Leading fund managers looking to establish funds focused on climate solutions are increasingly looking to quantify positive climate impact by calculating avoided emissions.
Avoided emissions, also referred to as ‘Scope 4’ emissions, can be defined as reductions that occur outside of a product’s life cycle or value chain, but as a result of the use of that product.
The metric serves a number of purposes for investors, namely:
Unlike scope 1-3 corporate and financed emissions reporting1 which follow clear standards under the GHG protocol and the Partnership for Carbon Accounting Financials (PCAF), there is no officially recognised agreed standards for the measurement and reporting of avoided emissions.
This is a clear problem for the metric, as the lack of a prescriptive methodology means that there is scope for ‘cherry picking’ of best-case outcomes and inevitably concerns around use of the metric for greenwashing.
However, there are a number of globally recognised credible frameworks available that provide guidance on how to address this, for example the Comparative Emissions Working Paper from the World Resources Institute, and the Avoided Emissions Framework from Mission Innovation, both of which are included as an acceptable framework in CDP reporting.
There are two methodological approaches to calculating avoided emissions – attributional and consequential:
The consequential approach is more holistic and looks at both secondary impacts and unintended consequences, and whilst this is the preferred theoretical approach, in practice due to information or time constraints the attributional approach is typically used.
An often-cited example is the avoided emissions associated with plant-based protein - the replacement of animal protein with plant-based protein results in reduced meat production. As meat production is associated with high emissions from agriculture and land-use, there is anticipated reduced emissions from this switch.
Taking an attributional approach, we can compare the lifecycle emissions of a functional unit, e.g. 1kg of plant-protein versus 1kg of animal protein (the ‘comparative impact’). The total annual avoided emissions will be equivalent to the anticipated sales in kg of the plant-protein multiplied by the comparative impact for each kg.
However, whilst this seems simple enough, the devil is in the details, or rather in the assumptions:
To address this, common across the frameworks are some fundamental key principles, which we can group into:
Our expectation is that as fund managers start to develop their climate solutions focused funds we will start to see a lot more disclosure of avoided emissions.
In our view, whilst the benefits of quantified climate impact metrics are evident, it is critical that they should be supported with robust and transparent methodologies and crucially should not detract from fund managers measuring, disclosing, and reducing their portfolio emissions.
1 Scopes 1, 2 and 3 respectively refer to direct GHG emissions from companies or financing projects, indirect GHG emissions from purchased electricity, and other indirect GHG emissions within the value chain.