Redefine the Decarbonisation Opportunity With Avoided Emissions
Oct 27, 2023
How quantifying avoided emissions opens new avenues for investment while advancing the carbon-reduction cause.
As nations and corporations strive to meet stringent emissions-reduction targets, emerging evidence confirms that the global transition to a low-carbon economy is far from a simple shift. Decarbonisation is such a complex process that investment strategies dedicated to it routinely undervalue the opportunity.
Solar, wind, and electric vehicles (EVs) play a dominant role in traditional decarbonisation strategies due to low reportable operational emissions. Crowded trades and ample valuations in these categories reflect consensus in efforts to invest in alignment with clean regulatory designations. Still, spending on these solutions is estimated to represent just 40% of the capital needed to reach net zero by 2030.1
Most strategies focused solely on companies addressing emissions Scopes 1, 2, and 3, which overlook significant parts of the carbon-reduction landscape. Jennison Associates sees considerable value in adding Scope 4 emissions to the evolving opportunity set and, as a result, developed a blueprint for quantifying Scope 4 at the company and portfolio levels.
¹Princeton Net Zero America Report, December 2020. https://environmenthalfcentury.princeton.edu/
CARBON EMISSION CATEGORIES
The standardised framework companies use to track and report greenhouse gas (GHG) emissions from “private and public sector” operations categorises GHG emissions by “scope.”
Scopes 1 and 2 are relatively easy to measure and are widely reported by companies and ESG data vendors. Scope 3, which is a broader standard covering the use, transformation, maintenance, and disposal of products, is harder to measure and often ignored. While Scope 4 can be larger than the first three Scopes combined, traditional decarbonisation strategies typically do not incorporate it into decision making. Why? Avoided emissions are the hardest to quantify in that they require counterfactual projection. That means estimating what emissions would have been absent the cleaner products or more efficient services being evaluated.
Scope 4: Emissions avoided form a big untapped part of the decarbonisation journey
Source: PGIM, for illustrative purposes only.
Once avoided emissions are appropriately recognised, the range of solutions that can help the world advance toward a low-carbon economy expands enormously. Read on to find out what benefits of examining a broader scope can bring, and how Jennison Associates has developed a framework to help investors understand and quantify the opportunity set that is notoriously hard to measure.
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