What do we put behind the term avoided emissions? What do they correspond to?
Cesar Dugast: These are the emissions that the solution marketed by a company makes it possible to avoid compared to a reference scenario that would have occurred in its absence. Thus, selling heat pumps can replace oil-fired boilers and therefore reduce customer emissions. The idea is to determine whether the activity of a given company is compatible with a carbon neutral world.
How is this an important criterion, with regard to environmental issues, and relevant, with regard to the criteria for rating companies?
CDs: It is one of the tools in the arsenal available to companies. It must guide them in their climate strategy. This is why Carbone4 has co-authored with the World Business Council for Sustainable Development (WBCSD) a “guide on avoided emissions”, available online for free access. Documentary resources exist to enable companies to compare themselves to a carbon situation where they would not have marketed their product. For them, it is a matter of fitting this calculation as well as possible. Avoided emissions should in particular always be highlighted so as to explain to what percentage of turnover they correspond. This indicator should facilitate the transition in terms of investment. It is a question of encouraging actors who are moving in the direction of climate resilience. A differentiated approach should be adopted for each sector. Five sectoral approaches will be developed by the Net Zero Initiative this year, including real estate, energy and digital. As we learn, we will have to evolve the reference scenarios. In theory, the more we go in the right direction, the less emissions there will be avoided, since the solutions will be increasingly low carbon.
Why should an investor refer to this indicator before making an investment decision? Is it already used by professionals?
Virginia Wauquiez: The objective of this indicator is to ensure the comparability of players in the same sector. However, various methods can be applied, and the one chosen by the company to be valued should be monitored to determine its robustness. Carbon4 Finance has been integrating this dimension since 2016 in the assessment of companies’ transition risk using the Carbon Impact Analytics (CIA) methodology. We calculate the avoided emissions of companies, take them into account in the evaluation of climate performance, which allows us to establish an order of merit in each sector. We also apply a dynamic vision on the subject, by verifying what a company has done in the past, what it says in the present moment and by evaluating its future commitments. At this time, communicating about avoided emissions remains a very rare practice. Companies don’t report, and those that do, surely don’t do it properly. Our clients – banks, asset managers or investors – are beginning to integrate this data. This is the case for investment advice companies for individuals, such as Chloé in the Sky, which use Carbon4 Finance ratings in their investment solutions. This is also true for Natixis, in terms of granting loans to businesses.
You alert on the way in which companies must communicate on the subject of avoided emissions. For what ?
CDs:Decathlon, Schneider-Electric, EDF And Engie are part of this approach. A few companies have already realized that they will contribute to avoiding emissions by adapting their product offering and by targeting audiences whose consumption habits are polluting. For example, it is more climate-efficient to sell bicycles to owners of internal combustion vehicles. What you have to be particularly vigilant about is the semantics. We can communicate on a volume of emissions avoided, but we cannot boast of achieving carbon neutrality: we can never repeat enough that the latter can only be a reality at the planetary level, not at that of a business.
Can we be certain that this indicator will not be diverted in favor of greenwashing?
CDs: We offer safeguards. For example, to calculate the emissions avoided by a solution, the company must prove that it has an emissions reduction strategy and that the solution in question is compatible with the global warming objective of 1.5°C. Of course, one should not take what is exposed in the annual reports of the companies without analyzing it, because the methodologies can diverge… to the point of not being comparable any more between them.
VW: The climatic analysis will impose itself little by little, in the same way as the financial analysis before it. Standards of reporting climate and ESG are currently being prepared in Europe and other areas. They will make it possible to better audit companies, by reinforcing the transparency that companies must demonstrate. Nevertheless, it will be necessary to remain vigilant in the analysis and, above all, to stop adding things that are not comparable. The semantics will inevitably be refined. It is therefore time to abandon the term “compensation”, in favor of that of carbon “contribution”, which includes avoided emissions. Still, there will always be room for interpretation, as with financial analysis. The challenge will be to stay as scientific as possible.