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 to the Sustainable Development Goals.
The 2030 Agenda for Sustainable Development established in 2015 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.”
While there is strong consensus on the relevance of the 17 goals, there is less agreement in terms of how to estimate a company’s alignment to a goal. All the companies in our portfolio contribute to SDG 13: taking urgent action to combat climate change and its impacts. While the indicators of this goal are aimed at local and national governments with respect to their policies, we’ve been led by the advice provided by the SDG Compass supported by the UN Global Compact on how to interpret this SDG for companies:
“Companies can contribute to this SDG  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 100% of our companies contribute to SDG 13.
To assess how our companies are aligned with the rest of SDGs we applied the same approach we use for measuring decarbonisation impact - aligning a company’s revenue to the goals. We developed a framework to assess SDG alignment by evaluating in detail how each company’s revenue contributes to each SDG target.
Our definition of what constitutes green activities is inspired by Project Drawdown’s findings of the most relevant and effective climate change mitigation solutions, in combination with the EU Taxonomy on environmentally sustainable activities. iClima incorporated, with equal representation across companies, a comprehensive set of relevant mitigation solutions that have a direct and indirect impact on the amounts of Greenhouse Gases (GHG) emitted. These solutions are represented in the iClima Global Decarbonisation Enablers Index across five segments: Green Energy, Green Transportation, Water & Waste Improvements, Enabling Solutions and Sustainable Products.
We assessed all green products across these segments and then mapped them against SDG targets and indicators. 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. Some SDGs target the development of country policies or are applicable for developing countries. We aligned companies’ solutions only with targets applicable to the private sector. The only exception is SDG 13 because climate action is at the heart of iClima’s operations, and all of our constituents contribute to climate change mitigation.
We focus only on the primary impact of the solutions produced and sold by the companies. The impact of companies is measured using revenues from the green activities and for this exercise we used fiscal year 2019 revenue data. iClima also used publicly available research and SDG frameworks.
Using iClima’s definitions of green products and associated revenues, we mapped companies’ revenues from green activities with SDG targets, focusing on direct impact only.
The diagram above represents our findings and shows the weighted average percentage of companies’ revenues exposed to SDGs in each segment. All 157 companies currently in our index contribute to at least one goal, with different materiality, that is also reflected by the diagram. For example, in the Green Energy sector, although all companies contribute to Goal 7, on average, 65% of the companies’ revenues in the segment are aligned with such goal.
Our key findings of quantifying the alignment of iClima’s Decarbonisation Index constituents with the SDG are as follows:
The pie charts above show iClima's alignment with SDGs based on the number of companies. Overall, based on the SDG Compass definition, all 157 constituent companies are aligned with SDG 13. Using the revenue based approach, we conclude that all companies contribute to at least one SDG, some companies contribute to more than one goal. This is because some goals have similar targets and indicators such as SDG 7 and SDG 9 with regards to energy efficiency. In other cases, companies are engaged in more than one green activity. You can find detailed company specific SDG alignment findings below.
In the table below, we summarise each of the relevant SDG goals and how it applies to each of the five segments in our index.
Our main goal is the decarbonisation of our planet and we believe a methodology that allows us to determine what companies are driving avoidance of CO2 is fundamental. We refer to the companies in our universe as the “climate champions”.
Evaluating net impact for the “climate champions” towards the sustainable development goals enables us to further qualify the nature of their impact and its materiality. This exercise is not static but dynamic. It requires high quality corporate disclosure and constant improvement in the guidelines of SDG alignment.
The approach we have put in place and summarised in this article is very robust and consistent with iClima’s green and brown revenues analysis. The combination of both metrics gives a holistic picture of companies’ economic activities and impacts. Our revenue-based approach makes it possible to compare contributions to SDGs from different companies.
Credibility of the approach to the SDG analysis is key to avoid so-called “impact washing”, as highlighted by OECD and MSCI in their collaborative paper on SDG Investing. To ensure credibility, the impact analysis framework should be “robust, easy to understand and transparent”. We share our findings, open source, and invite companies to review our conclusions and to engage with us towards further refinements.