Sustainable investment firm Ecofin, in partnership with data and analytics firm ICE Climate Transition Finance (ICE), has developed a proprietary framework to quantify avoided emissions for individual companies within investment portfolios.

Avoided emissions measurement seeks to quantify the carbon impacts of a company's revenue-generating products and services: they are emissions reductions that can occur outside of a product's life cycle or value chain but as a result of the use of that product.

To raise awareness and understanding of the avoided emissions concept, in June 2023, Ecofin and ICE published a whitepaper explaining the concept and detailing a framework to quantify avoided emissions for individual companies within investment portfolios.

The report, which was co-authored by Anny Giavelli, Ecofin's sustainable strategist, states the ability to analyse avoided emissions can be a powerful tool to identify opportunities with a positive impact and quantify the difference such investments can generate in the global transition towards a low carbon economy.

While climate-related policy tends to focus more on reducing emissions and less on the importance of developing innovative low or zero-emissions solutions, the concept of avoided emissions has a significant role to play when it comes to providing investors with a better understanding of the overall effects of decarbonisation, it said.

For instance, considering avoided emissions for an electric vehicle battery company that is adding new production capacity (increasing emissions) while simultaneously helping to offset tailpipe emissions (avoided emissions).

"Avoided emissions can provide more insight to climate analysis, enabling the assessment of the positive impact contribution of individual companies to the transition towards a low-carbon economy, rather than just assessing climate risk," commented Brent Newcomb, Ecofin's president.

Ecofin and ICE recommend a three-stage approach:

• Collection, assessment, and analysis of emissions data and information on individual companies to identify the various avoided emissions mechanisms, which each company may contribute to.
• Materiality assessment and life cycle assessment (LCA) modelling.
• Comparative scenario analysis, including "what-if" scenarios and forward-looking analysis to help put the results of the process into context.

The report states undertaking the LCA approach is one of the fundamental components in avoided emissions calculations, "ensuring a cradle-to-grave approach and accounting for emissions arising in all stages of a product's life is vital to comprehensively understand the emissions footprint for the low carbon product in question".

The report concludes: "Company-level avoided emissions reporting is gaining momentum, and we are encouraged by this trend. However, we make the case for greater transparency and detail regarding the methodologies used to arrive at reported avoided emissions data. Calls from the investment community should urge for a global reporting standard to help promote disclosure and transparency.

"The current level of understanding and adoption of the avoided emissions concept within the financial industry is reminiscent of Scope 3 emission analysis only a few years ago. The pace at which company level Scope 3 data reporting and analysis has developed in recent years to become an essential part of the climate analytical framework of investors is an encouraging precedent for the adoption of avoided emissions into mainstream investment analysis."