Solving climate change can be the investment opportunity of our lifetime
By Gabriela Herculano, CEO of iClima Earth Founder of the iClima Global Decarbonisation Enablers UCITS ETF (CLMA)
Solving climate change can be the investment opportunity of our lifetime…if we focus on the companies that bring to market the relevant solutions Solving climate change can be the investment opportunity of our lifetime…if we focus on the companies that bring to market the relevant solutions
The Paris Agreement signed by the world’s nations in 2015 to combat climate change aims to keep the increase in the global average temperature to below 2 °C above pre-industrial levels, and 1.5 °C if possible.
The Agreement has helped drive an increasing focus globally on assessing climate change risks, the impacts of business operations on the environment and how greenhouse gas (GHG) emissions are disclosed.
Several international initiatives, such as the Task Force on Climate Related Financial Disclosure, the United Nation’s Net Zero Alliance and several by the financial industry have all helped accelerate the transition to a low carbon world, rewarding companies that cut emissions while urging them to be more transparent about their impacts on the environment.
However, more action and new approaches are needed. Research (1) by the London School of Economics found, for example, that in a sample of companies generating 40% of global emissions, less than one in five (18%) were cutting emissions at the rate necessary to meet the 2°C target.
The United Nations (2) estimates the world must cut emissions by 7.6% every year. At present, global emissions are 56 gigatons, which means the world needs a 4.26 gigatons cut over the next year alone. Any delay and the required cut could rise to 15.5% by 2025.
New methods are needed to measure emission cuts
Any shift to a low-carbon world requires new approaches and innovations by companies that help change societal behaviour, and new ways of measuring climate impacts.
Unfortunately, many companies don’t adequately disclose their ‘carbon footprints’ and very few attempt to quantify their emissions; without proper measurement it is hard to track progress, which is one of the reasons we focus on CO2e avoidance, the other side of the coin.
We want to guide investors to those companies that are enabling the transition to a net zero emissions world. Our “climate champions” are companies that provide real solutions to climate change. They provide product and services that enable other companies to reduce their CO2 emissions (CO2e) and have a significant impact that can be measured in terms of ‘CO2e avoidance’.
Investors can help bring about fundamental change by investing in such companies.
iClima helps investors identify companies actively “doing more good” rather than those just “doing less bad” and provide investment products that focus on companies enabling CO2e avoidance.
But how much CO2e avoidance could such solutions deliver?
Defining ‘Avoidance’
‘Avoided emissions’ are reductions brought about by products or services that provide the same or similar functions as existing products - but with significantly less GHG emissions. (3)
They can be expressed in 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) - (solutions-enabled emissions)
E.g. a company that switches electricity supplier from a fossil fuel-based provider to one that sources power from renewable resources such as solar or wind projects would achieve net avoided emissions virtually equivalent to the CO2 emitted by its former supplier to generate its energy.
The focus is on suppliers
Companies that have reduced their carbon footprint such as Google and Microsoft are users of key climate change solutions, such as renewable energy, electric vehicles and even plant-based meals served in their cafeterias.
At iClima Earth we focus instead on the suppliers of the solutions; not just because we think these companies can do well financially, given they sell what the world needs to fight climate change and increasing demand for their products, but also because more capital needs to be channelled to the companies in these key segments. Shedding light on these climate champions will direct capital to much needed R&D and innovation.
Fig 1: Annual reductions needed in global CO2 emissions
Different Focus yielding different results
At iClima Earth we have developed a fact-based, data driven methodology to vet the companies that have potential to contribute towards the goal of decarbonising the planet.
We believe that the best way to reduce CO2e in the atmosphere is by not emitting them in the first place: we are driven by the products and services that can enable CO2 avoidance.
We started by looking at the 100 most substantive, technologically viable, existing solutions that can decarbonise the planet as listed by the incredible Project Drawdown, a non-profit organisation dedicated to reducing GHGs in the atmosphere.
We applied our own screening rules to make 360-degree assessments of the environmental impacts of companies and developed a unique equity benchmark, the iClima Global Decarbonisation Enablers Index, managed by Solactive.
We have spent over 15 months quantifying the CO2e avoidance that each company in our Index can generate from annual sales. We look at the solutions to assess those that are transient (such as a plant-based Beyond Meat burger, or a telepresence call on Zoom) and those that are based on products with long useful lives (such as a Siemens Gamesa wind turbine, or a Tesla electric vehicle (EV) car).
Key for us is the comparison of what the companies in our index can potentially avoid in CO2e emissions in 2021 to the amount of CO2e that needs to be avoided in the year.
Our iClima Global Decarbonisation Enablers Index is currently comprised of 151 companies. The products and services they represent fall within five categories (Green Energy, Green Transportation, Sustainable Products, Enabling Solutions and Water & Waste Improvements). We estimate they will contribute to more than 0.6 gigatons of the new and recurring CO2e avoidance in 2021.
These companies supply relevant climate change solutions; using the California goldrush analogy, they are the companies supplying the shovels.
We see tailwinds supporting these climate champions coming from global agreements and targets combined with green stimulus and policies and a positive shift in consumer behaviour.
This helps to explain the strong performance of our Total Return Index, which is up 63.6% so far this year (4). Investors can invest in the Index through the iClima Decarbonisation Exchange Traded Fund.
Reducing carbon footprints
Users of the products and services sold by the constituents of iClima index can reduce their carbon footprint based on several measures.
For example, ‘Scope 1’ is defined as direct emissions from a company’s facilities and vehicles. In our EV solutions subsegments, we have companies such as Workhorse
or Aptiv that could help an e-commerce player embrace zero carbon emission delivery solutions based on electric trucks, or EV makers such as Tesla to reduce the emissions of the company’s own fleet of cars.
‘Scope 2’ is defined as indirect emissions embedded in the energy sourced by a company. This is where many companies have been able to lower emissions, by sourcing electricity from renewable sources. iClima’s benchmark has several global and more local asset owners of renewable energy projects including Iberdrola, NextEra Energy, and Orsted, among others.
Finally, ‘Scope 3’ are emissions from both upstream and downstream activities, such as emissions from goods and services purchased, business travel, waste generated in the company’s operations, emissions that take place in the use of the products sold and end of life treatment of the products sold.
Although Scope 3 is the hardest measure to assess, it provides the most accurate picture of a company’s carbon footprint, and therefore the true extent of their emissions avoidance.
Looking ahead
The time has come for the world to quantify CO2e avoidance, and we hope to contribute to this task by providing our own framework of potential CO2e avoidance through the companies in our index.
We are stepping on the shoulders of the great minds behind Project Drawdown and other thought leaders to provide our own carbon avoidance benchmark, and we hope CO2e avoided emissions will become a widely used metric in the battle against global warming.
Gabriela Herculano is the founder of the iClima Global Decarbonsiation Enablers UCITS ETF. When you trade ETFs your capital is at risk.
(1) Source: The Grantham Research Institute on Climate Change at the London School of Economics, commissioned by the Transition Pathway Initiative, 2020
(2) Source: UN Environment Programme Emissions Gap Report 2019
(3) Source: (Avoided Emissions Framework, 2019)
(4) Year to date in sterling terms, as of 2 December 2020
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