Discussion 2: Learning in Community
Introduction
Sarah Kearney, Prime Coalition
We have four goals for our meeting today:
I’ll be giving a quick update about where Project Frame stands.
Annina Winkler from Emerald Technology Ventures is going to present our very first investor profile!
Matthew Harwood from OGCI will give a quick primer on the current state of forward-looking impact assessment and Project Frame’s suggestions.
We’ll have time to listen to your questions so that we can continue to build content at Frame toward what might be most useful to you and your teams.
Our attendees are the very same people that drove a 210% year over year growth in climate tech investments in 2021. In the first half of 2021, global investors closed as many climate focused funds as were raised during the previous five years combined. Qualitatively, the whirlwind of activity has picked up in the aftermath of COP in Q4 of 2021, not only in terms of corporations and investors making commitments, but also with the formation of the new standard setting board, the International Sustainability Standards Board, or ISSB, whose ambition is to help meet the demand for high quality, transparent, reliable, and comparable reporting by companies on climate and other ESG matters.
Today, Frame is working hard to build a welcoming community to create content and eventually develop tools dedicated to forward-looking assessment. Frame has now been approved to launch as a nonprofit program housed at Prime Coalition, and it's being supported by philanthropic grants. As we speak, there's already a lot of work going on behind the scenes that we're not presenting today, but we have plans to share with you soon. I do have a few notes on things that we've decided not to do at this point:
We’re not quantifying impact on climate change.
We're not focusing on climate change adaptation.
We're not addressing other ESG metrics beyond emissions.
We're not assessing the carbon footprint of an organization, scope one, two, or three.
We're not being prescriptive on any specific firm's practices or performance.
We're not evaluating any firm's compliance standards, and
We're not providing a target setting or disclosure platform.
So although much of this is important work, we've decided to stay laser focused, because there’s plenty to do for the foreseeable future just focusing on emissions and focusing on shared principles for forward-looking assessment.
Next up, we're so excited to be introducing Annina Winkler, who will be presenting a deep look at the impact assessment process of Emerald Technology Ventures. We're so grateful to Emerald and Annina for modeling collaboration and participating in the working group. Thank you, Annina!
Investor Impact Assessment Profile
Annina Winkler, Emerald Technology Ventures
I’d like to first give you an introduction on Emerald as a group, and then talk about how we look at impact assessment, including how we collect data, define impact, and quantify impact. I’ll then show you what impact has actually been achieved in our portfolio companies over the last couple of years.
Emerald’s Background
Emerald is a Swiss venture capital company that was founded in the year 2000 with a main investment focus on industrial technologies. We are currently managing four active funds with a total volume of more than EUR 300M. We also have the mandate to manage two external funds, one of which is the Swiss Technology Fund.[1] Our investors are large international corporates, of which currently count roughly 40.
Over the last 20 years, we have reviewed more than 18,000 investment opportunities and have made more than 600 transactions to support our 70 portfolio companies. We typically invest in early to expansion stage startups, starting our investment activity with initial tickets of approximately EUR 3-5M.
Emerald is dedicated to tackling climate change and sustainability by financially supporting the development of industrial technologies.
Core VC Practice
Our core venture capital business covers different sectors, including energy, water, agrifood, industrial IT and advanced materials. In our Emerald portfolio, we currently have 21 active portfolio companies. It is not a requirement for these companies to lead to an emission reduction, but it is definitely a “nice-to-have.” Due to the fact that impact is not a must for us in making an investment, we so far have not done forward-looking impact assessment. Realizing that impact assessment is important, we now have decided to do an annual backward-looking assessment, starting with the year 2020. To do this, we work with a third party consultant.
Swiss Technology Fund (STF)
As mentioned, in addition to its core VC business, Emerald has the mandate to manage the Swiss Technology Fund, an instrument that was launched by the Swiss government in 2015 and that gives loan guarantees to Swiss start-ups and SMEs developing GHG-reducing technologies. Companies applying for the loan guarantee need to be able to quantify the emission reduction caused by their technology. A forward-looking assessment of the impact over the next 3 years is conducted for each applicant. All these assessments for the Swiss Technology Funds are conducted in-house at Emerald, for which we have 3 dedicated employees in our team.
Data Collection
For both assessments, VC portfolio and STF-related, questionnaires are sent out to the companies asking for as much information as possible related to the baseline definition and the emissions per unit sold. In the case of a forward-looking assessment for the STF, we also ask for financial projections to understand how many units the applicants plan to sell over the next three years so that we can use this information for conducting the quantifications.
Defining Impact
When defining impact, we distinguish between three different cases:
Direct impact - when a product that is sold does not need to be part of a bigger system, but by itself directly leads to an emission reduction (i.e., electric vehicle/EV).
Indirect impact (a) - product sold or the technology sold needs to be part of a bigger system, but still itself directly leads to an emission reduction. An example here could be a lightweight panel instead of a steel panel in EVs, making the whole vehicle lighter, therefore lowering the energy consumption and therefore leading to an emission reduction.
Indirect impact (b) - the product needs to be part of a bigger system, but the product itself, being part of this bigger system does not lead to an emission reduction itself. Instead, it enables the emission reduction of the bigger system. An example here would be an EV charging station, which enables electric mobility, which then leads to an emission reduction. The product by itself does not lead to an emission reduction.
Quantifying Emissions
For quantifying the impact, the first thing to do is to define the baseline: What is the situation today without this new technology, to which an emission reduction can be compared? When we do a forward-looking assessment over the next three years (in the case of STF), we always assume that the baseline is static and that it will not significantly change over this time.
Once we have defined this baseline, we calculate the emission reduction per unit so that we know how many tons of CO2 can be reduced by one unit over one year. Depending on the kind of impact (direct or indirect), the calculations may slightly differ:
Direct impact
Multiply the annual emission reduction per unit with the number of units operational over a certain time frame of interest (e.g., last year, next three years) to know what the company’s total impact has been/will be.
As we at Emerald usually are one of several shareholders, we multiply this total emission reduction with the percentage we own in the company. We do this to avoid double counting, indicating what Emerald’s contribution to the company’s impact has been/will be.
Indirect impact (a)
In this case, the proceeding is actually the same as for the direct impact above:
Define the annual emission reduction per unit sold.
Multiply it with the number of units operational in a certain timeframe.
Multiply it with the percentage Emerald owns of the company.
Indirect impact (b)
Here, the procedure for calculating the impact is somewhat different:
The first step to take is to define the system (of which the company’s technology is part) as well as the annual emission reduction of the whole system the company’s unit belongs to.
For allocating a certain percentage of this total annual emission reduction to a single unit, we at Emerald analyze what percentage the unit’s price makes up of the total system’s price. We then multiply this percentage by the annual emission reduction of the total system to know what part of the emission reduction was actually caused by a single part. From now on the proceeding again is the same as in the cases above:
Multiply the annual emission reduction per unit with the number of operation units in a certain timeframe
Multiply it with the percentage Emerald owns of the company.
It is important to keep in mind that this is a very simplified explanation of Emerald’s process for emission reduction quantification and that these calculations will never be 100% correct. Rather they give an understanding of the magnitude of impact.
It is also important to mention that actually achieved numbers (calculated in backward-looking assessments) are often lower than the predicted ones (calculated in forward-looking assessments), as predictions are based on the companies’ projections, which in most cases are too optimistic. For Emerald’s VC portfolio, we therefore only conduct the backward-looking assessment which is based on facts and not on assumptions about the future.
Assessing Planned Impact
Matthew Harwood, OGCI Climate Investments
Thank you so much to Annina for her fantastic presentation and for openly sharing Emerald's approach with the community. First, I’d like to give you an update on what the Frame working group has been doing:
We have completed our review of the current landscape of methodologies that is out there today. And Richard and Shanbor will be sharing a high-level review of that landscape, which we hope will be useful for this community.
We're well-progressed through our benchmarking of what current practices in impact assessment are and are still looking for investors to complete it.
We've started to make good progress with our recommended guidelines for a workflow for forward-looking assessment. And I'm going to talk a little bit more about where we stand on that and what our next steps are.
And finally, we have been building a glossary of terms for forward-looking impact, which we will be releasing as part of our communication program going forward.
Impact Assessment Workflow
We have also started to build a very simple step by step practice to allow those that haven't done impact assessment before to quickly use this methodology in their own individual case. The first practice will focus more on what we're calling planned impact: the impact delivered by the investment in a particular company or entity rather than the potential impact that a total technology class could have, such as electric vehicles.
We've tried to break the process down into a number of clear steps:
What is the underlying hypothesis or theory that generates the improvement from your product or your services?
Then the methodology takes you through the difficult step of choosing the right baseline against which to measure your improvement. We've had a lot of discussions on that subject as a group.
Calculate unit impact.
Combine unit impact with your commercial forecasts for the business, which enables you to start to project or plan out what impact your investment can have going forward.
Qualify your metric. How exactly you are defining your metric. Is it annual or cumulative? What time period does it cover? And indeed, if you are taking an equity share or some sort of share of the total impact of the entity and be very clear about what methodology you're using there.
Get into a rhythm updating of impact realizations and projections on an annual or a semi-annual basis. We can expect to see the metrics being updated and improved as we go forward.
As we've gone through our discussions, we've realized that in each of the stages of this workflow, there are lots of issues. Annina alluded to some of them, such as the selection of baselines, and how to attribute benefit to different parts of a system or different investors within a particular entity.
We’re sharing our experience and developing case studies to come up with recommendations. And our aim is to publish each of these as we go along in bite size communications through our website. As investors learn, they can start to read more details on these subjects as we move forward. One of the earliest modules that we'll be releasing after the initial paper is the one covering the landscape assessment, which Richard & Shanbor will walk through.
Landscape of Frameworks
Richard Searle (Impact Analyst), OGCI Climate Investments and Shanbor Gupta (Investment Manager), Clean Energy Ventures
Avoided Emissions Framework/Mission Innovation
The key strength of this framework, which looks at avoided emissions as a metric, is that it's very flexible. When you're looking at assessments for a project or technologies, it fits in the center of the landscape. And that flexibility enables the framework or at least the steps within the framework to guide you in assessing either a specific company or a technology more broadly. One of the key parts of it is that you can also look at early stage or growth stage technologies and companies and assess their impact.
Prime/NYSERDA
PRIME and NYSERDA’s emissions reduction potential framework is great for assessing new technology and the diffusion of technology to cover 100% of the market. So when you look at, say EVs, you assume broadly what the impact of EVs could be, once they take over the world. They use an s-curve to assess that adoption rate or diffusion rate. This makes it very useful to evaluate the impact of new / early stage technologies. That pairs it well with Mission Innovation.
Project Accounting Framework/Greenhouse Gas Protocol
The Project Accounting Framework from the Greenhouse Gas Protocol is likely the oldest methodology out there. It was born out of a joint effort from the World Business Council for Sustainable Development and the World Resources Institute back in 2004. It acts as the foundation for many of the methodologies today and many of the concepts that organizations follow with their in-house methodologies. It provides very specific principles, concepts, and methods for how to quantify GHG reductions. Also, there is a great glossary that allows you to understand what they are talking about quickly.
Emerging Climate Technology Framework
This methodology goes one step beyond quantification and begins to tackle attribution– how to ascribe credit for investing in emerging climate technologies. It was created with the idea to help drive capital into the most promising technologies out there to combat climate change. This is a gap that other methodologies have not addressed. Accounting, reporting and verification of GHG reduction is still included in this methodology, but the interesting thing is that the ECT framework actually refers us back to Mission Innovation’s Avoided Emissions Framework on how to quantify impact.
[1] Swiss Technology Fund, founded by the Swiss government in 2015, gives loan guarantees to Swiss startups that develop greenhouse gas reducing technologies. These companies must show that their technologies lead to an emissions reduction.