Achieving Sustainability

Avoided emissions: how investors can judge companies’ net-zero credentials

The increasing frequency and severity of weather-related events due to climate change has highlighted the urgent need to take action and achieve net-zero greenhouse gas (GHG) emissions by 2050.1 Investors can turn to “avoided emissions” – the positive impact of a more sustainable product or service – to assess which potential investments can make the most significant contribution to achieving this target.

Key takeaways

  • Avoided emissions reflect emissions savings achieved by a product, service, or project in wider society. Avoided emissions is a key complementary metric to more established scope 1, 2 and 3 measures.
  • Climate solutions such as solar, wind, grid technologies and sustainable biogas are key to boosting avoided emissions.
  • There is a lack of methodological clarity around avoided emissions, but greater application across private and public markets will formalise measurement approaches.
  • Measures of avoided emissions can help channel investment to solutions that make the most significant contribution to achieving net zero emissions by 2050.

Following on from our July 2023 thematic paper on scope 3 emissions, in this piece we seek to break down the concept of avoided emissions, its importance in achieving climate objectives and how it is being integrated into financial markets.

What are avoided emissions?

Many investors will be familiar with companies reporting on their own carbon footprint in terms of scope 1, 2 and 3 emissions. These metrics capture GHG emissions produced across the entire value chain, from the energy used to run factories and operate delivery trucks to the emissions produced by a company’s suppliers and its customers when using its products.

In contrast, avoided emissions seek to capture the broader positive contribution (if any) of a product or service to the economy outside of the company’s own value chain.2 Solar panels or heat pumps, for example, can help residential customers “avoid” emissions when they use these products versus fossilfuel alternatives such as gas boilers. Exhibit 1 summarises some of the key climate solutions that can contribute to avoided emissions.

Exhibit 1: Example climate solutions according to the IPCC
Exhibit 1: Example climate solutions according to the IPCC

Source: IPCC (2022).3

In comparison to measuring a company’s own historical carbon footprint, this forward-looking approach measures the positive contribution of a company’s product versus a “reference scenario”, including alternative solutions, market developments and regulation over time (see Exhibit 2).

Exhibit 2: Illustrative explanation of inventory GHG accounting at company-level versus avoided emissions as project/intervention accounting at society-level
Exhibit 2: Illustrative explanation of inventory GHG accounting at company-level versus avoided emissions as project/intervention accounting at society-level

Source: WBCSD (2023).4

What are the most common misconceptions about avoided emissions?

The concept of avoided emissions has been developing for several decades,5 but common misunderstandings persist on identifying and measuring them.

Avoided emissions can substitute the reduction of scope 1, 2 and 3 emissions.

Avoided emissions are sometimes referred to as “scope 4” emissions. Avoided emissions do not contribute to a company’s decarbonisation science-based targets6 and fall under a separate accounting system (see Exhibit 2). Renewable energy purchases to decarbonise a product’s manufacture, for example, would contribute to lowering scope 2 emissions but not avoided emissions. However, if emissions in broader society are reduced due to a company’s product versus its alternatives serving the same function, these are avoided emissions and can complement a company’s profile in supporting net zero ambitions.

A reduction in scope 3 emissions is the same as avoided emissions.

Scope 3 emissions consider emissions in a company’s value chain before and after a company’s direct operations and are accounted for historically at the company level.7 Avoided emissions are forward-looking and anticipate the “additionality” of a specific product’s positive contribution relative to alternatives.

That said, a product’s improved energy efficiency can both lower a company’s own scope 3 emissions and increase the level of emissions avoided outside of a company’s own value chain – they are separate accounting approaches. This is critical since:

  • If a highly efficient solution is popular it will increase avoided emissions, but it could result in higher absolute scope 3 emissions for the producing company (albeit with better intensity).
  • Avoided emissions are expressed relative to existing “reference points”, and these may decrease over time as higher standards are adopted more broadly.
Carbon dioxide removal (CDR) projects should be considered avoided emissions.

CDR projects (also referred to as “negative emissions”) removes CO2 from the atmosphere and durably stores it in geological, terrestrial, or ocean reservoirs or in products.8 CDR activities can be accounted for both as avoided emissions and in a company’s scope 1, 2 and 3 emissions. However, purchased emissions removal credits should not. Having both metrics strengthens the actions companies can take to contribute to net zero targets.9 For example, instead of simply changing agricultural suppliers to reduce scope 3 emissions, a company may instead partner to implement bioenergy projects, contributing to an overall reduction in emissions to the atmosphere.

Why is the focus on avoided emissions so critical?

Very simply, we need solutions to solve problems. Unfortunately, the investment gap is significant (see Exhibit 3) and our ability to minimise global emissions and achieve net zero will be greatly constrained without both rapidly scaling existing technologies and new, innovative products.

Exhibit 3: Estimated global gap in climate solution finance between 2021 and 2030 to achieve net zero emissions by 2050
Exhibit 3: Estimated global gap in climate solution finance between 2021 and 2030 to achieve net zero emissions by 2050

Source: IIGCC (2021).10

How do avoided emissions link to climate action frameworks?

Net zero will require climate solutions. To facilitate the necessary finance, these solutions need the support of industry initiatives and relevant technical guidance. For example, the guidance on transition finance published by the Glasgow Financial Alliance for Net Zero (GFANZ)10 or the Climate Investment Roadmap developed by the Institutional Investors Group on Climate Change (IIGCC).11 The latter recommends avoided emissions as a key climate solution indicator, which coupled with revenue and capex metrics can help to quantify how much a portfolio is invested in climate solutions.

The developing industry guidance coincides with rising interest in integrating and measuring avoided emissions in investments. In 2022, around 50% of companies reporting low-carbon products also reported on avoided emissions in the CDP Climate Questionnaire (see Exhibit 4). That said, data and methodologies remain under-developed, and robust engagement is required to substantiate third-party or in-house avoided emission estimates.

Exhibit 4: Number of companies participating in different CDP Climate disclosures
Exhibit 4: Number of companies participating in different CDP Climate disclosures

Source: Allianz Global Investors and CDP (2022).12

How are avoided emissions being integrated into investments?

Climate investing can be broadly split into two categories: decarbonising portfolios and investing in solutions (see Exhibit 5). Where decarbonising portfolios capture adopters of climate solutions, we link “avoided emissions” to the enablers of these solutions.

Exhibit 5: Climate strategies
Exhibit 5: Climate strategies

Source: Morningstar, September 2023

Avoided emissions technologies remain at a relatively immature phase of development, where the focus has been to finance and scale up earlystage solutions and infrastructure. It is therefore unsurprising that private markets are more mature in integrating avoided emissions into investments, especially in the private equity and venture capital segments. Climate-orientated private market funds have gained the greatest share of impact fund launches in recent years, accounting for 33% of new assets under management launched across the first three quarters of 202313, and some of the largest funds are focused on climate solutions.14 As outlined in our 2023 whitepaper, avoided emissions has become a key indicator for positive climate outcomes in impact investing portfolios.

While public markets currently lag the private markets in focus on the topic, there are several ways we anticipate this will increase:

  • Climate solutions now represent 19% of public climate funds,15 but represent much higher shares in China and Rest of the World16 investors. Avoided emissions is a key technology in climate solutions, and with these areas focused on climate solutions, investment in avoided emission solutions and technologies should benefit from this specific focus.
  • Climate solutions represent the largest climate strategy focus for Article 9 Climate funds (see Exhibit 6), an area of renewed focus after areas of clarification from the European Union’s Sustainable Finance Disclosure Regulation (SFDR).
  • We anticipate specific activities supporting avoided emissions will be linked to contributing to environmental goals, which can be captured for Sustainable Investment Share or SDG alignment KPIs.
  • Avoided emissions is fast becoming a key indicator in objectives for green bonds (assisted by improved data from the likes of S&P Global).17
  • Lastly, we expect initiatives like the CDP Climate Questionnaire to prompt improving disclosures on climate mitigation and adaptation, which will increasingly include avoided emissions.
What are the next steps for avoided emissions?

The interest in climate solutions and the potential capital available was evident at COP 28, but the widespread adoption of avoided emissions to channel this investment largely depends on the continued methodological convergence around its measurement. This will enhance both the credibility and comparability of the metric. Defining common, sector-specific reference scenarios to measure the “additionality” of climate solutions will also be critical in ensuring comparability. Once consensus is reached, these can be hard-coded into binding criteria like taxonomies, science-based frameworks and regulation related to the energy transition.

A huge amount of investment is needed to bridge the climate solution financing gap to achieve net-zero emissions by 2050. Measures of avoided emissions can help solve this by channelling investment to solutions that make the most significant contribution to achieving this target. Its established use in private markets impact investing and its growing prominence in public markets should see increasing application but methodological standardisation will need to evolve swiftly to enable its integration and ensure the world has the best opportunity to hit a 2050 net-zero ambition.

Exhibit 6: Article 8 and 9 climate funds by strategy
Exhibit 6: Article 8 and 9 climate funds by strategy

Source: Morningstar, September 2023.18

1 IPCC (2021). Summary for Policymakers. In: Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.
2/4 WBCSD (2023). Guidance on Avoided Emissions: Helping business drive innovations and scale solutions toward Net Zero.
3 IPCC (2022). Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.
5 Mission Innovation (2023). The history of solution providers and avoided emissions/climate handprint in 35 steps.
6 SBTi (2023). SBTi Corporate Manual.
7 GHG Protocol (2013). Corporate Value Chain (Scope 3) Accounting and Reporting Standard.
8 IPCC (2022). Climate Change 2022: Mitigation of Climate Change. Contribution of Working Group III to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change.
9 GHG Protocol (2023). Land Sector and Removals Guidance. Part 1: Accounting and Reporting Requirements and Guidance (Draft).
10 GFANZ (2023). Scaling Transition Finance and Real-economy Decarbonization: Supplement to the 2022 Net-zero Transition Plans report.
11 IIGCC (2022). Climate Investment Roadmap
12 CDP (2022). Corporate Responses Dataset 2022.
13 Pitchbook (2023). 2023 Impact Investing Update, December 2023.
14 A look at the 5 biggest US PE impact funds – PitchBook, June 2023.
15 “Investing in times of Climate Change”, Morningstar, September 2023.
16 Includes Australia, Canada, South Korea, Taiwan, Japan, Malaysia, Israel, India, Singapore, Chile, New Zealand, Brazil, Thailand, and Indonesia.
17 S&P Global (2022). Measuring the impact of green bonds, October 2022.
18 “Investing in times of Climate Change”, Morningstar, September 2023.

  • Disclaimer
    Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.

    The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted. This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced, except for the case of explicit permission by Allianz Global Investors. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.

    This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors GmbH, an investment company in Germany, authorized by the German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; Allianz Global Investors UK Limited, authorized and regulated by the Financial Conduct Authority; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).


Recent insights

Navigating Rates

Markets are now pricing in only one or two 25bp cuts from the Fed in 2024, down from six or seven back in January, while a June rate cut from the ECB is also not guaranteed.

Discover more

Embracing Disruption

India’s economic growth over the past decade has been impressive. In 2023, India contributed 17.6% to global GDP growth.

Discover more

Navigating Rates

Iran’s direct action on Israel over the weekend has led to fears of further escalation. But in the absence of a full-blown crisis in the region – which is not our base case – we think the impact on financial markets will be contained.

Discover more

Allianz Global Investors

You are leaving this website and being re-directed to the below website. This does not imply any approval or endorsement of the information by Allianz Global Investors Asia Pacific Limited contained in the redirected website nor does Allianz Global Investors Asia Pacific Limited accept any responsibility or liability in connection with this hyperlink and the information contained herein. Please keep in mind that the redirected website may contain funds and strategies not authorized for offering to the public in your jurisdiction. Besides, please also take note on the redirected website’s terms and conditions, privacy and security policies, or other legal information. By clicking “Continue”, you confirm you acknowledge the details mentioned above and would like to continue accessing the redirected website. Please click “Stay here” if you have any concerns.