The way forward — A call to action for impact-driven investors

Avoided Emissions Series Part III.

Previously in this mini-series. Part I | Avoided emissions. Everyone’s talking about it. But are we talking about the same thing? Part II | How to measure systemic impact.

Incorporating systemic environmental impacts into investment decision-making is no longer optional — it’s essential. In this mini-series, we’ve shown why the widely used “avoided emissions” approach falls short of capturing crucial systemic effects. The current approach, derived from accounting, does not provide an answer to the key question impact-driven investors seek to answer: “What is the implication of my investment decision?” and “Does my investment help to achieve certain impact targets, e.g. Does it contribute substantially to achieving Net Zero targets?”.

Our recommendation? Move beyond simplistic assessments. Apply consequential life cycle analysis (LCA), factor in systemic effects, and use sensitivity analysis to account for uncertainties. Most importantly, focus on what’s likely to change in the market.

In this article we explore the practical next steps to refine existing frameworks and empower practitioners and investors to lead the way forward.

ENHANCING EXISTING FRAMEWORKS

Impact-driven investors, researchers, and organisations have made significant strides in developing frameworks to standardise impact assessments and metrics. These efforts have improved the way investors evaluate impact and have brought progress toward harmonising climate impact reporting in the finance sector.

However, challenges remain. The latest 2024 report by the World Business Council on Sustainable Development (WBCSD) states:

“a […] review of 28 publicly available GP impact reports from North America and Europe reveals significant variances in avoided emissions calculations. This includes a 15-fold difference between reported avoided emissions for the same company, a solutions provider of energy intelligence software...Such deviations show the lack of standardisation in measuring and disclosing avoided emissions”.

This points to a critical lack of standardisation in measuring and disclosing avoided emissions. Such discrepancies not only undermine the credibility of these assessments but also highlight the urgent need for more comprehensive and standardised guidance.

By incorporating systemic effects, impact assessments could be made far more relevant and actionable. This evolution would align environmental evaluations with the complexities of real-world outcomes, supporting better-informed decisions that truly drive sustainable results. In doing so, we can build upon the solid foundation these existing approaches provide while addressing their limitations in the face of increasingly complex global challenges.

STEPS TO ADDRESS SYSTEMIC IMPACT:

1. Clarify what we mean by Systemic Impact.

The first step is to articulate how a systemic perspective differs from the status quo. Tangible examples can illustrate why the current approach often fails to account for broader changes. See Part I in our series!

2. Adapt Tools for Consequential LCAs.

Assessing systemic impact requires not just a profound understanding of what is going to change, but also some technical changes in the assessments. For instance, the use of most emission factors or impact factors, as commonly provided by online tools, do not account for systemic impact and should therefore not be used to answer what the environmental implication of an investment decision might be. In simple terms: these emission factors (and attributional-style life cycle assessments) do not tell us if a certain investment will help to achieve net zero. Unfortunately, we have not seen any tool offering datasets and emission factors taking systemic impacts into account, i.e. consequential life cycle assessment-based emission factors. If you’re working on such tools, we would love to hear from you!

3. Standardise Systemic Baselines.

Systemic changes often hinge on shifts in the broader economy, including advancements in key industries and energy systems. To improve alignment and credibility, we need third-party validated baseline scenarios that are independent and scientifically robust. These baselines should enable more consistent and reliable assessments of long-term impacts.

4. Address Uncertainty.

Uncertainty is an inevitable aspect of impact assessments, but it can be effectively managed. By applying robust techniques to reduce and account for uncertainties, assessments become more actionable. For example, sensitivity analysis can highlight how changes in assumptions affect outcomes, helping stakeholders make better decisions (see Part II of our series).

5. Promote Transparency.

Transparent documentation of assumptions, data sources, and methodologies is non-negotiable. Without transparency, the credibility of impact metrics erodes, undermining trust among stakeholders. Comprehensive documentation builds trust and ensures that impact assessments remain useful and credible tools for decision-making.

6. Resolve Attribution Challenges.

Who is responsible for creating a certain impact? The investor? The inventor? The business customer employing a solution? The consumer making a deliberate choice? The attribution of impact remains a challenge. Without clear guidelines, attribution risks becoming inconsistent or misleading. More robust frameworks for attribution are needed to avoid greenwashing and inflated claims. Even if attribution cannot be fully standardised, consistent communication can help mitigate risks.

7. Refine Terminology.

A comprehensive view on systemic impacts points towards another important aspect: avoided emissions (in the true sense) and net reductions in emissions. There is an important difference between the two, because the former can help to stabilise emissions and impacts at best, while the latter is required to achieve net zero emissions or a net positive economy.

Understanding the difference and communicating the difference is key to humanity’s mission to evade negative outcomes of climate change and to reverse biodiversity loss. Growing markets and sectors might result in increasing emissions and impacts, even if more sustainable solutions are employed.

For instance, renewable energy technologies so far did not result in a net decrease in the use of fossil fuels on a global scale. In fact, we are using more fossil fuels and emit more greenhouse gas (GHG) emissions than ever before. All the renewable energy technologies avoided the additional use of fossil fuels and did not result in a net decrease in GHG emissions (yet).

Unfortunately, we need to reduce GHG emissions, not just avoid them. Methods that are able to assess this and clear terminologies are needed.

8. Look beyond climate change.

We are transgressing 6 out of 9 planetary boundaries. These boundaries present thresholds that we should not transgress if we want to maintain a planetary system that allows us to develop and thrive. We are losing biodiversity at a rate similar to the last mass extinction event when a meteorite hit planet Earth. This time it’s not a meteorite, it’s us causing the extinction.

This isn’t just an environmental issue — it’s an economic one. Ecosystem services are the backbone of our economy, providing resources and stability. Protecting these systems is not only essential for ecological balance but also for sustaining economic prosperity. To truly address sustainability, we must expand our focus to include these interconnected challenges alongside climate change.

FINAL WORDS

Understanding the environmental implications of investments is at the heart of creating meaningful change. Fortunately, many investors, scientists, founders and other individuals are interested in this or work on solutions that can deliver a real change for the better. To get a clear picture of what these solutions are, we need to apply methods that are inherently able to do so.

In this mini-series we provided some insights into how the “avoided emissions” approach embedded in many frameworks cannot deliver the answer to the key question asked. If we want to understand the implications of our actions and decisions, we need to assess potential changes in the system. Assessing these changes requires further refinement in the methods we use.

Fortunately, many are working on frameworks that standardise and guide impact assessments in the investment space. These efforts driven by highly mission-aligned individuals and organisations present a great opportunity to develop even more meaningful and robust methods. By providing some insights into our experiences and some suggestions on how existing frameworks could be enhanced, we hope to contribute to these developments and to initiate a conversation on how methodologies and indicators can provide truly meaningful results.

Authors: Dr. Benedikt Buchspies and Kritesh Shridar.