Our thinking

Non-emissions accounting

26 May, 2023

Investors interested in “green” investments have typically focused on carbon emissions produced by investee companies, but it’s quite possible that in doing so they are missing a golden opportunity to support the companies at the heart of the net zero transition.

A research paper from AXA Investment Managers a few years ago highlighted this: if you were to invest in companies on the basis of their emissions intensity, you would end up with a select pool of service-based companies. These companies may already be lean from an emissions perspective, but these won’t necessarily be at the forefront of delivering a net zero economy, and decarbonisation.

AXA instead pointed towards a ‘carbon footpath’, a more holistic approach than the relatively static carbon footprint measure, that considers companies’ commitment to reduce their own and society’s emissions in the future.

The idea of contributing to the broader shift to a net zero economy is encapsulated by the concept of ‘emissions enablement’, ‘scope 4’ or ‘scope X’ emissions, which goes beyond direct and value chain emissions to reflect a company’s capacity to create or catalyse emissions reductions (or increases) outside their value chain through their goods and service – for example, manufacturing a hydrogen electrolyser generates emissions (scopes 1 to 3) but once up and running, it is responsible for many many more tonnes of avoided carbon emissions by replacing fossil fuels. But until now, this has been hard to assess and report upon.

It’s for this reason that a group of eleven investors including AXA has launched a call for expressions of interest (CEI) to develop a database on avoided emissions. This database will aim to give investors the information they need to make a broader assessment of companies’ contribution to the transition to net zero, and therefore reorient financial flows towards companies enabling the decarbonisation of the economy and supporting innovation in this area.

Creating a database of comparable avoidance emissions data is no small task: it’s challenging to account for emissions that have been produced, but even harder to account for emissions that specifically haven’t been produced. There are challenges in defining an appropriate baseline scenario and attributing avoided emissions to multiple businesses, and how specific these elements can be to individual businesses.

But having a clearer view of the broader climate impact of businesses is essential. After all, climate change is a global crisis and reaching net zero is an economy wide transition. We’ll follow with interest to see how this evolves.

By Patrick Bapty