The global economy is embracing net-zero carbon as a common direction. However, to tackle climate change, we need to go beyond measuring the now accepted way of categorising different kinds of carbon emissions: the Scopes 1, 2, and 3 emissions. We must also measure the climate-related benefits generated by products and technologies.
Enter Scope 4 emissions – that is the estimated emissions saved and/or avoided for customers thanks to the performance of products. ESG-minded investors are now considering how this emissions source can be integrated into their analysis and engagement with companies in their portfolios.
While Scope 1, 2 and 3 emissions are well established terms within the investment community, Scope 4 emissions are the next disclosure frontier that investors may consider encouraging and adopting when seeking a more holistic perspective on a company’s contribution to Paris-agreement aligned trajectories.
Which companies are measuring Scope 4?
Examples of companies stepping up to the challenge and applying Scope 4 disclosures can be found in the capital goods sector.
As developers and providers of a wide range of components, as well as automation solutions, these manufacturers enable energy efficiency, green mobility, and ‘greenification’ of electricity systems for a large variety of products and end-markets. More importantly, they provide equipment and technological solutions to those end-markets, which comprise the highest-emitting sectors directly concerned by climate regulations.
We don’t need to look much further than Schneider Electric, a French multinational company that specialises in digital automation and energy management, which provides a concrete example of calculation of saved and avoided CO2 emissions through use of its variable speed drives (VSD) that generate savings on electricity consumed by motors by regulating their speed and rotational force.
Among the most notable aspects of its approach, the company clearly differentiates between saved and avoided emissions related to brownfield versus greenfield installations of its products, and uses a forward-looking energy mix in its calculation. Breaking down sales by country permits Schneider Electric to adjust for national electricity generation sources, and factor in different emissions averages for purchased electricity by country and by year.
In addition, in its latest reporting it revealed that its EcoStruxure Industrial Internet of Things platform has helped customers save an incredible 134 million metric tonnes of CO2 since 2018, the equivalent of 28,872,877 gasoline-powered passenger cars driven for one year.
Another example is Legrand, a global leader in low-voltage electrical components, which has been reporting avoided emissions since 2014. In its first CSR campaign, from 2014 to 2021, the company employed a cumulative bottom-up approach to measuring Scopes, but it has now updated and improved its methodology, most significantly by adopting yearly accounting instead of its previous cumulative method. Legrand believes the yearly approach aligns with current best practice, and that yearly accounting provides a more forward-looking picture. As part of Legrand’s 2022-2024 CSR Roadmap, it targets cumulative CO2 emissions avoidance for customers of 12 million tons via its energy efficiency product line, which represented approximately 21% of revenues in 2021.
Challenges to reporting
In addition to limited disclosure of methodologies, the most significant barrier at present is the lack of standardisation within the industry, meaning companies have to figure out their own approach for calculating and reporting saved or avoided emissions.
However, this is not as scary as it sounds. Given the nascent stage of Scope 4 coupled with the lack of standardisation, companies can provide transparency on their methodologies as well as the auditing of such methodologies and yearly reported figures.
In reporting, saved/avoided emissions should not be subtracted from real emissions, as this would combine ‘real’ and theoretical figures. Instead, companies can use a ratio approach in which they report Scope 1, 2 and 3 emissions over their avoided emissions.
Scope 4 for investors
We are already seeing promise from efforts such as the Net Zero Initiative on avoided emissions. Yet, Scope 4 is in a nascent stage. Enhancing transparency and increasing consensus on measurement methods will improve its usefulness to investors.
In addition, it will help bring a consensus among climate organisations and standards as to the question of officially including saved or avoided emissions in climate strategies.
Scope 4 is not an official category of the GHG protocol and does not count towards a company’s overall Scopes 1, 2 and 3 emissions reductions. Rather, Scope 4 is a theoretical calculation that is measured through a reference scenario, usually comparing products to the average market solution, a solution previously in place, and/or a previous generation of a product.
The calculation of this metric allows us to see the “decarbonisation” power of products as well as the quality of innovation of a company. What’s more, the first three Scopes have their own shortcomings as they may understate the climate positive value of capital goods products and their contribution to decarbonising the economy. For investors, taking into account Scope 4 disclosures therefore not only makes sense from a sustainability point of view, but can also make financial sense as it shows the true added value a company is making to the ESG agenda.
