This paper was co-authored by Andrew Howard, Global Head of Sustainable Investment, Schroders; Mervyn Tang, Head of Sustainability Strategy, APAC, Schroders; Low Ping Yee, Head of Institutional Business/Sustainability Lead, Southeast Asia, Schroders; Rachel Teo, Head of Futures Unit and Senior Vice President, Economics & Investment Strategy, GIC; and Wong De Rui, Vice President, Economics & Investment Strategy, GIC.

Climate change will be a defining investment theme for the coming decades.  As governments’ and societies’ decarbonisation commitments translate into tangible policies and actions, giving rise to winners and losers in the green transition, the importance of meaningful and comprehensive carbon measures is higher than ever.

Conventional measures only inform us of the emissions companies generate from their own operations and value chains. However, the leaders in the decarbonisation race are doing more than reducing their own emissions; they are developing products and services that can drive significant reductions in economy-wide emissions.

Avoided Emissions provide an additional lens by capturing companies’ contribution to emissions reductions through the substitution of high carbon activities with low carbon alternatives, as these are not reflected in their conventional Scope 1, 2 and 3 metrics.

We have developed an Avoided Emissions framework to capture these emissions savings, which are calculated relative to a baseline where low carbon technologies had not been deployed.  These represent real emissions reductions and will be vital to global decarbonisation efforts. Our framework is based on a proprietary systematic value chain approach, drawing on academic and industry literature to capture the contribution of a broad set of industries to Avoided Emissions, with an emphasis on investability and scalability.

The Avoided Emissions framework is built for direct application to investment analysis and the benefits are twofold:

  1. Sharpens our abilities to identify and assess an extended set of winners from the green transition, which are otherwise not captured using traditional carbon metrics or “green revenues”.
  2. Allows for ease of comparison with Scope 1, 2 and 3 emissions under a common unit of measurement, enabling a more integrated and holistic approach to building a portfolio that reflects both climate risks as well as opportunities.

We examined 19 carbon-avoiding activities and industries, and quantified the emission savings for each dollar of revenue (tCO2e/US$m). If adoption of these activities were now at the levels we expect in 2030, almost a quarter of economy-wide emissions could be eliminated. This highlights the importance of these low carbon products and services to decarbonisation efforts.

We also applied the Avoided Emissions framework to the broad MSCI ACWI Investable Market Index (IMI) stock universe and a focused portfolio of companies accelerating the low carbon transition. The analysis shows the latter made significant contribution to emissions reduction, even though their Scope 1, 2 and 3 emissions are undifferentiated.

The analysis further substantiates that companies with positive Avoided Emissions exposure saw revenues grow by an annualised rate of 7% over the past 3 years, which are 20% faster than the MSCI ACWI IMI stock universe as a whole . The global impetus to decarbonise will continue to provide a strong tailwind to this growth, making it all the more imperative for portfolio analysis to include Avoided Emissions.

As research in this space is still at a nascent stage, there is significant opportunity to further develop the framework. We highlight a few areas below where the analysis can be extended:

  • Widen the coverage of carbon-avoiding activities
  • Factor in regional and sector variances
  • Augment with additional non-revenue measures
  • Extend from public to private markets

For institutional investors, the investment implications of the multi-decade climate transition are immense. Our framework for incorporating Avoided Emissions in investment and portfolio analysis is a pivotal step which we believe will add valuable insights to investors.

This is the Executive Summary of the report. Please click on “Save As PDF” for the full paper.