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April 8, 2021
iClima Team - Rina Cerrato, Gabriela Herculano, Gary Hart
The methodology developed by iClima Earth was inspired by the work of Project Drawdown, a collaborative research publication by a team of over 200 scholars, scientists, policymakers, business leaders, and activists. Drawdown identified the most substantive, technologically viable and existing solutions to global warming that would help the world reduce greenhouse gas emissions (GHG) and avoid catastrophic climate change. iClima Earth has identified a unique approach to portfolio construction, placing a spotlight on the companies actually providing solutions to climate change through their products and services and highlighting the scale of their impact through assessment of their GHG emissions avoidance potential.
With a pressing urge for an acceleration of global climate action, iClima’s approach provides a much-needed change in tack, viewing the issue from a new angle and differing from the dominant approach of climate change mitigation initiatives that focuses on the issue of company emissions – a problem which must be reduced or offset (Avoided Emissions Framework, 2019). iClima shifts the focus from companies’ direct emission reduction actions, to companies offering products and services that provide emission avoidance solutions.
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.
Why CO2e Emissions Avoidance? What about Carbon Footprint?
Assessment of climate change risks and impacts on business operations and GHG emissions disclosure have gained traction since the Paris Agreement entered into force in 2016 with the target of “Holding the increase in the global average temperature to well below 2 °C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 °C”.
Stakeholders’ increasing awareness, Task Force on Climate Related Financial Disclosure (TCFD) recommendations backed by the Bank of England, UNEP FI’s Net Zero Alliance and many more initiatives in the financial field have helped accelerate the transition to low carbon, rewarding companies’ emissions reduction actions and increasing data transparency in the financial industry. These are positive steps towards companies’ emissions reduction to net zero, yet looking at the problem from a new angle has great potential to yield improved results.
Research carried out by the Grantham Research Institute on Climate Change at the London School of Economics, commissioned by the Transition Pathway Initiative, states that only 18% of companies in their study group representing 40% of global emissions were found to be reducing their emissions at the rate necessary to meet the 2°C target of the Paris Agreement (TPI, 2020). This calls for increased efforts towards a net zero decarbonisation path, but also shows that more action and new approaches are needed.
The emissions reductions approach is only part of the solution. As advocated by the Avoided Emission Framework, a shift to low-carbon will require “new approaches driven by companies delivering innovative and disruptive solutions that will bring significant changes in societal behaviour and overall reduction in emissions”. It will also require new robust ways to measure the climate impact which is not possible with the static and backward-looking carbon footprint methodology the majority are using today (Vontobel, 2018).
This is the gap in the market that iClima Earth aims to fill, by taking a solution-oriented route to navigate investors towards the enablers of the transition to a net zero emissions world. Our “climate champions” are companies that provide real solutions to climate change and have a significant impact measured by GHG emissions avoided as a result of their use.
Avoided emissions are emission reductions that occur as a result of a solution product or service (GHG Protocol, 2019) that provides the same or similar function as existing products in the marketplace but with significantly less GHG emissions or enables 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 scenario:
Net Avoided Emissions = BAU Baseline Emissions – Emissions of the Solution Enabled Scenario
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 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, the Scope 1 & Scope 2 emissions disclosure and emission reduction targets of the portfolio companies are part of the analysis and score cards developed by iClima Earth.
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:
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:
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:
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
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:
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:
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.
Figure 5: iClima segments
Challenges and the Future of CO2e Avoidance
The accuracy and reliability of the CO2e avoidance calculations depend heavily on the levels of uncertainty of the required components and assumptions around them for the calculation. That is why, as advocated by the Avoided Emissions Framework, we apply the appropriate level of detail to data gathering from reliable sources and calculation, ensuring validity of our assumptions and compatibility and transparency of our results. We believe that our findings reflect the order of magnitude of avoided emissions and which will still prove to be a useful indicator to measure the avoidance contribution of products and services. As necessary data becomes more available in the future, the calculation processes and results will get easier and more accurate.
Some organisations in sectors such as renewable energy and energy efficiency have been publishing their avoided emissions for many years as a way to highlight their emissions-friendly activities. Similarly, green bond issuances and organisations like development banks use the approach to justify the sustainability of projects applying for financing. The Avoided Emissions Framework envisions that in the future, companies could report avoided emissions for more of their solutions and even for the company as a whole that could then be used by investors and analysts to help understand companies’ potential to succeed in the transition under different climate impacts scenarios.
Often avoided emissions are the result of multiple products or services working together (Avoided Emissions Framework, 2019). Therefore, one solution alone is not responsible for all the avoided emissions.
For example, videoconferencing has an enabling effect through avoiding the requirement to travel for a business meeting. For the video-conference to take place we can assume that the following is necessary: the video-conference equipment, the software running on the equipment and the telecommunications network. Without any one of these technologies, the video-conference would not be able to happen. Thus, they all have a fundamental role in enabling the avoided emissions.
In this telepresence example, all three companies (the equipment provider, the software provider, and the telecommunications provider) could claim the total avoided emissions, thereby double counting, or overstating avoidance:
To overcome this, avoided emissions must be proportionally allocated to each company. However, there is currently no consistent way to allocate avoided emissions, thus it is common practice to attribute all of the avoided emissions to a solution where that solution has a fundamental role in enabling the avoided emissions at the usage stage.
Following the GHG Protocol, Scope 2 and Scope 3 emissions are by definition direct Scope 1 emissions of another entity. Given complexities of supply chains of solution products and services, inevitably this has generated an issue of double counting between the production companies, their suppliers and customers that all could report avoided emissions from the same source.
As recommended by the Avoided Emissions Framework, the issue of double counting is avoided where possible. Where possible, we allocate attribution to avoided emissions based on financial cost or value of the component to the system that activates the enabling effect. In cases where it is impossible to overcome this problem, iClima clearly states and explains
Glossary of terms
Avoided emissions: Reductions in GHG emissions that occur as a result of a solution product or service (GHG Protocol). This is where a product provides the same or similar function as existing products in the marketplace, but with significantly less GHG emissions’ (Emissions Avoidance Framework).
CO2e avoidance and GHG avoidance terms are used interchangeably.
Greenhouse Gases (GHG): Greenhouse gases are those that absorb and emit infrared radiation in the wavelength range emitted by Earth thus, causing warming through the Greenhouse Effect. The six regulated GHGs, covered by the United Nations Framework Convention on Climate Change (UNFCCC) are: carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6)
BAU baseline: The business-as-usual baseline is a reference scenario that reflects the situation in the absence of the avoidance enabling solution.
BAU baseline emissions: GHG emissions that occur in the absence of the enabling solution.
Enabling effect: The enabling effect is the avoided emissions due to the activities avoided as a result of using the climate change mitigation solution.