Schroders, in collaboration with Singapore’s sovereign wealth fund GIC, released a joint research paper, detailing how an avoided emissions framework can complement conventional carbon measurements in investment and portfolio analysis.
Climate change will be a key investment theme for decades to come. As government and corporate decarbonization commitments translate into tangible policies and actions, resulting in winners and losers in the green transition, the importance of meaningful and comprehensive carbon measures is higher than ever. . Yet investors currently lack a solid framework to systematically assess the opportunities this transition will bring and the impact it will have on their portfolios.
Conventional Scope 1, 2 and 3 measures focus on the emissions that companies generate from their own operations and value chains. However, the leaders in the decarbonization race are doing more than reducing their own emissions; they develop products and services that can lead to significant economy-wide emission reductions outside of their own value chains, which are not captured in these conventional carbon measurements. This highlights the importance of analyzing avoided emissions to identify these market shifts and opportunities in a low carbon future.
The avoided emissions framework aims to quantify the emissions saved through the substitution of high carbon activities with low carbon alternatives. These savings – compared to a benchmark where these technologies are not used – represent real emission reductions and will be vital to global decarbonization efforts.
For institutional investors, the implications of the climate transition over several decades are immense. The framework is built with the objective of direct application to investment analysis, refining managers’ abilities to identify and assess a broad set of green transition winners. This is a crucial step in enabling a more integrated and holistic analysis of climate risks and opportunities at the portfolio level, facilitating comparison with emissions from scopes 1, 2 and 3 in a common unit of measurement.
Andy Howard, Senior Author and Global Head of Sustainable Investments, Schroders, commented:
“The framework is based on a proprietary systematic value chain approach to capture the contribution of a broad set of industries and activities to avoided emissions. We believe that this innovative framework, with its emphasis on investability and scalability, presents a significant advance over common approaches to carbon footprint and exposure analysis. This underpins our focus and long-standing work on understanding the investment implications of the low carbon transition.
We hope that this collaborative effort will not only heighten the importance of this under-researched topic, but also pave the way for more holistic climate accounting that will provide a comprehensive view of the carbon exposures of business models. “
Rachel Teo, co-author and Head of Futures Unit and Senior Vice President, Economics and Investment Strategy, GIC, commented:
“Creating robust tools and models for integrating climate-related risks and opportunities into investment processes is a key objective of our climate research work at GIC. The avoided emissions framework allows long-term investors like us to better identify and potentially align our portfolio with the opportunities offered by the low-carbon transition.
As this is an increasingly important topic, collaboration is only a first step and we look forward to broadening the analysis. This includes taking into account regional and sectoral differences, as well as extending coverage to private markets and more activities that avoid carbon emissions as technologies mature. “
Johanna Kyrklund, Group Chief Investment Officer, Schroders, said:
“The global drive towards net zero is catalyzing innovations, technologies and, in turn, investment opportunities that will redefine long-term portfolio strategies.
Avoided emissions are no longer just a concept; affirming the value of this research, we have already implemented the framework for avoided emissions, by integrating it into our proprietary tool SustainEx, which measures the overall environmental and social contribution of a portfolio. It is a significant extension of our investment analysis toolkit and positions Schroders in the lead in identifying and capitalizing on the potential winners of the shift to a low carbon economy, while seeking to avoid losers, to the benefit of our clients’ long-term portfolios. “
Kevin Bong, Director, Economics and Investment Strategy, GIC, commented:
“Investors must fully take into account the causes and effects of climate change on our portfolios, and prepare for and participate in the carbon transition over several decades which will likely lead to a rewiring of the modern economy.
Avoided emissions introduce an important new dimension in a growing set of measures that investors and policymakers need to make better decisions. This helps investors like GIC to better identify the companies likely to be winners in the current carbon transition. A key feature that excites us is the ease of integration between conventional emissions data from scopes 1, 2 and 3 to allow a more consolidated and holistic view of our investment portfolio. “