Identifying sustainable outcomes through avoided emissions

Avoided emissions can help identify companies whose products and services may contribute to emissions-reduction outcomes.

Introduction: Avoided emissions in Sustainable Outcome Investing

Sustainable Outcome Investing (SOI) is an approach used to identify assets that are assessed as contributing to measurable environmental or social outcomes. As we explained in our previous paper, Identifying Sustainable Outcome Investments, central to this approach is the concept of asset contribution, which refers to identifying assets whose products and services are intended to contribute to sustainable outcomes.

This identification process relies on a set of key performance indicators (KPIs) linked to companies’ products and services. Revenue from products and services intended to contribute to a sustainable outcome is a prevalent KPI used in this process. Outcome metrics such as avoided emissions can be used as complementary KPIs. Within the SOI framework,¹ avoided emissions are considered alongside revenue and other relevant KPIs to help identify companies whose products and services are assessed as contributing to measurable emissions‑reduction outcomes within a defined theory of change.²

The metric focuses on the emissions associated with the use of a company’s products and services, rather than emissions generated directly or indirectly across the company’s own operations and value chain. Scope 1, 2, and 3 emissions quantify greenhouse gas (GHG) emissions attributable to a company and its value chain activities.³ Avoided emissions, by contrast, estimate the emissions difference between using a company’s product or service and a reference scenario in which that product or service is not employed.

Avoided emissions are inherently comparative and scenario-based. They are estimated using methodological assumptions, including the definition of the reference scenario and lifecycle scope, and are not directly measured through corporate greenhouse gas (GHG) inventories.

Relationship to Emissions Footprints

Avoided emissions are analytically distinct from a corporate issuer’s Scope 1, 2, and 3 emissions. Scope 1, 2, and 3 emissions quantify emissions from a company’s operations, purchased energy, and value-chain activities under corporate GHG inventory accounting frameworks such as the Greenhouse Gas Protocol. Avoided emissions instead evaluate the potential emissions effect associated with the use of a company’s products and services relative to a defined reference scenario in which that product or service is not employed. As a result, in our view, Scope 1, 2, and 3 emissions and avoided emissions should be interpreted independently. For example, a company may report increasing Scope 3 emissions as product sales grow while also reporting higher estimated avoided emissions against a defined reference scenario, if the products sold contribute to emissions reduction.

Widely referenced avoided-emissions frameworks⁴ generally suggest that avoided emissions should be disclosed separately from Scope 1, 2, and 3 emissions and should not be used to reduce or offset a company’s reported emissions inventory.⁵ They also highlight estimation methodology considerations such as reference scenario selection, lifecycle scope considerations, and transparency in disclosure assumptions.

Within Sustainable Outcome Investing, avoided emissions are applied as a complementary outcome indicator alongside revenue and other product- and service-related metrics. In this context, avoided emissions may provide additional insight into the estimated emissions associated with products and services sold, while remaining separate from operational and value-chain emissions calculated under Scope 1, 2, and 3 frameworks.

Estimation Methodology Considerations

Avoided emissions estimates depend on a range of methodological choices that can materially influence estimated results. These generally include the definition of the reference scenario, lifecycle scope, time horizon, and attribution approaches.

Reference scenario

Avoided emissions are calculated relative to a reference scenario in which the product or service being evaluated is not used. In practice, this scenario is generally based on the most likely existing alternative in the relevant market or geography. Because assumptions can differ across markets, technologies, and energy systems, estimated avoided emissions may vary materially. Widely referenced frameworks generally recommend realistic, transparent reference scenarios based on observable market conditions,⁶ rather than scenarios selected to maximize estimated avoided emissions.

Lifecycle scope

Avoided emissions estimation methodologies may differ regarding which stages of a product or service lifecycle are included in the estimate. The scope may depend on the nature of the product or service, the materiality of different lifecycle stages, and data availability. Some approaches assess emissions across the full lifecycle of a product or service, including production, use, and disposal, while others focus on the lifecycle stages considered most relevant for the product or service being assessed, depending on data availability and the methodology used. Differences in lifecycle scope can materially affect estimated results and reduce comparability across methodologies if the assessed product or service and the reference scenario are not treated consistently.

Time horizon

Avoided emissions may be estimated either on an annual basis or across an assumed product lifetime. Lifetime approaches typically require additional assumptions regarding future utilization, technology evolution, energy systems and regulatory conditions. Annual approaches generally rely on fewer forward-looking assumptions and are more closely tied to observed business activity during the reporting period. As a result, annual approaches may support greater consistency and comparability across companies and sectors where long-term assumptions may vary substantially.

Attribution approaches

Avoided emissions associated with a product or service may involve multiple participants contributing to its production. For example, emissions reductions associated with renewable power generation may involve equipment manufacturers, component suppliers, grid infrastructure providers, utilities, and end users. As a result, methodologies may differ regarding whether avoided emissions are attributed only to the company directly producing the product or service, or allocated across multiple participants contributing to the same solution.

The attribution of avoided emissions differs from Scope 3 value-chain emissions accounting. Scope 3 emissions are designed to quantify the Scope 1 and 2 emissions occurring across a company’s value chain, e.g., from upstream suppliers and downstream customers. Conversely, avoided emission attribution considers whether multiple companies contributing to the same emissions-reduction may result in overlapping avoided emissions estimates. Existing frameworks do not prescribe a single universally accepted attribution methodology, and approaches may therefore vary across data providers and reporting frameworks.

Managing methodological variability

Given the range of methodology choices involved in estimating avoided emissions, we deliberately use a conservative approach within our SOI framework, focusing on products and services sold during the reporting year and avoiding projections across assumed future product lifetimes, future adoption pathways, or future sales volumes. This approach emphasizes observed business activity during the reporting period rather than modeled future estimates based on assumed product lifetimes or future market conditions. It is intended to reduce reliance on forward-looking assumptions and limit the risk of overstating estimated avoided emissions.

In addition, we prioritize estimates that attribute avoided emissions only to the company’s directly associated products and services, rather than allocating the same estimated avoided emissions across multiple participants contributing to the same application. This reduces dependency on assumptions regarding cross-entity attribution, downstream usage patterns, and future technology development that may vary significantly across solutions and methodologies.

While this approach may produce lower estimated avoided emissions for certain products or services relative to lifetime-based or multi-participant attribution approaches, we believe it supports greater consistency, comparability, and methodological transparency across companies and sectors while limiting the risk of overstated avoided emissions estimates.

Interpreting avoided emissions within the SOI framework

Within our SOI framework, the avoided-emissions metric is used to evaluate the estimated emissions associated with the use of a company’s products and services and to help identify contributions to emissions-reduction outcomes. The examples in Table 1 below illustrate how the interpretation of the metric is conducted in the context of the company’s underlying solution type, business activity, and product mix.

Electric vehicles

For vehicle manufacturers such as Company A and Company B in Table 1, avoided emissions are assessed relative to internal combustion engine alternatives. However, the underlying technologies represented by Company A and Company B differ materially. Company A’s estimates are primarily associated with battery electric vehicles, while Company B’s estimates are more closely tied to hybrid and plug-in hybrid vehicle technologies, which generally involve lower estimated emissions avoidance per vehicle relative to full electric alternatives.⁷ Differences in estimated values therefore reflect both the type of vehicle technology sold and the scale of products sold during the reporting year.

These examples illustrate how we interpret avoided emissions in the context of the underlying technologies, reference scenarios, and estimation methodologies.

Conclusion

Within our SOI approach, avoided emissions are used as a complementary KPI to help identify companies whose products and services are assessed as contributing to measurable emissions-reduction outcomes within a defined theory of change. Because avoided-emissions estimates depend on assumptions around reference scenario, lifecycle scope, time horizon, and attribution, we interpret them separately from Scope 1, 2, and 3 emissions and alongside other product- and service-related KPIs. Our approach focuses on reporting-year activity and avoids projecting across assumed future product lifetimes, with the aim of supporting consistency, comparability, and methodological transparency across companies and sectors while limiting the risk of overstated avoided-emissions estimates.