Our CO2 Avoidance methodology and why this is so relevant

CO2e AVOIDANCE

A SUMMARY OF THE RATIONALE AND METHODOLOGY

PUT IN PLACE BY CLIMA INVESTMENTS

Our Vision

Clima is filling a gap in the market by taking a solution-oriented route to navigate investors towards the enablers of the transition to a net zero emissions world. The companies we see as “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 the use of the products and services they offer.

Clima’s approach allows a shift in narrative, helping investors to identify who is “doing more good” rather than who is “doing less bad”. The idea of investing in companies whose P&L is aligned to change that is coming is, in our view, much stronger than using carrots and sticks (like ESG ratings) to drag existing companies toward change.

Our Approach

Clima has identified climate champions through a rigorous, rules and fact-based vetting process. The impact is measured through avoided emissions, defined as emission reductions that occur as a result of a solution, product or service (GHG Protocol, 2019). The solution provides the same or similar function as an existing product in the marketplace, but with significantly less GHG emissions or enable emissions reduction of a third party (Avoided Emissions Framework, 2019). Therefore, the impact is calculated as the avoided emissions that result as the difference between GHG emissions from a business-as-usual (BAU) baseline scenario and GHG emissions from a climate change solution scenario.

For our analysis we focus only on the primary enabling effect which is an 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 data gathering of key indicators being performed by iClima Earth.

Vetting Companies

Clima leverages the work of Project Drawdown and the EU Taxonomy recommendations when defining the segments and sub-segments of the companies that can enable CO2 avoidance. Company revenue derived from the sale of the climate change solution is the basis for the vetting process. Clima has built an equity benchmark index following almost 160 global players enabling decarnonisation of the planet.

The vetting process determines whether a company has annual revenue attributable to a CO2e avoidance solution, and the contribution of that revenue to the overall company revenue. By doing so, Clima can determine if a company is a pure player, majority player, partial player, or upcoming one in the transition to a low-carbon economy. Clima takes care to exclude companies whose operations and revenue are associated with the production of fossil fuel or fossil fuel energy; companies that directly manufacture or sell armament or companies with material indirect exposure to fossil fuel (please refer to our Negative Screening document).

The Methodology: Estimating CO2 Avoidance for Companies with Relevant Solutions

Clima’s methodology is guided by the Avoided Emissions Framework, whereby CO2e avoidance is calculated for each enabling solution as the difference between GHG emissions from the business-as-usual (BAU) scenario and GHG emissions from a climate change solution scenario where the enabling effect takes place. Each individual enabling solution is assessed by determining a carbon avoidance factor that reflects the net avoided emissions per unit of the solution implemented. Doing so gives a normalised value that allows for comparability across assessments and studies.

Clima has categorised companies into five climate change solutions segments:

  1. Green energy includes companies that 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.
  2. Green transportation covers companies focused on climate change solutions that enable reduction of GHG emissions from fossil fuel combustion in ICE vehicles. Also companies in public transport that enable a modal shift from ownership and usage of private ICE vehicles.
  3. Water and waste improvements covers companies that provide water and waste management services that enable energy saving, sustainable treatment of waste and avoidance of landfill GHG emissions from decomposition.
  4. Enabling solutions segment covers a wide range of solutions that indirectly enable reduction of GHG emissions from energy generation, combustion in ICE vehicles and more efficient operation of buildings and industrial processes.
  5. Sustainable products segment consists of companies that offer products from sustainable raw materials, products that enable reduction of GHG emissions in the production stage, use phase and/or end of life phase.

Portfolio companies in these segments are assessed. We identify the solutions provided that enable significant reduction of emissions to a third party, relative to the equivalent incumbent product. The source of the GHG emission reduction is where the enabling effect takes place.

There are four primary mechanisms of carbon avoidance enabled by the companies in our five segments, namely:

Our CO2 Avoidance methodology and why this is so relevant

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

Author: Rina Cerrato, Albina Stukalkina and Gary Hart
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