Global investment manager Schroders and Singapore’s sovereign wealth fund, GIC announced today the publication of “A Framework for Avoided Emissions Analysis,” a new research paper outlining a holistic approach for investors to identify and assess emissions reduction investment opportunities beyond the confines of companies’ value chain emissions.

According to the paper, while climate change is emerging as a defining investment theme for the coming decades, with major opportunities arising from the pursuit of companies’ and governments’ decarbonization commitments, most conventional emissions reduction measures used by investors focus primarily on Scope 1, 2, and 3 emissions, without considering companies’ broader emissions impact.

The new framework launched by Schroders and GIC aims to enable investors to measure and integrate Avoided Emissions into investment and portfolio analysis, capturing a broader understanding of a company’s contribution to emissions reduction, such as a company’s development of solutions to drive economy-wide reductions and substitute high-carbon activities with low-carbon alternatives.

Rachel Teo, co-author and Head of Futures Unit and Senior Vice President, Economics & Investment Strategy at GIC, said:

“Building robust tools and models to integrate climate-related risks and opportunities into investment processes is a key focus of our climate research work at GIC. The Avoided Emissions framework enables long-term investors like us to better identify and potentially align our portfolio with the opportunities presented by the low carbon transition.”

According to Schroders and GIC, the framework utilizes a systematic value chain approach to capture the contribution of industries to avoided emissions, focusing on investability and scalability. For the paper, the companies examined 19 carbon-avoiding activities and industries, quantifying emissions savings per dollar of revenue.

Andy Howard, lead author and Global Head of Sustainable Investments, Schroders, said:

”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 advancement from common approaches to carbon footprint and exposure analysis. It underpins our longstanding focus on and work in understanding the investment implications from the low carbon transition.”

Applying the framework to a focused portfolio of companies identified as accelerating the low carbon transition and comparing to the MSCI ACWI Investable Market Index (IMI) stock universe, the analysis found that the Avoided Emissions portfolio saw significantly stronger revenue growth relative to the broader index, despite having undifferentiated Scope 1-3 emissions reductions, highlighting the opportunity identified by the more holistic approach.

Kevin Bong, Director, Economics & Investment Strategy, GIC, commented:

“Investors need to fully consider the causes and effects of climate change on our portfolios, and prepare and participate in the multi-decade carbon transition that will likely entail a rewiring of the modern economy.

“Avoided Emissions introduce a new and important dimension to a growing set of metrics that investors and policymakers need to make better decisions.”

Click here to access the research paper.