Insights
How do investors assess a company’s contribution to climate solutions, and aggregate those up to portfolio or fund level? It’s a question which has long posed challenges to investors committed to net zero and one which this guidance sets out to address.
This latest guidance from IIGCC helps investors identify and engage on investee companies’ climate solutions activities. It also provides recommendations for investors measuring their own allocation to such activities - a critical element of reporting against voluntary net zero commitments.
This work complements the Net Zero Investment Framework (NZIF) but can also support investors as a standalone guide.
| Definition: Climate solutions are those activities, goods or services that contribute substantially to or enable emissions reductions to support decarbonisation in line with credible 1.5˚C pathways towards net zero, or that contribute substantially to climate adaptation. |
IIGCC members access 'Investing in climate solutions: Listed equity and corporate fixed income'.
Identify and implement
The guide is split into two sections. The first sets out an approach for investors to identify climate solutions, using credible net zero scenarios and local green taxonomies. It also provides an illustrative example of the climate solutions investment lifecycle.
The lifecycle shows various points at which an investor can measure climate solutions activities and associated metrics. This includes the financial metrics of revenues and capex; low carbon production-based metrics; and metrics which directly capture contribution to decarbonisation, whether within or beyond a company’s value chain.
It explores the advantages and drawbacks of these metrics, as well as how investors can use them when assessing the credibility of a corporate’s transition plan from a climate solutions perspective.
The second section provides simple step-by-step guidance for investors wishing to use these green revenues and green capex metrics. By following four steps, investors can measure a corporate’s climate solutions activities, identify the type of decarbonisation contribution provided, and aggregate this up to fund or portfolio level using one of two approaches.
Numerous examples are provided, as well as important recommendations for data collection and transparency of disclosures.
Focused on listed equity and corporate fixed income, the guidance is designed to be supplementary to NZIF, with a strong focus on increasing investment in climate solutions, alongside the alignment of underlying holdings to net zero and subsequent portfolio decarbonisation.
The Net Zero Investment Framework is the most widely used net zero methodology by investors who have committed to net zero today, and many signatories to the Paris Aligned Asset Owners and Net Zero Asset Managers initiatives have committed to scaling up investment in climate solutions.
What are climate solutions?
The guidance sets out two approaches to identifying climate solutions. The first uses local green taxonomies, such as the EU Taxonomy, described as the taxonomy-based approach. The second uses analysis of technology growth in net zero scenarios, such as the International Energy Agency Net Zero Emissions by 2050 scenario, in a taxonomy-plus approach.
This dual approach provides investors with the flexibility needed to innovate the financial products and services required to scale up investment in climate solutions at the pace needed.
The taxonomy-plus approach to identifying climate solutions builds on IIGCC’s Climate Investment Roadmap (April 2022), which provides investors with granular technology pathways, differentiated by region, in a net zero scenario.
Though the taxonomy-based approach is also useful for identifying climate solutions activities, our guidance avoids over-reliance on such taxonomies to avoid disincentivising investment in emerging markets, where established policies are less likely to exist.
The mining of critical materials such as lithium, copper, and nickel, is essential for the production of many low carbon solutions including wind turbines, photovoltaic panels, heat pumps and batteries. Yet these activities are not currently included in the EU Taxonomy universe of climate solutions.
When coupled with a robust ‘do-no-significant-harm’ approach to protect against adverse environmental impacts and support a just transition, our climate solutions guidance provides the green light to investors and corporates to innovate and scale up production in this area.
Climate solutions investment lifecycle
The lifecycle model which underpins the guidance helps investors to consider the range of points where they can measure climate solutions activities, the type of contribution different activities make towards decarbonisation, and the metrics associated with each point.
It highlights nine potential measurement points for climate solutions-related activities and outcomes across three stages: capital allocation, corporate activities, and emissions reduction type.
Each point in the lifecycle can be measured using financial, operational, or emissions-based metrics. The emissions impact can take place within the corporate’s value chain (Scope 1, 2, or 3), referred to as activities that ‘transition own performance’, or ‘beyond’ the value chain in the wider economy, defined as “enabling activities”.
A good example of this is a car manufacturer that produces electric vehicles. The production of those electric vehicles, if displacing the production of vehicles with internal combustion engines (ICEs), is likely to reduce the manufacturer’s own value chain emissions and emissions in the wider economy.
Some of the metrics outlined are already covered by NZIF, as well as supporting guidance and tools such as Climate Action 100+'s Net Zero Company Benchmark and Diversified Mining Standard and our Net Zero Standard for Oil and Gas.
IIGCC expects a rapid evolution of climate solutions metrics over the coming years and this guidance will continue to evolve. Over time investors can expect new sections covering metrics such as low carbon production and avoided emissions, as well as for other asset classes such as private equity, infrastructure, sovereign bonds, and real estate.
IIGCC members access 'Investing in climate solutions: Listed equity and corporate fixed income'.
Calculating green revenues and green capex
To support NZIF the guidance recommends that, at a minimum, investors start to measure and disclose green revenue and green capex metrics. This is consistent with sustainable finance disclosure regulations in the EU.
Section two goes on to offer a four-step guide to help investors calculate green revenues and green capex for listed equity corporate fixed income. This includes two proposed approaches to calculation: one in line with the EU “green ratio” calculation, while the other draws on the attribution approach recommended by the Partnership for Carbon Accounting Financials (PCAF) for emissions accounting.
The guidance also nods to other emerging metrics, such as IIGCC’s cumulative benchmark divergence (CBD) metric, where we expect to see greater methodological development in the coming months.
There will likely be a need to add greater practical guidance for investors to practically account for and promote the just transition and nature and biodiversity as approaches evolve. We look forward to working with our members and partners to develop these crucial topics, but for now, this guidance looks set to become a valued asset in any net zero investor toolkit.
This guidance will be publicly available from 26 October 2023.
If you have any questions, please get in touch. If you’d like to take part in our working groups and be the first to see insights and analysis, why not speak to our team today to find out more about becoming a part of IIGCC.