In the evolving landscape of sustainability, understanding GHG emissions is increasingly critical for finance professionals, particularly in emerging markets like India. The classification of emissions into scopes 1, 2, 3, and the emerging scope 4 provides a structured framework for assessing environmental impact and the significance of these emissions on India’s financial sector. Although at a nascent stage, understanding scope 4 emissions holistically is crucial for financial institutions (FIs) to manage risks, attract sustainable investments, foster innovation, ensure compliance, and create long-term value.

Understanding scope 1, 2, 3, and 4 emissions 

The widely accepted GHG Protocol defines three scope emissions. Scope 1 emissions are direct GHG emissions from owned or controlled sources. Scope 2 emissions are indirect GHG emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company, such as emissions associated with the electricity consumed to power office buildings.

Scope 3 emissions are all other indirect emissions that occur in a company’s value chain. This includes both upstream and downstream emissions, such as emissions from the production of purchased goods and services, waste disposal, and employee commute to emissions from product use, end-of-life treatment, and transportation. Scope 3 emissions often represent the largest portion of a company’s carbon footprint, making them critical for comprehensive climate strategies. Analysis by CDP reported that scope 3 emissions of FIs is on an average 700x over direct emissions, explaining the criticality of managing and reporting them. While scope 1, 2, and 3 emissions are well known and come with standards, scope 4 is a novel concept.

Scope 4 emissions were introduced by the World Resources Institute, often referred to as “avoided emissions”. These are reductions in GHG emissions that occur outside of a product’s life cycle or value chain due to the use of a product or service, for example, efficient appliances that reduce electricity consumption, thereby reducing emissions from this consumption. Scope 4 emissions aim to provide a more comprehensive view of a company’s environmental impact by highlighting the positive externalities associated with their products or services. This aspect is crucial for understanding the full spectrum of companies’ carbon footprint and their progress toward achieving net zero targets. 

The BRSR & emissions disclosures in India 

India’s non-financial reporting landscape is rapidly evolving and driven by regulatory changes and increasing awareness of sustainability issues among stakeholders. The Business Responsibility and Sustainability Reporting (BRSR) framework requires companies to disclose ESG metrics, including emissions across scopes 1, 2, and 3. Additionally, beyond this framework, companies use IFRS and GRI as disclosure frameworks. Currently, major GHG reporting standards and the BRSR do not mandate reporting on scope 4 emissions. However, an increasing number of companies are voluntarily disclosing their avoided emissions to showcase their sustainability efforts. 

A study by the Shakti Foundation on the comprehensiveness of disclosures on scopes 1, 2, and 3 emissions found that 66 of the top 100 Indian companies by market cap reported their scopes 1 and 2 emissions, whereas 48 reported on all 3 scopes. Of these, 35 companies are making emission reduction targets voluntarily. Additionally, a PwC reporthighlighted that 51% of India’s top 100 listed companies disclosed their scope 3 data for FY23 despite it being voluntary under the BRSR. 

While scope 4 reporting has not been mandated, companies such as ReNew, Indian power company, are taking the opportunity to disclose such data. In their 2023 Sustainability Report, ReNew reported that it avoided 14.08 million tCO2 in emissions, demonstrating a 25% YoY increase, along with 318,708KL on water saved, a 48% YoY increase. In 2024, the company avoided 16 million tCO2. 

The Reserve Bank of India (RBI) has taken a significant step towards addressing climate-related financial risks by introducing a draft disclosure framework in February 2024. While under consultation, this framework mandates regulated entities to integrate climate-related financial risks into their operational strategies, emphasising the importance of comprehensive emissions reporting. This heightened focus on transparency will likely lead FIs to seek detailed disclosures, including avoided emissions, as part of their risk assessment processes. 

Despite this progress, however, scope 4 remains nascent in India, with companies still coming to grips with non-financial disclosures. Challenges such as lack of guidance and standardisation make scope 4 difficult to consistent and meaningful implementation. Lack of standardised methodologies for measuring avoided emissions is likely to lead to inconsistencies and potential greenwashing. Many industries are still grappling with emissions reporting and scope 4, thereby, adds another layer of complexity. 

Additionally, in its current form, scope 4 emissions are unlikely to be meaningfully applied to all sectors. For example, companies in the agriculture sector are likely to find scope 4 emissions disclosures more challenging, given that the full range of costs and benefits of such activities are difficult to quantify. On the other hand, agricultural activities are diverse and vary across geographies, making the calculation of avoided emissions further complex.  

Need for policy level intervention 

Developing clear standards and methodologies for measuring and reporting avoided emissions would be critical to formalise and enhance emissions reporting in India. This would need collaboration between government agencies, industry stakeholders and FIs to determine clear guidelines that can be meaningfully adopted. Additionally, providing technical assistance and capacity building for companies, particularly SMEs can help them navigate the complexities of scope 4 emissions reporting, and strengthen the reporting landscape. 

From a financial sector perspective, requiring avoided emissions disclosures from borrowers or investees would also lead to enhanced reporting. FIs can integrate scope 4 considerations as part of their investment criteria and risk assessment processes allowing them to drive capital towards projects that contribute to emissions reduction. To achieve this, robust policy and regulatory frameworks need to be established that encourage comprehensive reporting across all emission scopes especially considering the unique challenges and opportunities presented by different sectors ultimately fostering a more sustainable future for businesses and investors alike. 

Namita Vikas is Founder and Managing Director, auctusESG