To help investors deal with the transition to a low-carbon economy, Schroders and Singapore's sovereign wealth fund GIC are offering investors an “avoided emissions” framework to complement conventional carbon metrics in investment and portfolio analysis.
Investors, Schroders and GIC say in a recently co-published report, currently lack a robust framework to systematically assess the opportunities a green transition to a low-carbon economy will bring about, and the impact it will have on their portfolios.
Conventional Scope 1, 2 and 3 measures focus on the emissions companies generate from their own operations and their value chains. However, leaders in the decarbonization race are doing more than reducing their own emissions, the report points out. They are developing products and services that can drive significant reductions in economy-wide emissions outside of their own value chains, which are not captured in these conventional carbon measures. This underscores the importance of analysing avoided emissions to identify these market shifts and opportunities in a low-carbon future.
The avoided emissions framework aims to quantify the emissions saved through the substitution of high-carbon activities with low-carbon alternatives. These savings – relative to a baseline where these technologies are not employed – represent real emissions reductions and will be vital to global decarbonization efforts.
The framework is built with the objective of direct application to investment analysis, enabling a more integrated and holistic analysis of climate risks and opportunities at the portfolio level and providing ease of comparison with Scope 1, 2 and 3 emissions under a common unit of measurement.
”The framework is based on a proprietary systematic value chain approach to capture the contribution of a broad set of industries and activities to avoided emissions,” says Andy Howard, the report’s lead author and global head of sustainable investments at Schroders. “This innovative framework, with its emphasis on investability and scalability, presents a significant advancement from common approaches to carbon footprint and exposure analysis.”
“Building robust tools and models to integrate climate-related risks and opportunities into investment processes is a key focus of our climate research work at GIC,” adds Rachel Teo, co-author of the report and GIC's head of futures and senior vice-president for economics and investment strategy. “The avoided emissions framework enables long-term investors like us to better identify and potentially align our portfolio with the opportunities presented by the low-carbon transition.”