Amid global race to net-zero emissions, Environmental, Social, and Governmental (ESG) investors are now considering how Scope 4 emissions can be integrated into their portfolio analysis.
To combat climate change, going beyond the conventional methods of classifying diverse carbon emissions is an action must be taken.
Many are familiar with the Scope 1, 2, and 3 emissions. However, the positive impacts of new products and technologies have on climate, which is called the Scope 4 emissions, should also be considered.
Scope 4 emissions refers to saved or avoided emissions happening outside of a product's life cycle or value chain. In other words, this new category indicates emissions avoided for customers owing to product performance.
It’s crucial to include Scope 4 when an investor prefers to take a holistic approach on a firm’s contribution to Paris Agreement climate goals.
The capital goods industry is where businesses are most frequently seen adopting this new emissions disclosure. They create a vast variety of parts and even offer automation solutions. As a result, they are in a position to enable energy efficiency, green mobility, and the decarbonization of electrical systems for a variety of goods.
More importantly, they offer equipment and technological solutions to end users, who are usually the greatest emitting sectors impacted by climate regulations.
For now, the biggest challenge in reporting Scope 4 emissions is the lack of standardization. This means that companies need to build their own way to calculate this emission and report any saved or avoided emissions.
Yet, this problem is manageable as Scope 4 emissions is still in its early stages. Given there aren't any standards in this field, businesses can be transparent in their disclose method as well as auditing their annual reports.
For instance, corporations must not subtract saved or avoided emissions from their actual emissions when reporting Scope 4 emissions to avoid mixing theoretical and actual data.
Instead, businesses may use a ratio approach where they disclose Scope 1, 2, and 3 emissions over emissions that were avoided or saved.
Measuring Scope 4 emissions enables the economy to recognize products’ decarbonization power. Moreover, it demonstrates a company’s innovative quality.
Not to mention that the three existing emissions scopes have restrictions of their own. They may underrate a product's positive impact on the environment.
In conclusion, disclosing Scope 4 emissions not only benefits a company's sustainability reputation but also demonstrates the real added value of a company contributes to its ESG objective.
