Understanding Scope 4 Emissions: Why Venture Capitalists Should Measure It
For investors focused on sustainable investing, the measurement and management of greenhouse gas (GHG) emissions have become pivotal metrics for evaluating environmental impact. While many are familiar with Scope 1, 2, and 3 emissions, Scope 4 emissions are gaining popularity, particularly among venture capitalists (VCs) who play a crucial role in shaping the future of industries through their investments. This article explores what Scope 4 emissions entail and why VCs should prioritise measuring them.
What are Scope 4 Emissions?
Scope 4 emissions, also known as avoided emissions, refer to the reduction in emissions that occurs as a result of a company's product or service.
In a world where startups, scaleups and large corporations are trying to be more sustainable, the products they produce often replace older, more carbon intensive products or services. The difference between the carbon emissions of the old product, and that of the new product, is a company's Scope 4 emissions. It's also important to take into account a company's actual or forecasted sales to arrive at a per annum Scope 4 figure.
Unlike Scope 1 (direct emissions from owned or controlled sources), Scope 2 (indirect emissions from purchased electricity), and Scope 3 (indirect emissions from the value chain), Scope 4 emissions focus specifically on the environmental footprint of a product or service.
These products or services rarely come about on their own, and are usually the result of multiple parties working together, including investors. Therefore Scope 4 is particularly important to VCs, as they can calculate the Scope 4 emissions they have avoided by funding climate solutions. This is typically reported by dividing the investee companies Scope 4 in tonnes of CO2 per year, by the investors shareholding %.
Why Should VCs Measure Scope 4 Emissions?
1. Risk Mitigation and Due Diligence:
VCs face increasing pressure from stakeholders, including investors, consumers, and regulators, to demonstrate commitment to sustainability. Measuring or predicting future Scope 4 emissions allows VCs to conduct thorough due diligence on potential investments. Understanding the carbon footprint associated with investment portfolios helps in identifying climate-related risks and opportunities, thereby mitigating financial and reputational risks.
2. Enhanced Investment Decision-Making:
Incorporating Scope 4 emissions into investment decision-making provides VCs with a holistic view of the environmental impact of their portfolios. By considering sustainability factors alongside financial returns, VCs can make informed decisions that align with long-term value creation and contribute positively to environmental stewardship.
3. Alignment with Global Sustainability Goals:
Governments, international organisations, and society at large are increasingly prioritising sustainability goals such as those outlined in the CSRD, aiming to enhance corporate transparency and sustainability reporting. Measuring Scope 4 emissions enables VCs to align their investment strategies with these global frameworks, fostering a transition towards a low-carbon economy.
4. Stakeholder Expectations and Transparency:
Investors and consumers are placing greater emphasis on transparency and accountability regarding environmental impacts. By measuring and disclosing Scope 4 emissions, VCs can meet stakeholder expectations for transparency while building trust and credibility as responsible stewards of capital.
5. Competitive Advantage and Innovation:
Embracing sustainability and measuring Scope 4 emissions can differentiate VCs in a competitive market. It can attract impact-driven investors and entrepreneurs who prioritise environmental sustainability, fostering innovation in clean technologies and sustainable business practices.
If you are interested in measuring Scope 4 reach out to us at contact@portf.io or book a free 15 minute session with our Sustainability Consultant here.
