Scope 4! What is it good for?

Emissions accounting is about to take a big left turn

In our carbon accounting myopia, we invent new ways to measure and account for our efforts in the endless chase for progress.

In June 2022, PG&E, the primary utility company in California, announced in its Climate Strategy Report that it had started tracking Scope 4 emissions. The way they define this term is as follows:

An emerging term for categorizing emission reductions enabled by a company. PG&E can make a significant contribution by enabling these emission reductions in our service area.

For example, helping a school district electrify its vehicles lowers overall emissions, and PG&E accounts for those ‘avoided emissions.’ They are making this claim about customer or value chain emissions to show their progress and investment along the energy transition. This is a program PG&E runs where “Fleet operators can browse an electric vehicle catalog, learn about additional grants and funding, and calculate cost savings, emissions reductions, and more using our EV Fleet Savings Calculator.”

I’m mixed on this because, on the one hand, to support a transition project is certainly worth noting. On the other hand, these aren’t operational reductions and are projections claimed based on something that didn’t happen. In other words, determining the avoided emissions assumes that 1:1 replacement is enough of a consideration.

Take COVID as an example. If this program was started in 2020, would it be comparable to compare the avoided emissions 1:1 without considering remote learning?

In 2023, a year after PG&E’s announcement, The World Business Council for Sustainable Development (WBCSD) launched its guidance on avoided emissions. The opinion is broadly that innovation can be driven when companies consider the impact of their activities ‘outside of their value chain.’

This sounds like a very values-driven approach since it is outside the company's material perspective. We all have seen how quickly values-driven approaches get shut down by the slightest challenge (see this post on DEI).

Now, you might wonder where Scope 3, Category 11 (Use of sold products), or the other parts of the GHG Protocol fit. After all, we’re supposed to manage what we measure. According to the WBCSD page, innovation beyond operational reductions has not manifested with the ‘traditional’ focus, and Scope 4 will help.

While these frameworks (GHG Protocol, CDP, and GRI) remain critical for companies to reduce emissions in their operations and supply chains, the necessary shift towards large-scale emission reduction fails to materialize…
The global transition to Net Zero is entering a new phase, where (cross-)sectoral accountability and collaboration come to the fore. To meet the shared goal of achieving Net Zero globally by 2050, companies need to transform into climate solution providers. This is only possible if they understand the impact that their products and services have on others.

This argument states that we’re entering a new phase before the first CSRD reports have even been launched. Regarding the impact of products and services on others and cross-sectoral accountability, I thought this is what Scope 3 was meant to solve. How can there be yet more accounting to do here?

As with philanthropic efforts, Scope 4 avoided emissions might fall into ESG if the transition and reputational opportunities are material, but this broadly represents a non-material sustainability issue, driving impact. But there is another way to look at it. Avoided emissions accounting may solve the challenge where one company might increase its emissions to solve a problem so that another company might lower its emissions.

In other words, a cattle feed company might increase its manufacturing emissions to create a product that lowers the methane emissions resulting from the feed. The company would note an increase in its emissions and can account for the avoided emissions when farmers use the product.

So far, companies haven’t yet latched on to Scope 4 or avoided emissions, but that might change. The WBCSD is holding an open consultation on the matter through January 2025, doubling down to drive progress. In another area, financial services firms, the ones who have led the ESG and sustainability confusion and those for whom comparable disclosures are meant to serve, might take on the challenge themselves.

Financial Services standards look at Scope 4

If you aren’t in the Financial Services sector, you might not have reached the last Category of Scope 3 emissions, Category 15. Most firms align with the Partnership for Carbon Accounting Financials (PCAF), which covers emissions calculations and methodologies for banking (financed), capital markets (facilitated), and insurance-related emissions.

The PCAF framework aligns with the GHG Protocol. It covers some interesting additional components, such as specific types of debt vehicles, industry-related emissions, and even a quality score for the reported data.

I went through the 29 banks listed by the Financial Stability Board as Global Systemically Important Banks (G-SIBs) to see which ones align and discovered that most of them do. If you want to wade through the massive amounts of reports for terms like ‘PCAF,’ you can find them (or not) in the table below. The JP Morgan Chase report shows its calculations, the industries covered, and the metrics on pages 32-33 to give you a flavor of what PCAF calls for.

Full disclosure: It is entirely possible that I missed some PCAF alignments, so I am happy to update this table if you spot a mistake! If I couldn’t find the information quickly, and I did spend my Saturday on this, I think it is more on the bank than me.

From a standards perspective, PCAF leads beyond operational emissions into these firms’ core business. PCAF is the preferred methodology for Scope 3, Category 15. When they move, firms pay attention.

In early December, PCAF launched a new consultation on several areas, including avoided emissions. The consultation builds on the WBCSD opinion for companies and layers on the PCAF-specific framework, such as the type of debt vehicle, a company and/or project perspective, and that data quality score. It focuses on PCAF Part A, which is for the banking industry, mainly around lending from a bank.

PCAF included two other related areas to consider when accounting for avoided emissions, but WBCSD only touches on them. The PCAF guidance describes methodologies for future-looking emissions and expected emissions reductions (EER). After all, avoided emissions are an aspect of estimating what might happen in a future state, and you would need this for comparative analysis.

The GHG Protocol has a paper on avoided emissions, which includes a comparative analysis of the “impact of a product (good or service), relative to the situation where that product does not exist.”

Whether avoided emissions concern broader corporates or financial services, Scope 4 attempts to show what might have happened and compare it to what happened. The prevailing theory is that understanding these differences will motivate companies to transition because they can claim emissions benefits.

Well, there are just a few problems.

Scope 4 is likely not the answer to drive progress

While ESG regulations and standards are acceptable for producing standardized, comparable data for consistency's sake, even with Scopes 1, 2, and 3, no one really has comparable data because companies can’t be compared against this arbitrary carbon number. Not to mention that how we arrive at emissions data doesn’t afford us a comparable view unless you are talking year over year for the same company.

Too many varying calculations, emissions factors, and estimations are used to compare one company with another. Also, companies tend not to have similar business models. Take Big Tech, for example. Can you adequately compare Apple to Microsoft? Both are device companies, but Microsoft has a cloud, so what about Google and Amazon? Well, Amazon has an entirely different retail model and streaming services. Should we compare them to Walmart and Netflix?

In theory, Scope 4 would allow stakeholders to understand who is driving progress with this new claim. Still, if we are talking about ‘comparative analysis,’ which financial services firms need to move capital, Scope 4 still won’t have that, especially as it might include non-material issues.

Again, how would you compare the avoided emissions from PG&E’s Fleet program with another utility that didn’t have that exact program (because why would they)?

The second challenge is related to Scope 4. Companies will track progress against something that may not be a material concern because carbon isn’t universally material, nor are the efforts to reduce and innovate the same across companies. Unfortunately, without the business use case, which Scope 4 seems to be entirely removed from, carbon reduction alone or new claims about the company’s impact isn’t going to get a company to innovate. Scope 4 would only make sense to a leadership team willing to put a sustainability impact and a transition above the company’s operations.

The better argument is to align ESG metrics, including emissions, against other business requirements and make an informed decision to drive material change. Anything less than this will confuse claims and create an exercise in reputational risk management, not innovation. Even worse, it will quickly become an exercise in values-based decision-making, continually getting pushback from leadership, investors, and noisy stakeholders.

Closing thoughts

Scope 4 very well may see the light of day, but whether it will inspire the board and management team to move has yet to be seen, as does whether they are durable programs due to their non-material nature. One thing is clear: existing carbon accounting methodologies do not seem to do the job, so why would a different accounting approach succeed?

I believe there is value in Scope 4 because it can provide an additive perspective for the management team to make an informed decision as it seeks to transition beforehand, during, and after a project. If leveraged carefully after a project is executed, it could help show stakeholders how the company thinks about its issues. But again, how durable will it be if it isn't material?

Make it material to the business no matter what ESG project you are engaging in. Scope 4 projects, even the selfless ones that benefit us all, may not last if they aren’t material.

…and attesting to the claims is going to end up being an absolute disaster because if the project falls outside of your area of expertise, you will likely be missing important context when reporting about it.