Accounting and allocation of avoided environmental impact—Integrating scope 4 in sustainability reporting and investment analysis

Introduction Capital allocation toward renewable technologies is a prerequisite for the energy transition. Current reporting standards cover greenhouse gas emissions from companies' own operations, purchased energy, and increasingly upstream and downstream activities, while avoided emissions (scope 4) and other generated or avoided environmental impacts are normally not included. This paper presents a methodology for integrating scope 4 and a broader set of environmental indicators into investment analysis and discusses how this can assist investors in capital allocation toward renewable technologies. Methods Taking wind and solar power as examples, environmental impact is quantified from a life cycle perspective in five different geographical settings: Brazil, China, Germany, India, and the USA. The environmental impact in scope 1-3 as well as the potential avoided impact in scope 4 was calculated through life cycle assessment. Three different allocation methods were applied to demonstrate how avoided impact can be divided between system components: economic allocation, mass allocation and allocation according to scope 1-3 impact. Results For both wind and solar power, the scope 4 avoided impact can exceed the scope 1-3 environmental impact in several impact categories, including climate impact, particularly in regions with fossil-based electricity production. A gradual transition to more renewable electricity production is shown to reduce the scope 4 impact over time, but even with "net zero emissions" electricity by 2050 the avoided impact exceeds scope 1-3 for both wind and solar. Finally, this paper addresses the challenge of allocating avoided impact between components of renewable energy systems, where there is no physical relationship between the components and their scope 4 contributions, giving reporting companies and investors a view on how each component contributes to avoided impact. Discussion The study shows that avoided environmental impact, which is not covered in current accounting standards, can be of great importance when assessing renewable energy technologies. The presented methodology could be applied to other systems where avoided impact is created, such as waste-based bioenergy. Allocating avoided impact between components would allow companies behind each of them to claim a share of the positive sustainability effects and make them more attractive to investors.