just be broader in scope but progressively more verified.
Not Just a California Law
The reach is nationwide: among the publicly traded firms in our research sample that fall within SB 253’s scope, only 15% are headquartered in California. SB 253 is also being implemented as the Securities and Exchange Commission has rolled back federal climate disclosure rules, leaving a regulatory vacuum. Other states, including New York, New Jersey, Illinois, Washington, and Colorado, are advancing similar legislation, and internationally, SB 253 parallels the European Union’s Corporate Sustainability Reporting Directive, though the EU regime has since been narrowed under the 2025 Omnibus I simplification package.3
Adding Value-Chain Emissions Reshuffles Carbon Rankings
SB 253 enables a fundamental shift in perspective: investors will be able to assess the full carbon footprint embedded across entire value chains using company-reported rather than vendor-estimated data. The critical question is whether this shift changes how investors identify carbon leaders and laggards within sectors.
Our research shows it does, dramatically. Incorporating value-chain emissions fundamentally alters relative carbon performance evaluation. When we simulate how sector-peer rankings shift as investors move from partial (Scopes 1 and 2) to full (Scopes 1, 2, and 3) emissions-intensity metrics, we find a weak correlation of just 42% between the two approaches, with an average spread of 23 percentile points.
Why the Reshuffling Happens
This reshuffling is not an artifact of measurement noise. The mechanism is straightforward: not all companies in the same sector have the same mix of direct versus value-chain emissions. Consider two firms in the same industry, identical in every other dimension except that one outsources significantly while the other maintains vertical integration. The outsourcing firm’s emissions shift to Scope 3, and its ranking shifts with them. Two prominent cases illustrate the effect. Apple ranks in the 8th percentile under partial intensity but drops to the 43rd under full intensity, because 88% of its emissions are in Scope 3. Tesla, with 96% of its emissions in Scope 3, moves from the 14th to the 64th percentile, reflecting the large upstream and downstream emissions associated with battery production and vehicle use.
Some Sectors Are Affected More Than Others
The size of the effect varies sharply by sector. In utilities, where Scope 3 is a smaller share of the footprint, reshuffling is modest, roughly 15 percentile points, often immaterial. Vistra Corp., a major U.S. utility with only about 5% of its emissions in Scope 3, ranks among the highest emitters in its sector under either metric; the choice of measure does not change that assessment. But in consumer discretionary and technology, where Scope 3 represents 90% or more of emissions and varies widely across firms, reshuffling reaches 30 percentile points or higher.
For asset managers, this reshapes which firms are identified as leaders versus laggards, and therefore which firms are overweighted and underweighted in the portfolio.
What This Means for Building Portfolios
To quantify what this reshuffling means for asset managers serving climate-conscious investors, we develop carbon-tilted variants of popular indices like the S&P 500. Unlike divestment, which excludes entire sectors, sacrifices diversification, and simply transfers ownership without changing underlying business activity, carbon tilting reweights firms within each sector according to relative carbon performance while holding sector weights fixed at the benchmark. Our implementation preserves market-level returns before transaction costs, maintains diversification, and creates a market-based incentive for carbon laggards to reduce their emissions per unit of output and climb the sector rankings. This builds on the carbon-efficient indexing methodology we developed in earlier work published in Energy Economics.4
The question SB 253 forces is which emissions metric that tilt should be built on. To answer it, we construct two otherwise-identical tilted portfolios: one that ranks firms on partial intensity (Scopes 1 and 2), the other on full intensity (Scopes 1, 2, and 3). Same universe, same sector-neutral construction, only the carbon signal differs.
Same Returns, Very Different Emissions
On financial performance, the two tilted portfolios are nearly indistinguishable from each other and from the benchmark. All deliver returns of roughly 15%. Both tilts run a modestly higher annual turnover, about 14% against 11% for the standard benchmark, and the higher trading cost that implies is manageable. Between the two tilts themselves, the financial profile is essentially the same. What separates them is not return or cost but the carbon outcome they produce.
And there the two portfolios part ways. The partial-intensity tilt cuts financed emissions — the emissions of the companies the portfolio holds, scaled to the size of its stake in each — by only about 6%, because it reweights firms on a signal that ignores the roughly 86% of emissions sitting in the value chain. The full-intensity tilt cuts financed emissions by roughly 45%, with the same financial performance. Same construction, same returns, dramatically different carbon footprint.5
How Much Capital Would Move
The gap between them is not a rounding difference; it is a different portfolio. Shifting from a partial-intensity tilt to a full-intensity tilt implies a total reallocation rate of roughly 29%, about $290,000 in trades for every $1 million invested, or 2.6 times the annual turnover of the standard benchmark. Because the tilt is sector-neutral, none of that is a sector bet; it is a reshuffling of capital among peers within sectors.
For asset managers in sustainable investing, the choice of emissions metric is not a technical input but a determinant of the fundamental and carbon characteristics of the portfolio. Tilting on partial intensity reweights firms on an incomplete signal, one that misses wide differences across firms in where their emissions actually sit, and achieves only modest emission reductions. Tilting on full intensity delivers substantially more, at comparable financial performance. Full-scope disclosure under SB 253 is what makes the more complete signal available.
And our estimates likely understate what mandatory disclosure will reveal. They rest on vendor-estimated Scope 3 data, which tends to smooth over the firm-specific differences that drive the reshuffling in the first place. Once companies report their own value-chain emissions under SB 253, those differences, and the reranking they produce, should only grow sharper.
Why Every Asset Manager Should Care
For asset managers, the implications reach well beyond California. Whether they are based in New York, London, or Hong Kong, the shift bears directly on their capital allocation decisions, because virtually all large U.S. corporations fall within SB 253’s scope, wherever they are headquartered, and because other major jurisdictions are advancing or implementing their own mandatory disclosure regimes. Firms that look like carbon leaders under partial metrics may not hold that position once value-chain emissions are disclosed and verified, and asset managers who treat the distinction as a technicality risk leaving valuable information unused. Those attuned to the shift will be better positioned to make informed capital allocation decisions for their climate-conscious clients, and to identify which firms are genuinely prepared for a carbon-constrained world.
Authors’ Note
This synthesis is based on our original study, Full Emissions Disclosure Under California Senate Bill 253 Could Change Carbon Evaluations and Redirect Investment, prepared in response to practitioner interest in a concise overview of our key findings and their practical implications for asset managers and climate-conscious investors. The full study is published in Nature Communications Sustainability.
References
- California State Legislature, Senate Bill 253: Climate Corporate Data Accountability Act (Sacramento, CA, 2023).
- Sunil Dutta et al., “Full Emissions Disclosure Under California Senate Bill 253 Could Change Carbon Evaluations and Redirect Investment,” Nature Communications Sustainability 1 (2026): 42, .
- European Commission, Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022 as Regards Corporate Sustainability Reporting, Official Journal of the European Union L 322 (December 16, 2022).
- Sunil Dutta et al., “Fundamentals of Carbon Emissions Scaling: Implications for Sector Peer Comparisons and Carbon-Efficient Indexing,” Energy Economics 143 (2025): 108300.
- Partnership for Carbon Accounting Financials, The Global GHG Accounting and Reporting Standard: Part A — Financed Emissions, 2nd ed. (2022).
