Avoided emissions – the benefits of tracking a climate positive metric on the path to Net Zero
Tal Lomnitzer, Senior Investment Manager on the natural resources team at Janus Henderson Investors
There is now near universal acceptance that society needs to maintain global warming to 1.5 degrees Celsius. To meet this objective, the global economy must achieve Net Zero emissions by 2050, primarily through the decarbonisation of the energy, transport, manufacturing and agricultural sectors.
However, decarbonisation cannot be achieved without the increased use of carbon-intensive commodities. Additional copper, steel and lithium will be required for renewable energy technologies like wind turbines, electric vehicles (EV) and batteries. The EU Energy Roadmap 2050 estimates that copper-enabled decarbonising technologies can abate some 75% of EU GHG emissions. As such, copper demand is projected to grow from 25 million metric tons (MMt) today to about 50 MMt by 2035, a record-high level that will be sustained and continue to grow to 53 MMt by 2050.
Paradoxically, we need to stomach an increase in absolute emissions through the increased demand and consumption of enabling commodities in order to accelerate progress towards achieving Net Zero.
What are avoided emissions and are they worth measuring?
In addition to the focus of corporations on reducing Scope 1, 2 and 3 emissions over the past 20 years there has been increasing interest in other complementary measures that provide additional, ‘real economy’ information about corporate efforts to meet carbon reduction targets.
There are now a growing number of companies who are measuring and reporting the ‘climate positive’ benefits associated with the increased use of their products and services.
Whilst there is no universally agreed classification for avoided emissions, the Green House Gas Protocol defines them as “emission reductions that occur outside of a product’s lifecycle or value chain, but as a result of the use of that product. Other terms used to describe avoided emissions include climate positive, net-positive accounting, and Scope 4.” The Science Based Targets initiative (SBTi) states that avoided emissions are ‘critical to society achieving net zero and should indeed constitute part of a company’s net-zero strategy’.
There are a range of drivers for businesses to measure and report avoided emissions. Not only are they a useful measure of real-world outcomes occurring outside of an organisation’s value chain, but they also provide a basis for companies to make evidenced claims about the positive GHG impacts of their products or services, relative to the situation where those products do not exist.
Equally, measuring and reporting avoided emissions assists companies business strategy and decision-making in line with Net Zero commitment and the ability to demonstrate positive climate benefits helps to grow and attract capital and talent.
Avoided emissions are not sufficiently accounted for by current GHG accounting protocols
Most international climate-related standard-setting bodies and their respective guidelines recognise the relevance of avoided emissions and provide some direction as to how they can be accommodated in parallel to measuring and reporting Scope 1, 2 and 3 emissions. However, calculating avoided emissions still lacks consistency, and current protocols fail to sufficiently account for its beneficial climate impacts.
From an investor perspective, data on avoided emissions is critical to accurately identifying and supporting sustainable investment opportunities. However, current protocols do not offer investors a ‘green revenue’, carbon-related lead indicator, allowing for the comparison of climate change risk exposures and positive impacts. As such, investors are unable to indicate to companies their own preferences and requirements, which would enable the consideration of avoided emissions in their investment decision-making processes.
Avoided emissions is a complex, increasingly recognised ‘complementary’ metric, which when used appropriately has the potential to capture real world, beneficial climate outcomes required by businesses and investors to assess action on reducing Scope 1, 2 and 3 emissions and to encourage societal uptake of more carbon reducing products and services. Used incorrectly, avoided emissions runs the risk of being labelled as misleading at best, or ‘greenwashing’ at worst, potentially leading to poor investment decision-making and incorrect capital allocation by investors.
Where is the opportunity for investors?
In the absence of internationally accepted avoided emissions standards, investors have an opportunity to drive greater understanding through individual work and collaboration and provide guidance on their expectations relating to the measuring and reporting of avoided emissions at a company and portfolio level.
But with opportunity comes obligation. Investors have two requirements regarding the use of avoided emissions metrics. First, they must ensure that the use of avoided emissions analyses in their own investment decision-making has the necessary rigour and draws on the ‘best practice’ guidance contained in existing carbon accounting standards, like the Greenhouse Gas Protocol, the Global GHG Accounting and Reporting Standard for the Financial Industry and Life-Cycle Analysis.
Second, as part of their stewardship activities, they must engage companies on using best practice principles aligned with international carbon accounting standards to avoid greenwashing.
There are already a small number of asset owners and managers who are using avoided emissions to demonstrate how a share of the climate positive attributes in portfolio companies could be attributed to their investment portfolios and compared to market benchmarks.
As these ‘enabling’ industries focus on reducing their Scope 1, 2 and 3 emissions in line with Net Zero expectations over the medium-to-longer-term, investors should not lose sight of the positive societal impacts from the ‘avoided emissions’ associated with the increased customer use of products and services derived from these commodities and the products they make possible.