ICE on making an impact: avoided emissions

This article is sponsored by ICE.

This article is sponsored by ICE.

Author: Ian Stannard, ICE sustainable finance business development

Within environmental and climate analysis, the positive impact of an investment is often not fully recognised or considered, and could be overlooked altogether.

Most metrics focus on the risk side of the climate equation (carbon footprinting, net-zero alignment, temperature scores, etc), with any potential positive impact rarely taken into account. This is especially the case when that impact occurs outside a company’s supply chain or a product’s life cycle.

Climate-related policy and regulation also tends to be focused on encouraging companies to reduce emissions across not only their own direct operations, but also their value chains (Scope 3). However, the need for companies to also develop innovative low or zero-emissions solutions is important for global decarbonisation.

The broadening of climate analysis from the traditional one-sided (risk) approach to a more holistic understanding of an investment’s economy-wide environmental impact is gathering momentum, but generates questions, including:

How can a company’s (or investment’s) broader positive impact on the environment be quantified?

Avoided emissions[1] is one concept that aims to identify opportunities with a positive impact and quantify the real-world difference such investments can generate.

While the concept of avoided emissions is currently not as clearly defined as other climate metrics, the underlying intention is clear: to help stakeholders understand a company’s role in the global transition towards a low-carbon economy.

Source: ICE

From climate risk to climate opportunity

An understanding of a company’s or product’s role in the transition allows the identification of low-emission and carbon-reducing solutions, helping to drive investment towards these opportunities. Hence, avoided emissions analysis can shift the focus from climate risk to climate opportunity.

From an investor’s perspective there are many benefits from having a greater understanding of a company’s broader environmental impact. The addition of avoided emissions analysis to traditional climate risk analysis can provide a greater understanding of the effects of climate change at company level, enabling investors to take a more comprehensive view of climate related risk and opportunities within portfolios.

Identifying avoided emissions activities in revenue and/or capex (future revenues), may assist investors in finding companies with meaningful secular growth opportunities in sustainability.

In the transition to a lower-carbon economy, companies that provide significant avoided emissions for the entire economy are potentially exposed to additional growth opportunities.

Identify climate opportunities

The concept of avoided emissions is applicable not only to the most obvious sectors, such as renewable energy and utilities. Analysis across a broader range of sectors can identify sources of potential positive impact on the transition to a low carbon economy, even in the depths of complex supply chains.

Indeed, it is not uncommon for companies in sectors with large avoided emissions potential not to report this information, instead there is a tendency to focus in their sustainability reports on emissions (Scope 1, 2 and 3), the risk side of the equation.

For example, a manufacturer of cables, which are used in telecommunications, renewable energy transmission and distribution, transportation and infrastructure, has a positive impact on the energy transition because cables are an integral component in PV (Photovoltaic) utility-scale solar, onshore and offshore wind-power transmission and distribution. Thus, when calculating the avoided emissions for solar and wind energy systems, a share should be attributed to the cable manufacturer.

Total Impact

The concept of avoided emissions has a significant role to play when it comes to providing investors with a better understanding of the overall effects of decarbonisation. Used alongside the more traditional metrics such as emissions analysis (Scope 1, 2 and 3), net-zero alignment analysis and temperature scores, will provide investors with a more holistic climate analytical framework.

The development and use of metrics aimed at measuring and promoting positive climate impact, such as avoided emissions, is evolving rapidly and could help to direct capital to climate solutions and innovation. Indeed, avoided emissions analysis allows for the narrative around a company’s environmental impact to include climate opportunity.

To raise awareness and understanding of the avoided emissions concept, ICE and Ecofin Advisors Limited published a white paper explaining the concept and detailing a framework to quantify avoided emissions for individual companies within investment portfolios. Click here to read the white paper.

[1] “Avoided emissions are emission reductions that occur outside of a product’s life cycle or value chain, but as a result of the use of that product” – Definition of Avoided Emissions provided by the World Resources Institute (Do We Need a Standard to Calculate “Avoided Emissions”?).

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