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Full methodology

May 18, 2021

iClima Team


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Index Curation Full Methodology

1.0 Introduction

This document represents our full methodology, from initial research through company selection and screening to the measurement of impact. A number of articles on our website zoom in on parts of this process, but this is a comprehensive consolidated version. If you have any questions that are not answered here, please do not hesitate to get in touch.

The document is structured as follows:

1.0 Introduction
2.0 Background
3.0 Foundational Research
4.0 Climate Solution Themes
5.0 Vetting Process
6.0 Negative Screening
7.0 Brown Revenue Analysis
8.0 Increasing the Transparency of Borderline Brown Revenue and Negative Screening Cases
9.0 Green Revenue Analysis
10.0 Transition Solutions
11.0 Key Findings: The Changing Colour of Climate Change Mitigation
12.0 Potential Avoided Emissions
13.0 Full Results
14.0 SDG Alignment
15.0 SFDR Screening

2.0 Background

Currently, the research that underpins the majority of ESG investment strategies focuses on minimising ESG risk to a portfolio. At best, it might focus on how companies can minimise harm. Very rarely does it focus on actual solutions. Frustrated with this, we set out to define a new category of ESG investing, one that would reside in between concessional impact investing and this traditional approach. We believe we are pioneering a natural progression for the ESG paradigm, thus terming our approach ESG 3.0.

We believe there has been a major gap between academic and policy-oriented research that is focused on climate change solutions, and the dominant research undertaken within the financial sector. While all evidence, particularly that presented in the IPCC’s sixth assessment report, points to the need for a rapid acceleration of financing towards climate solutions, the Climate Policy Initiative still finds this lacking to the tune of X million. Despite this, the financial sector persists with research intended to identify companies doing less harm, many of which have business models unrelated to climate change. This is evident in the way that healthcare and tech stocks dominate ESG indices. Channelling large amounts of well-intentioned capital into these areas is not going to solve our pressing, overwhelming, environmental problems.

Our contrasting approach, then, flips the focus of sustainable investment from the companies doing less harm to those actively providing solutions.

The cornerstone of the research is the use of Potential Avoided Emissions (PAE) as a metric for impact, allowing us to identify the solutions with the greatest emissions reduction potential. This offers an objective and quantifiable way to decide between investments in terms of climate impact rather than just financials. This forward-looking concept is underpinned by the collection of green and brown revenue data.

Together, these metrics form an innovative approach that captures the holistic purpose of a company in a way that typical ESG indicators such as emission levels or water stress fail to do. For leading companies, climate change mitigation is a revenue generating item rather than just a cost centre. This means the economic incentives of the company are aligned with the broader need to reach Net Zero, rather than the two working in opposition, as is common.

3.0 Foundational research

Collecting & Connecting the Dots; Finding the Relevant Research

According to the UN in 2019, a net reduction in emissions of 7.6% p.a. is required to meet the 1.5°C goal of the Paris Agreement. The UN highlights the importance of action and the perils of inaction, stating: “Today we need to reduce emissions by 7.6% every year… Every day we delay, the steeper and more difficult it becomes. By just 2025 the cut needed would be 15.5 % each year…”.

To find the solutions that will assist the world in achieving this goal, we based our analysis on the following three fundamental sources:

1. Project Drawdown

A thorough and data-driven approach, Project Drawdown is a non-profit research study led by American environmentalist Mr. Paul Hawken. Conducted by global scientists, it identifies and quantifies the potential impact of existing solutions that can bring the world to “Drawdown,” defined as “the point in the future when levels of Greenhouse Gases (“GHG”) in the atmosphere stop climbing and start to steadily decline, thereby stopping catastrophic climate change.”  

2. EU Taxonomy

We triangulated these findings with the EU Taxonomy, which provides screening criteria to define environmentally sustainable activities including climate change mitigation solutions as well as harmful activities.

3. Mission Innovation

To measure the impact of each of the companies in the benchmark, we used the concept of Potential Avoided Emissions and leveraged the framework produced by Mission Innovation in our calculations.  Our data was sourced from publicly available information and, when this was lacking, from the companies themselves that we reached out to while conducting our analysis.  

Key Sources of Research

4.0 Climate Solution Themes

Our analysis of Project Drawdown, supported by the EU Taxonomy, allowed us to draw up a comprehensive list of climate change solutions. Whilst a number of financial products focus on, say, renewable energy or low carbon mobility, few include a holistic set of solutions. We wanted to change that, bringing much needed attention to less glamourous subsectors that are vital in our efforts to decarbonise the economy. Our analysis led us to five core themes, which could be broken down into 29 sub-segments. The solutions in these sub-segments directly enable the avoidance of GHG emissions, the reduction of GHG emissions, improvements in energy efficiency, and/or contribute to carbon sequestration.

4.1 Green Energy

Companies in the Green Energy segment provide or enable renewable energy generation from solar, wind, hydro, ocean, tide, and geothermal sources. Renewable energy generation is a climate change mitigation solution that contributes directly to the reduction of fossil fuel energy generation and GHG emissions.

4.2 Green Transportation

Companies in the Green Transportation segment focus on the climate change solutions that enable the reduction of GHG emissions from fossil fuel combustion in internal combustion engine (ICE) vehicles. The segment also includes companies in public transportation that enable a modal shift from the ownership and usage of private ICE vehicles.

4.3 Water and Waste Improvements

Companies in the Water & Waste Improvements segment provide water and waste management services that enable energy saving, sustainable waste treatment and the avoidance of landfill GHG emissions from decomposition.

4.4 Enabling solutions

Companies in the Enabling Solutions segment cover a wide range of solutions that indirectly enable the reduction of GHG emissions from energy generation, combustion in ICE vehicles, and the operation of buildings and industrial processes.

4.5 Sustainable Products

The Sustainable Products segments covers companies that offer products from sustainable raw materials, or products that enable the reduction of GHG emissions in the production, use and/or end of life phase.

5.0 Vetting Process

Having outlined the potential universe of solutions, we proceeded to identify the companies that would best represent each segment, offering the most potential to cut global emissions. Our vetting process is shown in the schematic below. The remainder of the document proceeds as outlined here.

6.0 Negative Screening

To gain a holistic picture of companies in our potential universe, and to ensure that they are not engaged in environmentally harmful or controversial activities, we undertake a negative screening exercise to:

  • Section 6.0: identify and exclude companies that produce alcohol, tobacco, armaments, gambling and adult entertainment (detailed overview of negative screening rules can be found here); and,
  • Section 7.0: Identify companies with unacceptable levels of activities that directly contribute to greenhouse gas emissions and climate change, directly compromising our mission.

Here, we outline our negative screening rules, before outlining our process for measuring brown revenue in Section 7.0. Some consolidated cases are provided in Section 8.0 for transparency.

6.1 Negative Screening Rules

  • Companies that directly manufacture and sell any type of armament are not permitted. Specific segments completely unacceptable include nuclear weapons or systems, chemical or biological weapons, landmine, cluster bombs, or depleted uranium weapons.
  • Our Enabling Solutions subsegments encompass battery solutions, electrical equipment, and electrical components. Some companies sell components that are sold to conventional military use.
  • Companies with sales of components that are used for conventional military purposes must have a revenue derived from such customers below 10%. Eaton Corp Limited and EnerSys are two examples of companies in iClima’s universe with such exposure. iClima will monitor the revenue generated by military sales and the companies will be excluded from the universe in cases where the revenue is above our threshold.
Nuclear Energy
  • iClima does not include nuclear energy in its definition of Green Energy, nor sees it as a needed solution to climate change.
  • However, a few companies in our Renewable Energy Assets, Green Utility and Renewable Energy Developer subsegments have revenue generating nuclear assets.
  • Companies that are predominantly renewable energy-based but have nuclear assets that represent less than 20% of their revenue are permitted, in line with the IEA’s 2019 report stating nuclear power represents 18% of total generation in advanced economies.
  • Iberdrola SA and Edison International are examples of companies with nuclear assets that are part of iClima’s universe.
  • Siemens have decommissioned nuclear assets that do not generate revenue. The ownership of decommissioned nuclear assets is not negatively screened.
  • Nuclear is deemed to be neutral as it is not a fossil fuel source.
Waste to Energy
  • iClima does not include waste-to-energy as a desirable solution but as a transitional one (see Section 10.0). However, we do include waste-to-energy revenue of the companies with this type of assets when calculating what we deem to be green revenue.
  • The solution is perceived by leading sustainability investors (a case in point is Breakthrough Energy) as a pragmatic acceptable practice until better technologies are available.
  • Some companies in our Water & Waste Improvement as well as in our Sustainable Forestry subsegment have waste to energy (or biomass) assets.
  • iClima excludes any companies with assets in oil exploration and processing activities.
  • Land property that is leased for E&P activities that are owned and operated by a third party are acceptable.
  • Diesel blended with biofuel is deemed to be a transitional solution and is acceptable. A 10% limit applies to resale of petroleum diesel.
  • In the Renewable Energy Assets and Green Utility subsegments a few companies have peak generators that run on diesel. We have a clear cap on these revenues at 1%.
  • Companies that manufacture back up power products that run on either diesel or natural gas have a revenue threshold of 50% of total sales.
  • No coal exploration or processing activities are allowed for the companies in our universe.
  • iClima Earth excluded renewable energy players with material power generating assets that use coal as a fuel.
  • We make a concession for generators that are predominantly renewable energy players with less than 1% of their total revenue associated with coal-based power generation.
  • A buffer of 1% is applied to such revenue if it is associated with a coal fired power plant that is to be decommissioned within three years. An example of this is Orsted, whose revenue derived from coal generated electricity oscillates around 1% of total revenue. However the company has plans to exit coal completed by 2023.
  • China Longyuan Power Group is predominantly a wind energy asset owner. However, at our first rebalance in 2019, they derived ca.15% of their sales from coal power plants. The company was excluded on that basis.
  • Iberdrola SA has ca. 0.3% of its revenues derived from coal power plants. Under iClima Earth’ 1% concession rule, Iberdrola remains in iClima’s universe.
Natural Gas
  • iClima Earth excluded renewable energy players with renewable energy assets but with the majority of power being generated by natural gas CHP or CCGTs.
  • We make a concession for generators, or companies with gas distribution assets, that are predominantly renewable energy players with less than 50% of their total revenue generated by natural gas power plants.
  • Transalta Renewables Inc is an example of company with renewable generation, but material operations related to natural gas distribution and power generation.
  • Fuel Cell makers that sell equipment that can use natural gas are acceptable, where the technology is transitioning to an application based on biogas or green hydrogen.
Fossil Fuel Association
  • In the Renewable Energy Assets and Green Utility subsegments some companies have transmission and distribution assets. We estimate the electricity derived from fossil fuel sources and have a cap of 40%.
  • Some of the companies in our Renewable Energy Equipment, Pollution Control, Alternative Fuels, Battery Supply Chain, Electric Systems, Energy Efficiency, Energy Storage, Green Finance, Semiconductor Devices, Lighting Systems, Measurement Instruments, Sustainable Infrastructure, Electrical Components, Telepresence, Efficient Materials & Processes subsegments do derive sales to clients involved with fossil fuel exploration, processing or distribution.
  • iClima applies best efforts to identify and quantify the companies generating over 40% of their sales to clients that enable fossil fuel E&P activities.
  • GE and Canadian Pacific Railway are example of a companies that were excluded due to significant fossil fuel association.
  • In our Waste Management subsegment some companies have environmental services provided to E&P companies. We don’t class that as a brown revenue (nor as green).
  • For our EV subsegment, iClima Earth excludes companies generating over 40% of their sales of automotive with ICEs that run on fossil fuel.
  • Hybrid vehicles, Public transit ICE vehicles and ICE carpooling are seen as transitional solutions and are therefore deemed as green.
  • Emissions reductions components sales to ICE makers are defined as green from a transitional perspective. An example of a company in such case is BorgWarner Inc.
  • Companies like Toyota or Volkswagen, albeit with relevant R&D and EV sales growth, are still predominantly ICE automakers. These companies did not merit to be included in iClima’s universe.
  • For our Ride Sharing subsegment, iClima attribute green sales to what is derived from EV based rides with ICE carpooling and hybrid rides seen as transitional.
  • iClima is cognisant of the high ICE usage by the companies in the space, but pledges to get to majority EV based rides in the next decade to justify a concession to the current high ICE exposure.  
  • For our Pollution Control segment, we make a concession and allow companies with substantial sales to fossil fuel related companies, as the pollution control products are pragmatic, transitional solutions for GHG emissions.
Additional Negative Screening
  • iClima’s company selection is based on products and services that can decarbonise the planet. As such, companies with revenues over 1% from direct alcohol production (spirits, beer or wine), adult entertainment, gambling, and tobacco production and sale are not allowed.

6.2 Results of negative screening

The results from our first negative screening analysis are shown in the table below. Data is from 2019.

7.0 Brown Revenue Analysis

We define revenue from the following activities as brown and exclude companies that do not meet the threshold criteria, as shown below.

As part of our Brown Revenues analysis, we estimate the percentage of a company’s total annual revenue that comes from brown activities as defined above. Total annual revenue data for the analysis is taken from the previous years’ financial reports, investor presentations and investor relations contacts. The percentage of brown revenue indicates how material brown activities are for a company in absolute terms and relative to its green activities as well as whether a company should be screened out from selection for our portfolios.

As with our Green Revenues analysis, the accuracy of this exercise depends directly on the level of detail disclosed by each company. Some companies tend to report their revenues at a granular level, for example, based on different types of power generation, products and end markets. For these companies, brown revenue estimates can be precise. However, many companies report their revenue based on business operation segments made up of several products or services that may contain a mixture of brown, green and neutral products and activities.

When there is a lack of disclosed data, iClima gets in touch with companies’ investor relations department to directly request required details. Otherwise, assumptions are made based on knowledge of the market and the companies’ historical operations and data. In some cases, when robust assumptions cannot be made, companies are flagged as “Not Enough Information” (“NEI”) indicating they may have brown revenue with unknown materiality.

To provide more clarity for investors, many corporates could make further efforts to disclose data in a form that makes it easier to understand what drives their main sources of revenue and align their revenue with green and brown activities. This level of granularity varied considerably across the companies that were analysed.

The European Banking Federation and UNEP FI came to a similar conclusion in their 2019 report after testing the EU Taxonomy in their analysis of green business activities. The report found that “the availability and quality of data and information proved to be the most difficult challenge in evaluating Do No Significant Harm (DNSH) criteria, particularly when segmenting alignment by turnover/revenue and in the alignment of SMEs and non-EU based assets.”

Our brown revenue analysis helps us assess the materiality of a company’s harmful activities, allows us to monitor changes in these activities over time and communicate this to investors, while also engaging with companies more effectively on these issues. As such, we believe this approach provides valuable added insight, helps us and the industry avoid ‘greenwashing’ and improves corporate disclosure and transparency, allowing investors to make more informed decisions and navigate them towards being fully green.

While the EU Taxonomy is a widely used tool to help stakeholders identify environmentally sustainable activities, as of March 2021 it does not provide a guideline on brown activities. Our approach addresses this need and we hope to see further consensus on negative screening in the near future.  Given these limitations, iClima uses the EU Climate benchmark as a reference.

The chart below shows the brown revenue of the constituents of our first index, GLCLIMUN, as of our first rebalance in 2019.

In 2019, then, only 2% of companies had a borderline percentage of revenue gained from coal and oil power generation.  One company was engaged in biofuel blending and had retail sales of petroleum diesel. Similarly, only 1% of companies derived close to 50% of their revenues from natural gas-related activities. Around 12% of companies had a reduced association with fossil fuels between 0-25% of their revenue.

8.0 Increasing the Transparency of Borderline Brown Revenue and Negative Screening Cases

After careful revenue and negative screening analysis, we identified a number of companies engaged in borderline brown activities. Some companies are often assumed to be fully green, and their brown revenue is not highlighted by some green ETFs. However, the transition to a green economy will take time and creating a portfolio with only 100% green companies would reduce diversity significantly. We believe it is key to highlight and disclose the companies in our benchmark that do have some brown revenue in order to improve transparency and track their performance over time, making sure they are on the right track to phasing out these activities and actively reducing their exposure to emissions-intensive business lines.

1. Diesel power generation and retail: There are five companies in our universe with legacy operations related to these activities.
  • Algonquin Power Corp, Clearway Energy Inc, Contact Energy Ltd, Orsted A/S, Edison International and Renewable Power Energy Group.
  • We estimate based on company annual reports that revenues from these activities are below 1% of total revenues (FY 2019).
  • We applied a 10% limit on revenues associated with petroleum diesel sales.
2. Coal power generation: There are five companies in our universe that generated some revenues from coal in 2019.
  • Algonquin Power Corp: Decommissioned its last coal plant in March 2020.
  • Orsted A/S: In the process of converting coal fired power stations in Denmark to sustainable biomass. Due to be coal free by 2023.
  • Verbund:  Decommissioned its last coal plant in April 2020.
  • Iberdrola SA: Decommissioned its last coal plants in 2020.
  • UPM Kymmene: lower than 0.25% of total revenue.
3. Gas power generation and distribution: There are companies in our universe that are very close to the threshold of acceptable level of natural gas power generation.  As it is a transitional fuel, in the long run natural gas power generation should be eliminated, and we keep track of these companies to make sure they are on track to phasing it out.
  • Clearway Energy Inc, and Transalta Renewables.
  • Revenue streams from natural gas power generation were estimated to be below 50% of revenue (FY 2019).
4. Association with Fossil Fuels: There is one company in our universe that produces generators - a source of backup power and decentralised energy - that could use natural gas and diesel.
  • Generac Holdings.
  • Generators form the biggest share of Generac’s revenues as of FY 2019. In the same year, however, Generac made valuable acquisitions to move away from fossil fuel-based generators into residential solar and energy storage. This business line is believed to be growing >20% going forward and becoming central soon.

9.0 Green Revenue Analysis

Our goal of identifying the solutions that enable emissions avoidance requires that we estimate green (desirable) revenue as well as brown (undesirable and often unacceptable) revenue. Green revenue is defined as the total or percentage of sales that are derived from environmentally sustainable solutions that enable avoided emissions. Our Green Revenue Assessment tool therefore allows us to evaluate the materiality of a company’s exposure to climate change mitigation solutions. We use company financial reports, investor presentations and information received from a company’s investor relations team to calculate the percentage of the company’s total revenue that comes from climate change mitigation solutions.

The concept of green revenue emerged in response to the growing popularity of thematic investments claiming to have a positive impact on the environment. However, there has been a lack of a systematic, universal standard to identify and measure green business activities that can help to navigate investors away from greenwashing and hype. The EU Taxonomy was created in response to that problem, in order to provide rigorous granular criteria for business activities that contribute to one of six environmental objectives including climate change mitigation. From 2022, large companies and financial product providers in the EU will also be legally obligated to disclose how their activities are aligned with the EU Taxonomy. As companies are not yet reporting in line with the new requirement, data is often not available and needs to be estimated.

The main challenge we came across in our green revenue analysis effort was the lack of granular data required to accurately classify company business lines as aligned with green criteria, a challenge that has been echoed by many investors and highlighted by research from FTSE Russell:

“Less than 30% of companies with green revenues provide disclosures that are granular enough to allow investors to systematically break out and quantify companies’ green business activities”

The chart below shows the green revenue of the constituents of our first index, GLCLIMUN, as of our first rebalance in 2019. We divide companies into ‘Pure Players’, ‘Majority Players’, ‘Partial Players’ and ‘Upcoming Players’.

As shown above, 44% of companies in iClima’s benchmark are ‘Pure Players’, defined as those with green revenue accounting for more than 90% of total company revenue.  Majority Players (28%) are classified as companies with green revenues representing between 50% and 90% of the total. Partial Players (23%) have between 20% to 50% of revenue defined as green, while just 5% of companies are Upcoming Players, with 20% or less of their revenue derived from green solutions but demonstrating high growth in these areas.

9.1 Materiality Testing for Green Revenue

We are aware of the fact that many companies are developing new solutions and product lines that contribute to enabling CO2 avoidance. That means that in some cases the revenue derived from what iClima deems to be “green solutions” represent less than 20% of a company’s total revenue.  In these cases where company reporting makes this percentage difficult to ascertain, iClima looks at several indicators to assess if a green solution, although possibly representing less than 20% of a “Climate Champion’s” revenue, is a relevant part of the business:

  • Growth rate rule: When data is available, iClima looks at the CAGR of the product revenue line. If the CAGR for previous years is in double digits, the green solution is defined as an “up and coming”.
  • Segment growth rule: iClima also looks at the overall reported annual growth in the reported segment of where the green solution is accounted. If year over year growth of the segment is in double digits, the green solution is defined as “up and coming”.
  • Xiaomi Corp is a case in point. The company is predominantly a smartphone producer. However, its IoT and LifeStyle products are growing segments with relevant green solutions, such as their foldable electric bike, LED smart lighting and Xiaomi Ecosystem products.
  • Relevance: The product & service deemed green shall represent a product line that is a material segment for a company.
  • Microsoft Teams is not a stand-alone product and Telepresence is not a segment that Microsoft discloses and refers to as a key revenue line. Therefore, Microsoft was not considered for a Telepresence solution within iClima’s universe.
Further Tests  
  • Companies need to be revenue positive to be part of iClima’s universe.
  • At the time of launch Nikola Motor was not, and although their solutions are in line with the subsegments we deem to have potential to decarbonise the planet, it is currently not part of iClima’s universe.
  • Companies with three consecutive fiscal years of negative revenue growth are excluded, with a concession for companies that have restructured operations, shifting strategy and product lines towards more relevant carbon avoidance solutions.
  • A company must have a market capitalisation above US$200 MM to be considered to iClima’s universe.

10.0 Transition solutions

Our comprehensive benchmark includes a diverse range of key zero or low emission solutions that go beyond renewable power generation. These include high-performance glass, insulation, LED lighting, transportation solutions (electric vehicles, public transportation and EV car pooling), plant-based-diet products, telepresence, heat pumps, and electric trains. However, iClima also includes some technologies defined as Transition Solutions (“TS”); these “regrettable” solutions are pragmatic solutions that are needed until technology evolves. TS reduce emissions through avoidance but also create emissions through their processes. These solutions include waste incineration and waste-to-energy technologies, fuel cells using natural gas and diesel, bio-diesel, brown hydrogen, and ICE car-pooling. We expect, however, these technologies to be used only in the short term, and that they will shift towards low-carbon alternatives. Many are highlighted at the end of the section entitled ‘brown revenue’, with a comprehensive list of those in GLCLIMUN in the master table entitled ‘2019 GLCLIMUN Full Results’ in section 13.0.

11.0 Key Findings: The changing colour of Climate Change Mitigation

iClima wants to identify and represent the companies with relevant green revenue while minimising exposure to brown activities, especially holdings of emissions-intensive power generation. The holistic results of our first analysis of the holdings in GLCLIMUN are shown below.

Based on this 2019 revenue analysis, the majority of companies (71%) in iClima’s benchmark are not engaged in any brown activities and 44% are pure green players with green revenue exceeding 90% of total revenue. Providers of Transition Solutions comprise 8% of all companies.

After identifying the relevant solutions that can bring the planet to carbon neutrality, we focused on finding the companies at the forefront of climate innovation that could bring these solutions to fruition. Our methodology attempts to maximise green revenue with minimum levels of brown revenue, as we recognise that many relevant solutions are being sold by companies with some historical ties to the oil & gas industry. Not all green companies are like Tesla (100% green revenue and zero brown). At iClima we believe that some levels of brown revenue is acceptable at this stage of the transition to a greener planet, and is often necessary to activate and support innovation until greener solutions can be more widely implemented.

In total, 25% of our current holdings have some brown revenue with 5% at the borderline of acceptable thresholds. We also identified that for 4% of companies there is not enough information (labelled as NEI in our visualise to analyse table entitled ‘2019 GLCLIMUN Full Results in Section 13.0) to evaluate levels of their brown revenue.

The world is transitioning to a low carbon economy, and we expect many companies in our universe to significantly reduce their brown revenue in the next few years to lead the transition. Many of the companies in our benchmark have already made relevant pledges and set effective targets. That is why by 2030 we expect to have significantly minimised exposure to brown activities in our benchmark, while maximising dark green activities.

There are a few companies in iClima’s benchmark that derived a small percentage of their 2019 revenue from emissions-intensive coal power generation and oil & gas upstream activities but that have successfully moved away from such operations, moving towards greener solutions.  This is particularly the case for a company like Ibedrola, which has been on path to phase out of coal since 2001 and became coal free in 2020. Companies like Siemens AG and Schneider Electric are similar examples. In 2020, Siemens AG became more ‘green’ after its spin-off of Siemens Energy, which included its fossil fuels business lines, in order to focus on digitalisation, smart infrastructure and mobility.

In the case of Schneider Electric, it produces valuable innovative industrial automation and power management systems as well as software and data management solutions boosting energy and resource efficiency. These solutions, however, are still also applied in the oil and gas industry, helping to refine crude oil and produce LNG. Importantly, this association was significantly reduced in recent years and now forms a minor share of Schneider’s revenue, at less than 30%.

Some companies are in the process of leveraging existing distribution channels to push sales of greener solutions, while still deriving some revenues from fossil fuel-related products. This is the case for Generac Power Systems, a leading producer of residential and commercial backup power generators. As of 2019, the company has made 14 acquisitions since 2011. Since 2019, the M&A focus has been on green solutions, such as Neurio Technology Inc. and Pika Energy in 2019; and Mean Green Mowers and virtual power plant software provider Enbala in 2020. This accelerated Generac’s entrance into the residential solar energy storage and energy monitoring markets. Generac is committed to transforming its business model and shifting from an upcoming green player to a pure player. We are currently assessing the company’s shade of green revenue and the impact of its recent acquisitions.

12.0 Potential Avoided Emissions

12.1 Introduction to PAE

iClima’s solution-oriented approach allows the identification of the companies that are “climate champions” – those delivering impactful solutions measured by the GHG emissions avoidance potential of the products. A fundamental shift happens if more capital flows into the segments that support the transition to a low carbon economy, accelerating the uptake of existing individual and system solutions, and encouraging the development of new solutions. The assessment of GHG emissions avoidance (CO2e avoidance) will provide a quantitative measurement of the climate impact, or decarbonisation potential, of the “climate champion” companies.

Put simply, iClima’s approach allows a shift in narrative, helping investors to identify who is “doing more good” rather than who is “doing less bad”. We believe that very relevant investment products can be built by focusing on the companies enabling CO2e avoidance through their products. We identified the climate champions through a rigorous rules and fact-based vetting process. The question then became: how much CO2e avoidance can these solutions deliver?

iClima wants to quantify the impact of the universe of companies that are part of its innovative equity benchmark. Moreover, we want to compare the universe’s total estimated CO2e avoidance in 2020 to the amount of CO2e, estimated by iClima, that needs to be avoided in the year. By doing that we want to answer the question of how impactful are the solutions of the companies we have selected and focus on the number that we should all have clear in our minds – the CO2e that needs to be avoided per year. Like a long car trip, or a diet with the aim to lose material body weight, the target needs to be a specific figure and the plan needs to be quantified and milestones determined.

12.2 Defining PAE

Avoided emissions are emission reductions that occur as a result of a solution product or service that provides the same or similar function as existing products in the marketplace but with significantly less GHG emissions, or enables the emission reductions of a third party (Avoided Emissions Framework, 2019). Avoided emissions can appear in any stage of the solution’s life-cycle and in Scope 1, 2 and/or 3, depending on the type of product or service offered and how it affects the third parties’ value chain.

Following the definition, avoided emissions can be translated into a formula as the difference between GHG emissions from a business-as-usual (BAU) baseline scenario and GHG emissions from a climate change solution enabled scenario:

Net Avoided Emissions = BAU Baseline Emissions – Emissions of the Solution Enabled Scenario


  • The BAU baseline emissions are GHG emissions that would have occurred in the absence of the enabling solution.
  • The solution-enabled scenario is where the enabling effect takes place. The enabling effect is the avoided emissions from replacing the BAU with the climate change mitigation solution.

Emissions are measured in tonnes of CO2 equivalent (tCO2e) which is the functional unit for quantifying the per unit impact of greenhouse gases, relative to one unit of carbon dioxide (CO2). This functional unit of measurement is applicable to the six GHGs covered by the UN Framework Convention on Climate Change (UNFCCC): carbon dioxide (CO2) methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).

For our analysis, we focus solely on the primary enabling effect, which is the immediate effect of products and services sold and used on an annual basis. The complete life cycle emissions throughout the lifespan of solutions and rebound effects are not yet part of the analysis due to the lack of required data in public domain. Nevertheless, Scope 1 and Scope 2 emissions disclosure and the emission reduction targets of the portfolio companies are part of the analysis and score cards developed by iClima Earth.

12.3 PAE Methodology

The Avoided Emissions Framework outlines the general method for calculating CO2e avoidance for a solution in the following way:

“Each individual enabling solution is assessed by determining a carbon [avoidance] factor that reflects the net avoided emissions per unit of the solution implemented.”

For example, for video conferencing this would be the avoided emissions per video conference measured in kgCO2e per video conference.

Similar to an ‘emissions factor’ in product footprinting which is multiplied by activity data to give overall product emissions, a carbon avoidance factor is a normalised value that allows for comparability across assessments and studies.

To calculate overall CO2e avoidance of a solution over a specific time period, the carbon avoidance factor is multiplied by the volume of the solution deployed. iClima uses annual sales volumes to allow comparability across solutions.

In practice, calculating the carbon avoidance factor is complex and should be based on existing academic or industry studies where available, or otherwise based on data or supported assumptions that demonstrate the carbon avoidance. The carbon avoidance factor could also vary regionally to reflect local emission factors and vary depending on the solution applications.

iClima’s methodology is based on the outline provided by the Avoided Emissions Framework and contains the following steps, which are shown in the following schematic and outlined in more detail below:

1.Identify the Solution

An initial analysis of a portfolio company is carried out to identify the solutions it provides that enable significant reduction of emissions to the third party relative to the equivalent conventional average market product. This can be done via a rough calculation of the avoided emissions of possible solutions to determine which merit further investigation.

Prior to that, all companies in the portfolio go through iClima’s vetting process and are analysed in terms of their attribution to iClima’s climate change solutions and segments that were based on Project Drawdown and the EU Taxonomy. The vetting process ensures that each company successfully meets our negative screening criteria and generates a material share of its revenues from solutions that help to decarbonize the planet by 2050 not only through the reduction of its own carbon footprint but rather by providing the means for others to get on the track to the net zero world.

2.Establish CO2e Emissions Avoidance Source and Mechanism, System Boundary, and BAU Baseline

2.1 Establish CO2e Emissions Avoidance Source and Mechanism

The source of the GHG avoidance is where the enabling effect takes place. Where possible this is identified by looking at the complete life-cycle of the solution. The enabling effect can occur in various life-cycle stages, for example:

  • Use stage: where the avoidance of emissions takes place during the use of the electric vehicles instead of an internal combustion engine vehicle;
  • Production stage: where emissions are avoided producing the materials used in production of a plant-based burger compared to a beef-based one.

As such, the products and services are analysed across the following product life-cycle stages to identify sources of emissions and the potential enabling effect of climate change solutions:

  • Material acquisition & pre-processing
  • Production
  • Distribution & storage
  • Use-phase
  • End of life

Based on iClima’s climate change solution segments, we focus on four primary mechanisms of carbon avoidance:

  • Direct reduction of GHG emissions from fossil fuel energy generation and burning, landfill decomposition, chemical water treatment and use of livestock
  • Enabling of solutions that provide a direct reduction of GHG emissions
  • Enabling of energy efficiency
  • Carbon sequestration

2.2 Establish System Boundary

For each solution a boundary level is defined and set. The boundary refers to the set of processes, activities, sources/sinks, or life-cycle stages that are part of the assessment (GHG Protocol, 2019). Therefore, the carbon avoidance for companies in the same segment and the enabling effect of their product is calculated using the same boundary. Following Schneider (2019), iClima differentiates between the following boundaries:

  • Product-level: The boundary can be set to the product itself, looking at the energy consumed over the product’s end use or GHG emissions produced preparing raw materials.
  • System-level: The boundary can be defined as the system in which the product is included, for instance building operations or industrial processes.
  • Ecosystem-level: The boundary can be defined as a larger ecosystem, for instance when the offer enables a superior quality of service and operation to a network, thanks to increased connectivity and managing capabilities.

2.3 Establish BAU Baseline

The business-as-usual (BAU) baseline scenario or reference baseline is decided for each segment depending on the solution, end user segments and geographies (Avoided Emission Framework, 2019).

First, all alternative scenarios are identified based on the alternative solutions on the market, average market penetration of the offer, other available technologies, regulatory requirements, and innovations.

The scenarios are then screened based on the barriers that limit the possibility of those scenarios to occur. The most probable baseline scenario is chosen.

As data quality and availability improves, it may be possible to update baselines for the next iteration of the CO2e avoidance calculation exercise.

3. Initial Documentation of Methodology and Identifying Data Requirements

The carbon saving mechanism and the calculation methodology are documented. This helps to formalise the process, allows the methodology to be reviewed, and identifies what data is required for the calculation. We intend to be constantly refining and documenting the methodology.

4. Test Mechanism and Methodology

Independent review of the methodology is sought. Subject specialists have helped us to test that assumptions and proposed methodology are valid and reasonable.

5. Identify Studies and Determine the Carbon Avoidance Factor

By using public domain and directly contacting investor relation representatives (IRs) of companies, sources of information needed to make the calculations are identified. Data needed can include:

  • Product-level: Data needed to calculate the carbon avoidance factor or emissions factors for the solution and BAU system (at a regional or global scale)
  • Product-level: Annual volumes of solutions sold by each company.

Primary sources of data are estimations disclosed by companies as well as sales volumes shared with iClima through a direct engagement with the universe companies.

In case primary data is not enough for calculation, publicly available secondary sources are used. Examples of open sources used are market studies, field research, expert estimates, technical standards.

6. Collect Data (for Volumes and Carbon Avoidance Factor)

The relevant data is collected, taking care to note the source and any relevant assumptions or specifics of the data. For example, if the data is based on a study focusing on a particular region or product variant.

7. Calculate Carbon Avoidance

Based on the data available, the carbon avoidance calculation method is chosen and used. Detailed overview of the methodologies used for different climate change solutions can be found further below.

8. Results Evaluation and Validation of the Process

Findings are reviewed, methodology is documented, including assumptions and data sources in a way that would be straight forward for an independent party to replicate. In case the company discloses its CO2e avoidance figures, the company’s methodology is evaluated to ensure consistency with estimated results and alignment with considered climate change solution products & services.

12.4 PAE Examples

The table below shows some common examples of PAE. This is followed by a more in depth case study. In preparation for Gabriela’s presentation at COP26, the team constructed five our most comprehensive assessments yet, which are presented as infographics here. We would encourage you to take a look a them, and watch the Gaby’s full presentation here.

EVs x ICEs – A Specific Case that Demonstrates the Methodology and its Relevance

The below example illustrates how we apply the PAE methodology in the case of an EV, compared to a traditional Internal Combustion Engine (“ICE”) car.  PAE is based on the annual difference in emissions in the use phase of a company’s EV and its closest ICE alternative, where emissions from the ICE arise from fuel combustion and the emissions from the EV are based on the electricity used to charge the vehicle.  Emission assumptions for the EV would include variations by region to account for the different sources of electricity generation in the grid. This annual avoided emissions number for a single vehicle can then be multiplied by the number of EVs sold by the company in the previous FY as reported in its financial statement to give an estimate of the annual avoided emissions for the company in that year (as outlined below).

A Simplified Example of a CO2 Avoidance Calculation: EVs x ICEs

A spotlight on carbon avoidance shifts the focus away from companies trying to reduce their direct emissions (often via power purchase agreements, or PPA’s, with renewable power generators), to companies offering products and services that provide emission avoidance solutions. We believe this fundamental shift in focus will allow more capital to flow into the segments that support the transition to a low carbon economy, accelerating the uptake of existing individual and system solutions which will further encourage the development of new solutions.

Potential Annual Avoided Emissions from Electric Vehicles – The Tesla Case

  • Tesla delivered 500,000 cars in 2020 and expect to deliver 20 million cars per year before 2030.
  • This implies a 44.6% CAGR and 63.7 million cars delivered over this period.
  • These 63.7 million cars would avoid 158 million tonness of CO2e per year in tailpipe emissions compared to equivalent ICE vehicles if they were all produced today.
  • If we compare this to the ~30 gigatonnes of CO2e reduction in annual global emissions needed by 2030, these vehicles would contribute a significant 0.5% of the reduction needed from 2020 to 2030.
  • If we assume that all of the 380 million EV’s in IRENA’s World Energy Transitions Outlook were Teslas produced today, these cars would contribute 3.1% of the reduction in annual emissions needed from 2020 to 2030.

*Assuming the same Tesla product mix, baseline comparison fossil fuel vehicles and emissions factors as per iClima’s 2019 estimate.

Note: This estimate focuses on use-phase emissions in the 1st year of purchase, so does not count the significant continued emissions avoided in the subsequent years of the electric vehicle’s operation.

13.0 Full Results

iClima uses a visualise-to-analyse approach to demonstrate our revenue analysis and PAE findings. This approach gives investors a quick and easy way to assess and compare the percentage of each company’s annual revenues that come from climate change solutions.

We use coloured bars to represent a company’s green or brown revenues as a percentage of total revenue. The letter “D” next to these bars indicates sufficient company-disclosed revenue information to fully assess their green and brown revenue activities.  An “E” represents companies for which there was insufficient company information and industry data and reports had to be used to partially or fully estimate the percentage of green or brown revenue.

2019 GLCLIMUN Full Results

14.0 SFDR Screening

Having gone through the process of screening and compiling an index once, we re -appraised our methodology in Spring 2021, taking note of the following: from December 2022, the EU Sustainable Finance Disclosure Regulation (SFDR) will require all small and medium sized Financial Market Participants (FMPs) to disclose how they incorporate ESG risks into their methodology. While our purpose was always to lead with climate impact, we saw this as an opportunity to ensure that our wider systems impact was aligned with the SDGs and the world we want to live in. We therefore undertook the SFDR process ourselves over a year before mandated to do so. It involved analysing the companies in our fund against fourteen set Principle Adverse Impact Indicators (PAIs). These are as follows:

Climate and other environment -related indicators:

1. Greenhouse Gas (GHG) emissions

2. Carbon Footprint

3. GHG intensity of investee companies

4. Exposure to companies active in the fossil fuel sector

5. Share of non -renewable energy consumption and production

6. Energy consumption intensity per high impact climate sector

7. Activities negatively affecting biodiversitysensitive areas *

8. Emissions to water

9. Hazardous waste ratio

Social and employee, respect for human rights, anti - corruption and anti -bribery matters:

10. Violations of UN Global Compact principles and Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises *

11. Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines for Multinational Enterprises *

12. Unadjusted gender pay gap

13. Board gender diversity

14. Exposure to controversial weapons (antipersonnel mines, cluster munitions, chemical weapons and biological weapons)

Having engaged multiple ESG providers, we chose S&P Trucost due to its disclosure of raw indicators rather than being largely reliant on a scorecard based system. The starred PAIs above are those not provided by Phase 1 of S&P Global Data. Additionally, the SFDR requires disclosure on two further indicators, which the FMP can choose.

Two of the fourteen mandatory indicators contain criteria that would require the exclusion of the holdings from our indices. These are exposure to controversial weapons, and forced or child labour. Where companies are performing particularly poorly against other indicators, we aim to engage them and try to influence the issue. If change is not forthcoming then we may exit the investment, but we believe that in these cases engagement is more effective than immediate divestment, particularly at this stage of the low carbon transition when there is still much ESG -agnostic capital around which could easily sustain the company and its poor practice.

15.0 SDG Alignment

We believe capital markets can be a source for good.  Our laser focus at iClima Earth is to find companies that can decarbonise the planet with their products and services.  This not only means these companies make a significant impact by enabling emission reductions, but also means they are poised for growth as they deliver the tools the world needs in its shift to a low-carbon economy.  Similarly, we believe companies that contribute to a greater good, with a responsibility to their employees and communities, will have both an impact on the world around them as well as a greater chance of success in the long term.  For this reason, we carried out an exercise to gauge the alignment of our portfolio with the Sustainable Development Goals.

Established in 2015, the 2030 Agenda for Sustainable Development provides an action plan to resolve global economic, social and environmental challenges and achieve a sustainable future. The agenda includes the United Nations Sustainable Development Goals (SDGs) that consist of tangible universal aspirations, divided into 17 goals, 169 associated targets, and 230 individual indicators.

SDG alignment has become an important exercise for investors hoping to mobilise capital to achieve sustainability. A study by the United Nations Conference on Trade and Development (UNCTAD) shows that achieving the goals “will take between US$5 to $7 trillion, with an investment gap in developing countries of about $2.5 trillion.”

15.1 Findings

As a result of our screening processes, we found in 2019 that all of our companies contribute to SDG 13: ‘taking urgent action to combat climate change and its impacts’. Criteria for contributing to this goal, as provided by the SDG Compass supported by the UN Global Compact, are as follows:

“Companies can contribute to this SDG [13] by decarbonising their operations and supply chains through continuously improving energy efficiency, reducing the carbon footprint of their products, services and processes, and setting ambitious emissions reductions targets in line with climate science, as well as scaling up investment in the development of innovative low-carbon products and services. In addition, companies should build resilience in their operations, supply chains and the communities in which they operate.”

The companies in our benchmark particularly contribute by providing innovative low -carbon products and services that serve as alternatives to those with higher emissions. That is why we believe that 100 % of our companies contribute to SDG 13. The SDG targets provide a description of results to be achieved by 2030 within each goal, with clear cut indicators used to measure progress toward each target. Once again, we used a tangible, revenue focused approach to map green revenue onto SDG targets, to see how our companies were contributing to a holistically sustainable world.

The chart below shows the results from fiscal year 2019 for reference. We are proud of our findings and plan to re -do this valuable exercise in 2022.

iClima Team, 2022

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