Quantifying the GHG emissions that a climate solution company will avoid, as well as the impact of an investment into that company, remains a fundamental challenge in our view. The main issue is that there is no reliable way to actually measure impact - many of the “impact numbers” you see out there are built on estimates, speculative forecasts and assumptions, not hard measurements. Therefore, we’re simply unsure whether avoided emissions are legitimate claims of impact, as that claim mostly rests on a scenario of what would have happened if a company or technology didn’t exist. Most importantly, there is no standardized methodology yet with which to estimate this impact. Reporting on these numbers as benchmarkable results feels wrong to us.
Still, the real goal is creating and financing solutions that drive the net zero transition. At Carbon Equity, we are dedicated to supporting companies making substantial contributions to this shift. Last year, we collaborated with Project Frame to improve how the potential impact of climate tech startups is estimated. Currently, we’re working with industry partners, including the WBCSD, to develop GHG impact reporting standards, though we expect it will take a few more years to finalize a standardized methodology. In this article, we will review the state of GHG emissions and impact reporting today, its limitations and what we believe we should be focusing on instead.
The state of emissions data and reporting
Today, the GHG Protocol is widely regarded as the global standard for estimating the GHG footprint of a company (the emissions that they have directly or indirectly created). It was developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBCSD). The protocol divides emissions across 3 scopes. Many institutions, like the Carbon Disclosure Project (CDP) and the Science Based Targets Initiative (SBTi) require companies to estimate their GHG footprint based on this methodology for carbon accounting, target setting and disclosures.
Here’s a breakdown of each scope:
- Scope 1: Direct emissions from activities controlled by a company, such as fuel combustion or factory operations.
- Scope 2: Indirect emissions from purchased energy, like electricity used to power operations.
- Scope 3: Indirect emissions not produced by the company, including those from its supply chain, products in use, and disposal.
However, in our case, we see limited value in reporting realized GHG impact as we're investing into companies for their long-term potential. These figures don’t tell us to what degree a company is having a positive impact on getting to net zero. For climate technology, looking at avoided emissions offers a fuller picture. Avoided emissions refer to the positive climate impact a product or service achieves by displacing the incumbent alternative that has a higher GHG footprint. This shifts the focus from simply cutting emissions to creating solutions that actively reduce them. In this way, scaling avoided emissions helps drive the decarbonization of our economy.
More on our previous work on improving how we estimate the impact possibility of a climate tech startup here.
The fundamental flaws of estimating avoided GHG emissions
Trying to prove a counterfactual
Because traditional carbon accounting doesn’t give you insights into the net benefit of a company, avoided emissions are gaining traction as a metric for evaluating a company’s impact and are playing an increasingly important role in informing investment strategies and decision-making. Most impact investors want more than to know what was emitted—they want to know what wasn’t. But here’s the thing: as exciting as the concept is, avoided emissions are based on a counterfactual, or baseline. That’s something we can estimate but hardly ever really prove. For example, a solar company might claim they’ve avoided X amount of CO2 by replacing coal power with solar energy. But that claim rests on a counterfactual: what if the coal plant was actually replaced by something else two years later, like natural gas or nuclear power?
Estimating real effects in a complex world
Estimating the real effects of a product in our complex world comes with multiple culprits and intricacies. One major challenge is displacement, like mentioned above. Imagine we’re comparing two products, say a plant-based Beyond Burger and a traditional beef burger. One study might show that the Beyond Burger has a carbon footprint of 0.43 kg of CO2, while a beef burger emits 4.26 kg. Based on these numbers, we can claim that the Beyond Burger has a 90% lower footprint compared to a beef burger. But we can’t extrapolate that every time someone buys a Beyond Burger, we’ve “avoided” 3.83 kg of CO2. This doesn’t account for market dynamics and complex consumer behavior. Another challenge when estimating avoided emissions is horizontal attribution. If you make a component for an electric car, do you claim the impact of the entire vehicle or just your part? Without a clear methodology, companies could easily overestimate their contribution. Rebound effects are another issue - classical market theory dictates: if it's cheaper, you will use more of it. And that’s not even accounting for how improving energy efficiency often leads to greater overall consumption, as savings get reinvested elsewhere, such as more frequent air travel for example.
In conclusion, while estimating avoided emissions helps paint a picture of possible impact, the real-world accuracy of these estimates is often hard to verify, leading to numbers that may not fully reflect reality.
Speculative forecasts: counting CO2 before it’s avoided
Now, let’s take one step further into estimating the future GHG impact of a company, and mix avoided emissions with sales forecasts. Imagine claiming that, when 20% of the market adopts a company’s solution, we could avoid X gigatonnes of CO2. This sounds great for investors, but it’s speculative. It’s based on projections of market adoption that may or may not happen. And it’s based on a counterfactual in a world that is rapidly changing. Moreover, you can’t just add up these speculative numbers across a portfolio because some solutions might be competing to avoid the same emissions. It’s like counting your chickens before they hatch—and then using this potential impact to secure more investment.
The lack of standardization
Because the entire avoided emissions framework relies on “what ifs,” it is incredibly difficult to standardize or audit. And we’re simply not there yet. Multiple institutions, among which Carbon Equity and most importantly the WBCSD, are taking on the challenge with Project Frame. But it is our opinion that today’s reporting landscape is creating a distorted view of impact.
For example, Lazard Asset Management looked at the CDP disclosures and found some big discrepancies.
Take, for example, an industrial company making elevators and automatic doors—industries you wouldn’t typically associate with climate impact—claiming nearly 50 gigatons of avoided CO2 emissions over their product lifetimes. To put that in perspective, it’s almost equivalent to today’s annual global emissions. This raises a key issue: companies can easily overestimate their avoided emissions. For investors, it’s thus crucial to see the full calculation behind an avoided GHG emissions claim to get a sense of if these numbers aren’t inflated or misleading. There is a crucial need for transparency from funds on the calculations that went into their final avoided emissions claim.
While this example is obviously an extreme case, it showcases exactly why we are very skeptical about using avoided emissions as a reporting and benchmarking metric between funds. Many funds use different methods, making their numbers hard to compare and, as a result, ineffective as reference points.
Yet investors are increasingly using them to compare funds, which we find dangerous. The risk is that investors allocate capital to funds that are less sophisticated or thorough and display bigger numbers. The real paradox is that this race to show the highest avoided CO2 numbers actually disadvantages the most conscientious, intentional funds. Good impact doesn’t always translate into showy figures, and we’re okay with that.
What should we be looking at?
At Carbon Equity, we don’t use avoided emissions claims for reporting or fund benchmarking. We believe it’s important to wait for a standardized, auditable methodology before relying on these numbers. But if we’re not reporting on the potential avoided GHG emissions of our portfolio companies, what should we focus on instead? Beyond the question of validity and standardization, it’s worth considering what a figure like “X tons of CO2 avoided” actually conveys. More importantly, why report on avoided emissions at all? We believe every fund should reflect on that.
The core question we aim to answer with the data we report on is simple: Is the investment delivering on its promise? Our main goal is to provide our customers and ourselves with data that shows whether we are achieving the impact we set out to create. Avoided GHG emissions numbers can be helpful in understanding a company’s direction but don’t tell the whole story. This is why we’ve developed our own approach to reporting impact.
We started by setting goals for what we want to achieve with our funds: to invest the capital in technologies and solutions that have the potential to substantially contribute to achieving a net zero future. We then designed a methodology to track the extent to which we are achieving this goal.
For a product to be considered to make a substantial contribution, it needs to address a significant emissions challenge, deliver meaningful GHG reductions, and be aligned with the net zero trajectory.
We classify a product as tackling a large GHG challenge, by asking the following questions:
- (1a) is the technology mentioned in the decarbonization pathway of the IPPC, IEA, EU Taxonomy or Project Drawdown?
- (1b) If not, does it resolve one of the main barriers to further adoption of one of these technologies?
- (1c) If not, does the problem which this technology addresses cause at least 50 Mt of GHG emissions per year?
Next, we classify a product to create a significant reduction of these emissions and to be net zero aligned with these questions:
- (2a) Is it a fully clean/ renewable technology?
- (2b) If not, is the GHG reduction material and does not lead to lock-in risks further down the line?
If the answer to 1a, 1b or 1c is yes, as well as 2a or 2b is yes, then we consider the technology as a substantial contribution to net zero.
For every investment done by a fund, we evaluate its potential contribution to achieving a net zero future. Our target is that over 70% of the investments are critical net-zero technologies, allowing our investors to play a meaningful role in scaling the building blocks of a fossil-free economy.
In conclusion, we strongly believe the biggest risk in overestimating impact is thinking that we are on track to achieving net zero when we’re not. We’d rather be on the cautious side and transparent about where we stand than claim big numbers that don’t hold up under scrutiny.
For us, impact reporting is about intent. It’s about gathering data and insights that challenge you and help you critically assess if you’ve made the right decisions, not about scoring points with inflated figures. We want to be part of the solution and that means being honest about what we’re really achieving and what we can actually claim as investors. It also means being honest about the state of impact reporting and its lack of consistency and transparency behind the publicized numbers. We’re proud to make this stand, even if it means not reporting numbers and going against the grain.
