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In response to the call for a transition to a low carbon (and eventually net zero emissions) economy, more and more financial institutions are actively exploring ways to decarbonize their investment portfolios. The TCFD recommendations represent a commitment to better account for the risks and opportunities on the path towards a more sustainable global financial system. As a result, large asset owners and managers are expressing the need for better climate-related financial disclosures from corporations they invest in.
Attention so far has mostly been given to the evaluation of climate-related risk in investment portfolios. But beyond risk, and as investors start looking at opportunities to shift their investments towards more sustainable firms, corporates able to provide evidence of greater sustainability performance will be at a competitive advantage. ‘Avoided emissions’ is an example of how they can do this.
What are avoided emissions?
Avoided emissions allow corporates to quantify the climate benefits expected from their products and services over their useful lifetime. This means a company looks at how to deliver emissions reductions in the value chain i.e. supporting customers and/or suppliers addressing their environmental footprint while at the same time encouraging innovative technologies and solutions.
Working with value chains can often be a challenge for companies (e.g. due to the limited availability of data) and ‘innovation’ is the term often used to inspire action. But what does that mean in practice? If a company is considering developing low carbon products and services, assessment of avoided emissions may help quantify the value and feasibility of this. If there are already low carbon products and services in the business portfolio, an assessment of avoided emissions allows robust emissions reductions claims.
How to begin with avoided emissions?
To assess avoided emissions, companies should look at a comparative analysis of emissions in a business as usual against a scenario involving the use of their green products and services. This will involve emissions calculations which take into account:
- market growth, market share and associated performance criteria
- the definition of a baseline scenario (i.e the business as usual scenario)
- the definition of a functional unit (i.e a means of comparing the equivalent level of service delivered to the user in both the baseline and improved scenarios)
- the allocation of emissions reductions among the various technology providers across the value chain
Progress is being made by some companies. EPE, a French business association has come up with general guidelines that will help promote greater levels of transparency and comparability. But as assumptions and approaches for a robust evaluation are sector-dependent and even company-specific, companies will probably need help.
For example, the chemical sector collaborated on the development of such sectoral guidelines under an initiative led by International Council of Chemical Associations and the World Business Council for Sustainable Development in 2013. Other sectoral guidelines may be developed in the future to allow for more harmonized and comparable claims.
Best practice also calls for caution when making claims around ‘avoided emissions’, as emissions reductions derived from green products and services sold to customers should not be used by suppliers against their carbon footprints and carbon neutrality objectives. Instead, these can be used as evidence for the quantification of suppliers’ contributions to a decarbonized economy. Also, environmental trade offs often arise when evaluating the introduction of innovative technologies and these should be taken into consideration.
Avoided emissions – some examples
The concept of avoided emissions applies across many sectors and market segments whenever a technology or service goes beyond business as usual and delivers climate benefits.
The chemical manufacturer BASF evaluated avoided emissions by comparing an existing single-family home retrofitted with a thermal insulation product with a market-average single-family home in Germany. Avoided emissions were claimed to amount to 141 tonnes of CO2e per house.
There is growing interest among green bonds issuers for a metric such as avoided emissions, as it helps address the ongoing debate around the definition of the ‘greenness’ of bonds. EDF reports on the emissions avoided thanks to renewable energy plants financed via green bonds. Green bonds issued in 2013 and 2015 financed 15 renewable energy projects avoiding a total of 2.9 million tonnes of CO2 annually.
The concept of avoided emissions is important as one of the tools to address environmental impacts in the value chain. Although complex, leading companies are already finding the value in pursuing such a strategy.