Innovation opportunities: Avoided emissions (Scope 4)

Why are Scope 1, 2, and 3 emissions alone not enough?

As highlighted in our Berkeley curriculum, many companies concentrate primarily on Scope 1, 2, and 3 emissions. With scope 3 emissions often representing 70-80% of a company’s emissions and generally estimated from models.  Reporting on Scope 1, 2, and 3 emissions is also backward-looking, which helps in tracking changes overtime, but fails to provide insight into how companies plan to reduce future emissions and, furthermore, are likely to increase as companies increase in size or the use of their product increases. None of these categories capture the positive potential that innovative designs, especially in the field of technology, can have on avoiding greenhouse gas emissions (aka avoided emissions), which are also sometimes referred to as Scope 4 emissions.

“Scope 4 reporting is still very early, but companies need to move beyond roll-ups of last year’s emissions, to understanding where they can drive innovations that materially reduce their emissions, particularly as they grow their businesses. Assessing avoided emissions is really the cutting edge of carbon measurement and reporting.”

 

 – Dara O’Rourke, Associate Professor at UC Berkeley’s Rausser College of Natural Resources.

Technology’s avoided emissions opportunities in lifecycle thinking

Lifecycle analysis (LCA) is an ideal methodology for evaluating impacts throughout a product’s life, from cradle to grave, on greenhouse gas emissions and thus is a useful way to compare the carbon footprint of a new technology against one it replaces. For example, every purchased good has associated greenhouse gas emissions, and the choice between using fossil fuels or renewable energy in manufacturing processes affects emission levels as does the way a product is designed for use, longevity, and end-of-life management (like recycling vs landfilling).

Avoided emissions help us understand how a company’s product can actively reduce emissions across society. They capture:

• Replacement: When a new product replaces a higher-emission predecessor
• Displacement: When a new company or solution disrupts an old, inefficient model. The step changes here can be gigantic, completely changing the way we work and live.
• Enablement: When a service helps others decarbonise (e.g. cloud computing, AI optimisation)

Company engagements

As investors, we engage with companies in our portfolio, such as Nvidia, Taiwan Semiconductor Manufacturing Company (TSMC), Pure Storage and Itron, to gain insight into how their technological innovations can benefit society through avoided emissions. These insights aimed at gaining a deeper understanding of how they may capitalise on innovation opportunities are then incorporated into our investment decisions.

As a top player in the semiconductor industry, Nvidia has shown positive progress in technology innovation. Generation to generation Nvidia’s graphics processing units (GPUs) are seeing gigantic leaps in energy efficiency. Their GPUs are 50x more energy efficient than the best CPUs available for AI inference, transforming compute economics, highlighting how new technologies are disrupting and displacing legacy solutions.

Another innovative standout is TSMC. Our conversations with this holding highlighted their progress in technology enablement.  Their resource efficiency and physical risk-aware manufacturing enables global scaling of sustainable computing infrastructure. TSMC’s manufactured chips help to conserve 4.28 kWh for every 1 kWh used, for high performance compute cases this ratio increases to 1:6.8.

Pure Storage is revolutionising the sustainability of data centres with its innovative flash-based architecture that replaces traditional, energy-intensive spinning disks. Storage accounts for nearly 25% of total data center energy use, and Pure’s technology reduces storage energy consumption by 85–95%, leading to an overall 20% drop in total energy use. This efficiency also means 96% less physical space, up to 85% less e-waste, and significantly lower heat output—reducing cooling demands.

Similarly, Itron is enabling responsible AI at the grid edge, using machine learning to optimise water, gas, and electricity systems. In 2024 alone, Itron’s solutions helped avoid 7.5 million metric tonnes of CO₂e, showing how smart infrastructure can drive real-world decarbonisation. In an AI-driven world, this kind of resource-aware ecosystem is essential to ensure technology remains a net positive.

The technology sector’s ability to innovate and adapt plays a critical role in addressing global challenges, demonstrating how companies may use innovation to harness opportunities and manage risks.  Our ongoing engagements with companies at the forefront of this transformation are crucial for understanding what opportunities encourage sustainable growth and long-term shareholder value. Through these insights, we are better positioned to make financial decisions that capitalise on opportunities that can contribute to a more sustainable future.

Why should investors pay attention?

The concept of avoided emissions extends beyond environmental benefits; it has significant implications for investment portfolios as well. Companies that prioritise sustainability not only reduce costs but also attract eco-conscious consumers. Those that incorporate lifecycle-conscious designs often see a lower total cost of ownership, appealing to cost-sensitive purchasers. Moreover, firms leading in avoided emissions are frequently at the forefront of innovation. This not only positions them as leaders in sustainability but also as attractive investment opportunities, promising both reduced risks and enhanced returns.

To make better informed decisions about avoided emissions, as investors we should consider encouraging standardisation in reporting of Scope 4 emissions. At Janus Henderson, our engagements with companies help facilitate ongoing discussions about how our holdings are thinking about Scope 4 emissions, to ensure we are focusing on the best innovative opportunities.

Technology is transforming how we live, work, and consume. Innovation isn’t just reducing emissions—it’s redefining what’s possible.