Quantitative Approach to Environmental Impact
Our Impact Approach is not intended to be unique.
In fact, our hope is that impact assessments of climate solutions, including forward-looking assessments, one day becomes demystified and that investors convene around a standardized methodology – just like we do for financial analysis and reporting. To this end, Future Energy Ventures contributes to the Content Working Group of Project Frame, a nonprofit initiative purpose-built to organize investors around forward-looking emissions impact methodology and reporting best practices. Our own approach closely aligns with the Project Frame methodology, and we publish a summary below. This section will evolve with our thinking on the subject.
Our approach takes 6 steps:
I. Strategy and sourcing
Fortunately, most of the technologies needed for net-zero are available today, ready to scale (IEA). Such technologies include all the energy transition hardware we all know well, EVs and charging infrastructure, solar PV and wind turbines, heat pumps, meters. With new business models and supportive policies, these can achieve 65% of the progress towards net-zero.
Unfortunately, the solutions are not scaling fast enough, and their full potential often remains untapped. On their own, each hardware piece is an isolated island, not taking the needs of the wider system and society into account – and not benefiting from the immense opportunities posed by connectivity and intelligence. Such lack of innovation hinders the accelerated deployment which could otherwise be unleashed. So, to tie it all together, to optimize, balance, shift, scale and improve, software solutions are key. For us at FEV, we see digital and hybrid business models as true game-changers.
And we believe investing in such early-stage game-changers can be a low-cost way to achieve large scale climate impact through cutting GHG emissions.
At the first stage, we screen for companies within our strategic areas Future Energy, Future Cities and Future Technologies, and we particularly look for companies whose impact is intentional, and where it is likely to be highly scalable and substantial in scope
II. Impact thesis and Unit impact
The next step is one of the most challenging and company-specific steps. First, articulate all the ways in which the climate solution will abate CO2e emissions compared to status quo or an incumbent solution, and quantify the various effects at the unit level. This step requires an extensive understanding of the company’s solution, in-depth assessments of peer-reviewed science and Life-Cycle Analyses, and expert interviews.
III. Scaling
“If it does not scale, I don’t care” – said one of our founders at one point, and we agree. Climate change mitigation is the game of big numbers. This is why in this step, we combine the unit impact with commercial forecasts and market analysis for various time horizons:
Planned Impact: Multiply unit impact with the Company’s business plan for the coming years to forecast it’s planned impact. At FEV, we focus on what the companies plan to achieve by the time we exit, assumed to be 5 years post investment, as well as during the lifetime of the Fund (10+2 years).
Potential Impact: Forecast the longer-term impact of the Company’s solution based on market analysis, industry expectations and by assuming growth according to a standard technology adoption s-curve. We deliberately avoid making assumptions about a certain achieved market share by the company. Instead, we focus on the question of “if this solution succeeds wildly, how large is the impact?” This approach puts all companies on equal footing without the guesswork of making individual projections of market capture in a competitive environment. We take this approach because we know we can influence the speed of scaling (i.e., share of market captured), and we see competition between solutions as a good thing, aligned with the world’s decarbonization imperative. Considering the uncertainty and added complexity involved with projecting adoption and market shares, we think the s-curve technology adoption method is a simple and effective way to compare potential impact between companies. It also allows us to see what share of global emissions potential investees are attacking.
IV. Evaluate
The remaining carbon budget allowing us a chance to limit global warming to 1.5 degrees is 275 GtCO2e [1] . Continuing with business as usual (41 Gt/y) [2] means we spend our budget in less than 7 years. Assuming a linear decline, reaching Net Zero by 2050 would entail a decrease of 1.5 GtCO2e each year. To put this into perspective, this is comparable to the decrease in emissions caused by COVID-19 in 2020, highlighting the sheer scale of the challenge and the need for climate action.
As part of due diligence, we ensure the forecasted impact passes our minimum thresholds of 5 MtCO2e in 5 years or 500 MtCO2e by 2050 [3]. To understand the significance of these thresholds, and as such how compelling the impact opportunity is, comparison against this linear depletion of the Global Carbon Budget is helpful.
For simplicity, let’s assume the Fund makes all 30 investments in year 1. If all companies enable 5 Mt avoided emissions each within 5 years, these companies alone have contributed 1% of the emissions cuts needed during that time period globally to be on track for Net Zero. If the companies all have the potential to achieve minimum 500 Mt each within 2050, combined they can contribute 3% of the cuts needed for Net Zero.
Considering escalating risks and the compounding effects of emissions on climate change, abating a ton of carbon today has a greater impact than abating a ton tomorrow. We prioritize measurable decarbonization impact during the lifetime of the fund, over impact further out in time.
V. Track and report
We track the impact performance of the overall portfolio and each portfolio company, and report the progress to our LPs. For additional insights into the impact of the portfolio, we track both the realized CO2e reductions, as well as underlying Impact KPIs causing the impact such as energy saved, or flexibility enabled. We also adjust the impact based on FEV’s equity ownership percentage, aka. the Fund’s „impact pro-rata” (i.e. if FEV owns 10% of the enterprise value, we only claim 10% of the impact) to assess how much impact we get for the capital invested, as well of the cost per ton abated.
The Fund includes regular quarterly reporting obligations on the Decarbonization Impact and Adverse Impacts within the legal documentation for the respective investment.
VI. Review
The final step our impact approach is to review and if required, adjust the impact model on an annual basis to incorporate new research or company results.
We recognize our approach requires further refinement; however, it represents a substantial stride toward progress, and we encourage other funds to adopt similar strategies. For instance, we have yet to conclude on the best approach for the challenge of value chain attribution, i.e. giving credit for the GHG impact caused by a climate solution proportionally to each party involved in the value chain. Currently, we strive for appropriate discounting on a case-by-case basis, and we work on guidance on the topic with other leading climate-tech funds.
Sources:
[1] With 50% likelihood (Global Carbon Budget report 2023 by the Global Carbon Project: https://essd.copernicus.org/articles/15/5301/2023/)
[2] Business as usual keeps constant the GHG emissions of 2023, 40.9 GtCO2e (Global Carbon Project Report 2023).
[3] As part of our continuous strive for ESG&I excellence we are in the process of adjusting selected aspects of our impact methodology, e.g. replacing the company focus in 2050 with a focus on the company’s technology, and increasing the associated threshold accordingly to 1 GtCO2e.