Carbon emission reporting revolves around different scopes of impact. Traditionally, organisations who are disclosing their emissions have homed in on Scope 1 and Scope 2 - direct emissions and indirect emissions from purchased electricity heat and steam- with an increasing number now extending their reporting to include indirect Scope 3. More recently, a previously lesser-known category of Scope 4, or ‘avoided emissions’, has gained traction.

Scope 4 is a term introduced by the World Resources Institute in 2013, and refer to emission reductions that take place outside of a product’s (i.e. goods and services) life cycle or value chain, but as a result of the use of that product. There are two primary categories of avoided emissions. The first involves products that replace more emission-intensive alternatives. For instance, a company providing teleconferencing services can replace the need for traditional, in-person meetings, resulting in reduced emissions. The second involves the introduction of a product which facilitates emission reductions in other areas. For instance, a chemical manufacturer might develop a new product, such as low-temperature detergents, which require lower temperatures for chemical reactions. This, in turn, empowers their customers to consume less energy during the washing process.

Unlike Scope 1, 2 and 3 emissions which follow clear standards created by the GHG Protocol, currently there are no officially recognised and agreed upon standards for the measuring and reporting of avoided emissions. However, there are several recognised guidance documents which can be used as a point of reference. These include: i) WRI’s working paper entitled ‘Estimating and Reporting Comparative Emissions Impacts of Products’ ii) Net Zero Compatible Innovation Initiative’s The Avoided Emissions Framework (AEF); and iii) The World Business Council for Sustainable Development: Guidance on avoided emissions.

To date, prominent disclosure organisations like the CDP and Science-based Targets Initiative do not mandate the reporting of Scope 4 by organisations. However, as the recognition of avoided emissions as a significant disclosure gap grows, it's possible that this requirement may evolve in the future.

While the idea of calculating and reporting on Scope 4 emissions may seem daunting, there are numerous benefits which should incentivise businesses to embrace the challenge. Here are a few worth considering:

  • Brand reputation: In today's increasingly environmentally conscious market, consumers are making choices that align with their climate concerns. They are more inclined to support businesses that proactively measure, manage, and reduce their emissions. By quantifying and disclosing avoided emissions (along with Scope 1, 2 and 3 emissions), a company not only offers a more comprehensive and transparent perspective on its emissions but also accurately assesses the climate impact of its products and services across their entire lifecycle. This level of transparency provides organisations with a powerful tool to grant customers and investors complete insight into their carbon footprint.
  • Investors and shareholders: According to the Financial Times, some investment firms, such as Schrodes, have begun to include avoided emissions in their investment analysis. Additionally, a growing trend in the investment community involves the inclusion of Scope 4 as a metric when determining the value of company. While this practice is not yet widespread, as the advantages of measuring and disclosing avoided emissions gain broader recognition, shareholders and investors could increasingly push for the adoption of Scope 4 reporting.
  • Benchmarking: Through the process of measuring avoided emissions a company is required to interrogate the carbon efficiencies of their products. Part of this process also involves looking into the efficiencies of other products on the market as a comparative exercise. The information gained from this process may prove invaluable to company, allowing them to establish a benchmark from which strategic decisions can be made.
  • Innovation: Measuring avoided emissions may assist company’s in making informed and strategic decisions to prioritise climate-friendly innovations and investments that support a transition toward net zero.

While reporting on Scope 4 emissions brings forth several compelling benefits, it is crucial to acknowledge potential drawbacks. One frequently cited concern is the susceptibility of Scope 4 emissions to exploitation for greenwashing purposes. This risk stems from the lack of widely accepted standards for calculating avoided emissions, making it challenging to guarantee the credibility and comparability of these estimates. The consensus among experts is that Scope 4 emissions should not be counted toward companies' emission reduction targets, and that separate reporting should be considered best practice. However, even if companies report Scope 4 emissions separately, the risk of greenwashing remains high due to the current lack of standardisation in this area.

In the immediate future, we forecast that it will likely be the measuring and reporting of Scope 3 emissions which will increase as a result of the requirement of disclosure standards such as the International Sustainability Standards Board’s (ISSB) International Financial Reporting Standards (IFRS) Climate-related disclosures. However, organisations should remain aware of Scope 4 emissions, as they are progressively gaining recognition and could assume a more prominent role in voluntary disclosures in the future.

Written by: Jess Vujovic