What Role Do Scope 3 Emissions Play in the Carbon Financial Performance Context? Evidence From Disentangling of Scopes 1, 2, and 3 Emission Performance Within the Science‐Based Targets Initiative Setting

ABSTRACT Former research has predominantly focused on Scope 1 and 2 emissions when examining the relationship between corporate carbon performance and corporate financial performance. This study investigates this relationship in greater detail by disentangling the financial relevance of Scopes 1, 2, and 3 emissions specifically for firms engaged in the science‐based targets initiative (SBTi). Notably, Scope 3 emissions account for the largest share of SBTi‐engaged firms' carbon footprint. Leveraging a comprehensive dataset covering 1,434 firms that comprises 6642 firm‐year observations from 2016 to 2023, we apply a firm‐ and year‐fixed effects panel regression model. The results demonstrate that reductions in Scope 1 and Scope 2 emissions are positively correlated with financial performance. In contrast, Scope 3 emissions do not appear to significantly influence financial outcomes. The research addresses a vital gap in understanding the relationship between Scope 3 emissions and financial performance. To assess the robustness of our results, we conduct additional tests including industry and country fixed effects as well as Heckman two‐stage estimation. The results highlight the necessity for managers to prioritize the reduction of directly controllable emissions while also strategically planning for the long‐term reduction of Scope 3 emissions.