Informed decision-making on portfolio decarbonisation using GHG accounting and lifecycle analysis (Podcast)

[00:00:05.290] – Aristeidis Tsakiris
Hello, and welcome to the Podcast series “Scaling up energy efficiency”. This is episode nine, and today’s topic is “Informed decision making on portfolio decarbonization using greenhouse gas accounting and lifecycle analysis”. We are podcasting from Denmark, which aims to reduce its greenhouse house emissions by 70% by 2030 and become climate neutral by 2050. My name is Aristeidis, and I work as a project officer at the Copenhagen Centre on Energy Efficiency and part of the UNEP Copenhagen Climate Centre. So, without further ado, here is your host, Elisabeth Resch, Finance Project Manager and advisor, who will moderate today’s podcast.

[00:00:55.010] – Elisabeth Resch
Hello and welcome. My name is Elisabeth Resch and I’m greeting you today from the UN city in Copenhagen. Today’s podcast will explore the application and use of carbon footprint calculations, that is greenhouse gas accounting and lifecycle analysis with my colleague Vanja Wylie. This podcast is part of a series of podcasts by the Copenhagen Center for Energy Efficiency. We host a center here at the UNEP Copenhagen Climate Center. Moreover, the UNEP Copenhagen Climate Center supports Mission Efficiency. Mission Efficiency is part of an effort to build the ecosystem needed to drive progress on energy efficiency and to elevate it in personal, organizational, and global agendas. For more information, please visit www.missionefficiency.org. In today’s talk, we will discuss, among others, how greenhouse gas accounting can inform decisions on energy efficiency. I will be speaking to my colleague Vanja Elizabeth Wylie, who served as a Climate Accounting Expert both here at the UNEP Copenhagen Climate Center and at UNOPS. Here she analyzed the portfolio investments of Danish financial institutions, and at UNOPS, she currently advises on methodological options for greenhouse gas accounting. I look forward to an enlightening discussion. Vanja, welcome and please introduce yourself to our audience and what you have done for the UNEP Copenhagen Climate Center.

[00:02:27.260] – Vanja Elizabeth Wylie
Thank you very much, Elisabeth. I’m happy to be here and talking about this. So, my name is Vanja. I originally educated as a mechanical engineer and then throughout my degree, I got involved in lifecycle assessments, did some courses, became a teaching assistant, and from that it evolved and did a lot of work on LCA SDG assessment and then moved on to work for the UNEP Copenhagen Climate Centre. And for the UNEP Copenhagen Climate Centre. I worked for the financial institutions, as you said, mainly doing impact assessments of the investments that these institutions were considering. So assessing the emissions they would generate and then attributing these emissions back to the financial institutions also assisted them in methodology development and overall portfolio calculations on an annual basis. And then now working for UNOPS, as you said, we’re trying to develop methodological framework options to assess and reduce greenhouse gas emissions on UNOPS projects across the world.

[00:03:43.590] – Elisabeth Resch
That is fascinating. Can you explain to our listeners how can greenhouse gas accounting and lifecycle analysis support organizations in their journey to Paris alignment? And what’s the difference between those two anyway?

[00:03:56.560] – Vanja Elizabeth Wylie
Of course. I think I’ll start with the definitions. So starting with Life Cycle assessment, or LCA for short, this is a standardized approach to quantify the environmental impacts that a system or product can or will have and the assessment it compiles and examines the inputs and outputs of these systems throughout the entire lifecycle. And that means it goes all the way from raw materials extraction to the final disposal of this product or system. So for example, if we’re thinking about a car, you’re looking at all of the materials we need to produce this car, the actual production of it in the use phase as well, accounting for whatever fuel, spare parts, and then finally how the car is disposed of towards the end. So that’s the full life cycle. And then when you have these quantified effects or impacts, you need to characterize them into different categories. And this is where it becomes a little bit more technical. So in most methodologies, it varies a little bit the amount of impact categories that you have. But the midpoint impact categories, as we call them, are typically 15 categories. Climate change is one of these. And all of these impact categories can further be aggregated into endpoint categories that look into areas of protection. So human health, resources and ecosystem health. But going back to our midpoint impact categories, climate change is one of them. And in climate change, we look at the CO2 equivalent and the global warming. And this is where greenhouse gas accounting comes into the picture. Because in greenhouse gas accounting, you only look at the greenhouse gas emissions. So it’s a very small part of an LCA, you could say. And then we’re also looking specifically typically at the operations of a business or a company. So when you’re doing greenhouse gas accounting, we talk of emissions scopes. We have scope one, direct emissions caused by the company’s owned assets. So any fuel that’s burned in their own vehicles, you have scope two, which is any purchased heat or electricity which is not produced by the company, but they use it. And then scope three is anything else up or down the value chain of the company. So any services that they purchase or any products that they purchase, this sort of thing, or use of their products if they produce something. And typically when you do greenhouse gas accounting, you have a few steps that you go through where the first is just scoping. So you set the boundaries of the assessment, then you develop a baseline. So what’s your starting point? Basically, then you need to decide on what specific calculation methodology you will be using. You need to collect a lot of data. You need to then do the inventory of this data. And then you need to look at the results and consider mitigation options, if there are any, and potentially redo the calculation to see how you can change it. So that was a lengthy description or definition, but a little bit of what you can use it for.

[00:07:33.660] – Elisabeth Resch
But I think I understand that greenhouse gas accounting is more narrowly focused on the carbon footprint or CO2 equivalent footprint, whilst life cycle analysis takes in other impact barriers like health, like you said, and there are different procedural steps associated. That’s good.

[00:07:49.300] – Vanja Elizabeth Wylie
And it’s a far more extensive assessment where it would take typically a few months to do a full LCA. But greenhouse gas accounting is a small part of it, as you say.

[00:08:00.280] – Elisabeth Resch
How does greenhouse gas accounting, for instance, support businesses when they want to see whether they align with the Paris agreement goals or not?

[00:08:07.610] – Vanja Elizabeth Wylie
So I heard a saying once, or I don’t know if you can call it a saying, but you can’t manage what you can’t measure. And I think it’s perfect, really. If you don’t know what you’re emitting or where you’re emitting from, then how would you know to reduce it and by how much? And I mean Paris alignment is all about reducing emissions to reduce or to avoid the warming of the atmosphere. So greenhouse gas accounting does exactly that. It gives you knowledge, it gives you a view on your operations. Where do the emissions come from? Are there any hot spots in your value chain in your operations? It will guide decarbonization. And then also when you take this whole life cycle perspective, it allows you to avoid burden shifting. So for example, choosing maybe computers that are more energy efficient, but then the production process of them is far worse then it would allow you to see that and maybe you would go for a different product in itself. And then also depending on when you do the emission estimations, if you do them early in a project, you can also help there identify potential emission hotspots and you can already, before implementing a project, you can try to reduce and find alternatives. So there are many ways that greenhouse gas accounting can help a business.

[00:09:48.910] – Elisabeth Resch
Yes, truly. So I’m wondering what are some of the challenges in assessing credibly the greenhouse gas emissions of an organization or a product or an action in developing countries in particular?

[00:10:02.450] – Vanja Elizabeth Wylie
So developing countries have many issues, let’s say, when it comes to greenhouse gas accounting in general, it’s very hard to get reliable data from developing countries on processes, on use of materials, these sort of things. What are the sources of materials? But then developing countries often typically have limited options in finding options that are lower in emissions or mitigating. And then I think another thing that needs to be sort of acknowledged is that developing countries are typically those hit the hardest by the effects of climate change. So their priority might not necessarily be greenhouse gas accounting. They’re looking at adaptation. How can we avoid that the city is going to flood in the near future rather than counting the greenhouse gases that they emit? So they have some more urgent matters to tend to in a way which sometimes sets greenhouse gas accounting as a lower priority. So typically if you want to encourage greenhouse gas accounting in developing countries, you also need to consider that whatever options you’re trying to offer will have some other effects as well. It would embody operational climate resilience along with decarbonization.

[00:11:37.230] – Elisabeth Resch
And okay. And wherever there is an issue where data gaps do persist, what do practitioners such as yourself do? What do you draw on in terms of proxy data or other tools without compromising data integrity in such situations?

[00:11:51.610] – Vanja Elizabeth Wylie
So again, if we assume that we’re going to be using greenhouse gas accounting in early stage of a project, for example, then you would typically not have a lot of data available to you and you would draw on a lot of assumptions or expert knowledge basically. And typically you just have to be very transparent in terms of these assumptions that you make and what data that you use for it typically sector estimates or these sort of things. Overall it’s a problem for companies to get reliable data from their supply chain. A lot of companies don’t have data on their products or their services or they’re reluctant to share it often. So for many companies that is the very challenging part. And then often what they do is that they use financial data instead. So sales, revenues or these sorts of things and they use sector estimates. So emission intensity or emission factors to align with this data. The only issue with using this kind of data is that it doesn’t give you a lot of insight into the emission profile. So you don’t necessarily know where in your company operations the highest emission density comes from or why, because it’s all sector estimates.

[00:13:22.130] – Elisabeth Resch
That is very interesting. Let’s bring it back to financial institutions because I know that’s what you’ve been working on in the past. Why does greenhouse gas accounting matter to them, why is this work important to them and what potential does it hold for them?

[00:13:36.840] – Vanja Elizabeth Wylie
So, as I mentioned earlier, we have these different emission scopes where scope one is direct emissions caused by owned assets, for example and scope two emissions is the purchased heat or electricity. And this is of course important to reduce for banks and branches. But given the transformative role that finance has in our economies, scope three emissions, which is everything else around the financial institutions, most importantly those from banks investments or lending portfolios, they matter so much more. What banks enable with their financing matters a lot and therefore there is also a lot of focus on it. And the Paris Agreement, it speaks of aligning financial flows with the goals of the Paris alignment with carbon resilient investments and climate change mitigation, climate change adaptation and so on. For climate change mitigation, what is important is that financial institutions decarbonize their portfolios and greenhouse gas accounting can help measure a baseline and track progress on this goal. That’s something I forgot to mention earlier, but when you do this annual emission estimation that you can track your progress over time to see if you’re actually reducing as a result of your actions. So, more and more financial institutions are looking into the carbon footprint of their investments and they seek to compensate and or reduce it. And the goals that financial institutions set themselves with regard to decarbonization of their portfolios, it varies significantly. But one prominent approach is to set a greenhouse gas reduction target. It could be, for example, a gear by which they wish to be net zero or perhaps a 45% reduction according or with respect to the baseline. So in my previous work, I worked with two Danish financial institutions that had set themselves a year by which they would want to achieve a net zero target and previously they had compensated for the portfolio emissions like many other financial institutions or other companies for that sake, both in past and present. And so they would buy carbon credits to offset the emissions of their portfolios. But this strategy is suboptimal and instead they should try to change their actual portfolio makes to invest in less carbon intensive asset classes or invest in sequestration. And greenhouse gas accounting helps track this effort credibly.

[00:16:27.090] – Elisabeth Resch
That’s interesting. I’m also wondering because many of our listeners follow this podcast because of energy efficiency and hearing you talk makes me wonder where do you see the carbon footprinting work that you do? Where does it come in when it comes to tracking energy efficiency improvements or making any decisions, let’s say between two alternatives or energy efficiency investment, how can it be used?

[00:16:51.570] – Vanja Elizabeth Wylie
So, LCA or carbon accounting, it allows you to quantify the emission reduction of an energy efficiency investment or improvement. And it also allows for a holistic perspective in weighing decisions, namely a lifecycle perspective on products or any asset. If you only looked at the energy performance in a building or a laptop, you might conclude that they are better from a climate standpoint and call it a day. But that’s not all that there is to it. Energy efficiency labels reflect energy efficiency efficiency performance and that is valuable. But whether it is a building or a laptop. From a greenhouse gas perspective, what matters is not just the operational carbon, that is, the carbon emissions from operating said building or laptop, but it also the embodied carbon, which is the carbon footprint associated with the building or a laptop’s material carbon footprint. That what went into producing it and so on. All of the manufacturing and these things. So taking a life cycle perspective is valuable to arrive at informed decisions regarding greenhouse gas performance, taking into account greenhouse gas driving factors other than energy efficiency. This is factors such as durability and recyclability of materials, which is important to consider. And there are a few examples that we can look to. So for example, environmental project accelerations EPDs are becoming more and more common, especially for IT equipment such as computers and EPDs are based on full LCAs, so they consider all of the embodied carbon as well as the operational aspects of said computer. And actually, for a computer, the energy used throughout the lifecycle, only about 30% of it comes from use of the computer. So if you can just extend the lifetime of a computer by one year, that will have a huge impact on the emission reduction that you can do, rather than the actual energy efficiency optimization. And you can see something similar with buildings as well. There has been a lot of focus on operational emissions of buildings, but the embodied carbon consists of a far greater portion of the overall emissions throughout the life cycle. And especially concrete and steel are known for being high emitting sectors, which is used for pretty much every building.

[00:19:40.520] – Elisabeth Resch
That’s fascinating. Thank you for explaining it. I wish you well with the future of your carbon accounting work, both in financial institutions and otherwise, and I hope that you can join us again. Thank you.

[00:19:52.900] – Vanja Elizabeth Wylie
Thank you very much for having me.

[00:19:59.230] – Aristeidis Tsakiris
Thanks for listening to the podcast “Informed Decision Making on Portfolio Decarbonization Using Greenhouse Gas Accounting and Lifecycle Analysis” with Vanja Elizabeth Wylie and Elisabeth Resch. If you like our show, share it on your social network. And if you want to know more about today’s topic, please check the Copenhagen Centre on Energy Efficiency web page. Stay tuned and subscribe to receive notification about our next podcast. See you at the next episode. And do not forget, energy efficiency is a journey, not a destination. Cheers.