A group of investors have appointed two consultancy firms to work on a project to establish key metrics for the development of avoided emissions data products.
The investor group, led by Mirova and Robeco, called for expressions of interest last year from academics, data providers and consultancies and has now selected I Care by BearingPoint and Quantis, which is part of BCG, to work on the project.
The investor initiative, which also includes Edmond de Rothschild, Natixis CIB, Natixis IM, Lombard Odier, Comgest, Man Group, Sienna IM and Caisse des Dépôts, has two key aims. It wants to develop a standardised toolkit to calculate avoided emissions and then encourage data providers to build out their own avoided emissions products based on the metrics.
The toolkit will also be designed for use by investors with exposure to asset classes such as infrastructure and project financing.
The initial costs of developing the toolkit will be borne by the investor members and I Care and Quantis. It will then be handed over to the two consultants as a fully fledged commercial product. They will be responsible for the annual upkeep of the metrics.
Fees to access the toolkit will be kept at a “reasonable” level to allow widespread market access, according to the organisers.
The toolkit has a delivery deadline of Q4 this year and the first avoided emissions products are expected to hit the market in early 2025.
The usage of avoided emissions – a metric in which the actual emissions of a low-carbon project are compared with the hypothetical emissions of more polluting alternatives – can help investors identify providers of climate-friendly products such as wind turbines and electric vehicles for financing.
Despite their climate advantages, these companies are likely to see increases in their own emissions when ramping up production of green products and may therefore score poorly on traditional metrics of climate performance.
But the use of avoided emissions has fallen out of popularity in recent years, mainly because of a perception that it was being misused by companies and investors to offset their broader carbon footprint.
Members of the investor group believe that standardisation and accessibility are key for the metric to regain its credibility, provide a template to draw on for regulators and, eventually, direct funding to climate solutions.
Despite recent guidance on calculating avoided emissions from global CEOs and strong advocacy from the G7 on its usage, there has not been a collective industry attempt to develop standards around their calculation. PCAF, which develops standards to measure financed emissions, has so far declined to provide guidance on avoided emissions.
The investor group believes its unconventional project model is the first of its kind and could provide a route for investors to standardise and seed the market with sustainability datasets that do not yet exist. The group may consider applying this approach to other areas such as social and human rights metrics depending on the pilot’s success.
The group is supported by a number of other investors who will not contribute to funding but will provide feedback on the project’s development. These include PGGM, Railpen, Impax and Abrdn.
Project development stages
The appointment of I Care and Quantis means the project has now entered into its first phase.
Assessing avoided emissions is complex for products that are not manufactured in-house because each individual supplier of parts and components will need to be assigned an “avoidance factor” to calculate the share of a product’s avoided emissions they can lay claim to.
The first phase will see the consultants develop a toolkit of avoidance factors across the value chains of 80 different types of low-carbon solutions and will result in the creation of “around 9,600 distinct avoidance factors”. Examples include biomass energy, recycled plastic and low-carbon concrete.
The second phase will see the creation of a working group of ESG data providers interested in developing their own avoided emissions datasets using the avoidance factors toolkit. The product-based avoidance factors can be applied to individual corporates or projects to generate avoided emissions estimates.
The working group will also have to agree on “common methodological principles” to ensure consistency. These deliberations will be overseen by a soon-to-be-appointed scientific advisory committee to ensure rigour and that best practices are followed.
Mirova deputy CEO Guillaume Abel said the attempt to contribute to a new global market standard represented “a major step forward in the history of Mirova”.
“This innovation will allow investors to better identify and value companies that contribute positively to the decarbonisation of the economy and are therefore well-positioned to create value in a world in transition,” he said.