For investors with sustainable or net-zero mandates, navigating the complexities of a company's carbon footprint has become second nature. Scopes 1, 2 and 3 – a well-worn framework for quantifying direct emissions, energy purchases, and broader value chain impacts – are now entrenched in ESG analysis. Yet, a crucial element remains largely unexploited: Scope 4, the oft-overlooked metric that captures a company's potential to avoid emissions.
Raj Shant, managing director at Jennison Associates, sees that as a fundamental flaw in the investment category. Shant says that ignoring Scope 4, as most traditional decarbonisation strategies do, is tantamount to neglecting opportunities to reduce emissions that in many instances can exceed Scopes 1, 2 and 3 combined. His firm maintains that a broader embrace of Scope 4 would accelerate carbon-reduction progress while enhancing the decarbonisation investment universe.
"To focus only on the supply side of the decarbonisation journey is missing a massive part of the overall solution, which is also thinking about demand," says Shant. "When you start thinking about demand, if we want to live in a world where there are eight billion people with similar standards of living to today but where the carbon emissions are much lower, we're going to need to do a ton of things in a really different way, in a much more carbon-efficient way."
To be sure, solar, wind, and electric vehicles play important decarbonisation roles. Still, according to a 2020 Princeton University report, spending on these solutions represents only an estimated 40% of the capital needed to get to net zero by 2030.
Jennison believes the path forward is clear: Investors need to embrace many solutions beyond renewables and electric vehicles to recognize the complexity of the decades-long challenge of reducing carbon emissions while maintaining and improving living standards.
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