Nearly a decade after the concept was first coined, the financial sector is taking a stab at developing a new methodology for reporting “avoided emissions”, also known as Scope 4 emissions.
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Up until 28 February 2025, the Partnership for Carbon Accounting Financials (PCAF) will be consulting on its inaugural guidance to expand avoided emissions reporting to all asset classes, beyond renewable power projects which such reporting was previously restricted to.
The industry-led body counts over 560 financial institutions among its members and has emerged as the gold standard for measuring and disclosing emissions associated with loans and investments, also referred to as “financed emissions” as well as capital markets transactions, or “facilitated emissions”.
Currently, no official standards for avoided emissions accounting exist, though the globally recognised Greenhouse Gas Protocol (GHG Protocol) has referenced the term in Section 9.5 of its corporate value chain – or Scope 3 – standard and defined it as “GHG reduction opportunities [that] lie beyond a company’s Scope 1, Scope 2 and Scope 3 inventories”.
Scope 4 emissions represent avoided emissions that arise from the use of one product or service, compared to higher-emitting alternatives in the existing market. Examples may include using wind turbines or solar panels, instead of fossil fuel power plants; LED bulbs, instead of incandescent bulbs, or an online meeting software, instead of business travel.
In its standard, GHG Protocol acknowledged that some of the Scope 4 accounting challenges include determining an appropriate baseline scenario for selecting the technologies to compare, avoiding “cherry picking” – so both emissions increases and decreases across the entire product portfolio are accounted for – and avoiding double counting of reductions between multiple entities in a value chain.
For financial institutions, PCAF has identified two distinct ways that financed avoided emissions can be calculated and attributed.
The first is on an entity level, through general corporate instruments, like loans and investments in a company selling solar energy or meat replacement products. The second is on a project level, through specific use-of-proceeds instruments, such as a green bond investment in energy efficiency measures in real estate or a direct investment to close down a fossil fuel power plant.
PCAF is also seeking comments on emerging forward-looking emissions metrics and getting feedback on the preferred approach between two specific options it has put forth for quantifying “expected emissions reductions” (EER), which the Glasgow Financial Alliance for Net Zero (GFANZ) introduced last year to measure the decarbonisation contribution of transition finance activities.
The first option is to establish an emissions baseline to calculate the expected absolute emissions to be achieved by a certain year. The second option is to use a counterfactual scenario to estimate the expected emissions, which makes it akin to an “expected avoided emissions” metric.
The concept of EER has particularly gained momentum in Asia – discussions around the managed phase-out of coal have increasingly taken place in the fossil fuel-reliant region. Just last month, Indonesia’s new president Prabowo Subianto pledged to fully phase out fossil fuels by 2040, though financiers have cast doubt on current efforts to scale its first early coal retirement project nationwide.
Last October, Yuki Yasui, the regional director of the GFANZ Asia Pacific network, said that financed emissions – the dominant metric for evaluating progress on decarbonisation to date – may not sufficiently account for emissions reduction from financing transition activities.
“If you are financing the managed phase-out of coal, you would be bringing more financed emissions into your portfolio and it doesn’t look good,” Yasui said at a launch event where Singapore’s central bank launched new transition planning guidelines. This is even though a bank’s intention for financing such a transaction is to bring future emissions down, she added.
Yasui said that some investors have already started using portfolio alignment metrics, which track how aligned their financing activities are with a Paris Agreement-aligned pathway. This was also one of PCAF’s recommendations related to how financial institutions may disaggregate financed emissions according to portfolio characteristics liike green finance, transition finance, managed phase-out or alignment with an international net-zero framework.
Examples illustrating how disaggregated disclosure can help financial institutions show that even though certain transition-related investments have a high emissions intensity, they could be expected to decrease. Source: PCAF
Last July, Japan’s Government Pension Investment Fund (GPIF) – the world’s largest pension fund, with an estimated US$1.59 trillion in assets – commissioned the United States-based data provider Intercontinental Exchange to estimate its avoided emissions across three portfolio sectors, including zero emission vehicles, utilities and mined minerals like copper and nickel.
The resulting analysis found that the mined minerals industry had the potential to increase avoided emissions at the highest relative pace by 2030, given that it supports other decarbonisation solutions like solar and wind energy, battery storage and electric vehicles.
