“Scope 4” is here - Avoided emissions becomes a new way of measuring climate impact

June 2022

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:

• Pre-investment: to compare the impact of various potential investments to allow allocation of capital to the most impactful in terms of quantity of avoided emissions per unit of investment over a particular timespan (also known as the ‘Carbon Yield’); and,
• Post-investment: to monitor and communicate quantitative climate impact to investors

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:

• Consequential approach - assesses the system-wide change in emissions from a specific decision
• Attributional approach - looks at the absolute emissions and removals of a product when compared to a reference product

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:

• How is the reference product chosen? Is this a kilo of beef? Or a weighted basket of ‘meat products’ (e.g. beef, lamb, pork, chicken etc.)
• Is it a 1 for 1 replacement of meat for plant-protein? Is the nutritional value the same? What if consumers were previously buying vegetables or pulses?
• What is the system boundary and time-period assessed?
• What data sources are we using for the lifecycle analysis? Is this country-specific?
• Is there any attribution across the value chain needed?
• Are we using sales forecasts? What is the associated uncertainty level?

To address this, common across the frameworks are some fundamental key principles, which we can group into:

• Robustness – how well would the model stand up to scrutiny? Are you adopting the ‘precautionary principle’ by taking conservative assumptions? Are you consistent in your application of assumptions? If there is uncertainty are you using sensitivity analysis?
• Transparency – could a third party recalculate the outcome or have the calculations been assured or verified by a third party?
• Balance – are you also considering and disclosing the scope 1-3 emissions footprint of the portfolio and have you set decarbonisation targets?

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.}