III. Methodology
GHG Impact
Impact assessment techniques in investing often hinge on a simple challenge; the amount of reliable data you have affects the types and quality of assessment. The earlier a solution is or further into the future you look, the less reliable the data is on both unit impact and volumes. We classify assessment types in order to ensure that readers understand differences in reliability and why they exist. This is essential to avoid greenwashing.
In this chapter, we discuss three approaches to impact assessment classified in Frame, mapped broadly to the information that is available at the different stages of a solution’s development and how far into the future the analyst is projecting.
Overall, the expectations of impact assessment should gradually increase as a company develops, eventually leading to detailed life cycle assessments (LCAs) that quantify GHGs, among other environmental factors, on an absolute basis across all company operations. Such assessments go well beyond Frame’s methodology, which focuses on GHG impact of narrowly defined solutions. LCA and ESG reporting already cover these topics more fully, and investor should move portfolio companies towards them with intention as they evolve. The same applies to investors themselves as their own firms grow.
As we referenced in Chapter 2, progression in impact assessment is best managed by always lining it up with the company's business reporting and planning, starting from day one. This includes presenting impact metrics alongside market segments, volumes, and units selected for assessment. GHG reporting can thus steadily graduate in lockstep with overall company data over time.
Potential Impact
In potential GHG impact, volumes are represented as SOM. To calculate potential GHG impact, the net unit impact array quantified for the solution at its stage of development is multiplied by the SOM volume array for each year of the analysis period. Potential impact can then be rolled up to a total number over the measured time horizon by adding the annual impact values. It also takes into account the operational lifespan of solutions.
Potential impact focuses on the long-term transformative potential of technology or solution class in the absence of comprehensive information about the company. For impact-focused investors where the primary goal is to address climate change rather than achieve profits, copycat solutions are also a form of success.
Just as net unit impact is more theoretical in potential impact, so is SOM. It carries a wide band of uncertainty and is most relevant when seeking to understand how early-stage solutions could significantly alter emissions patterns if they succeed in scaling in the next 15 to 30 years. Nonetheless, investors in early-stage solutions should have some market segmentation information available to blend unit impacts as appropriate.
Planned Impact
To calculate planned impact, the latest net unit impact array for the solution is multiplied by appropriate project volumes, auch as the sales or installed base, for each year of the analysis period. Volumes are represented by realistic annual sales projections or number of units in operation, while net unit impact values are based on the more granular data available at the solution stage. Planned impact can then be rolled up to a total number over the measured time horizon by adding the annual impact values.
Planned impact should be based directly on a realistic estimate of net unit impact alongside company business plans—which typically project no more than 5 to 7 years—demonstrating what the company can realistically achieve with its actual resources, capabilities, and focus.
Planned impact is only applicable to solutions that have business plans. If business plans are available, investors should seamlessly integrate planned impact analysis into business planning to help companies communicate and manage impact as they evolve. The net unit impact for associated market segments is thus multiplied by the company’s forecast for those segments in each year of the analysis period.
Planned Impact
Unlike potential and planned impact, realized GHG impact is backward-looking, not forward-looking. To calculate it, the analyst multiplies the net unit impact by the appropriate solution volume for each year of the analysis period. At this point, the company should begin collecting granular life cycle data on the solution, based on actual business practices, and re-evaluate unit impact according to the latest market context and segments, including their associated incumbents.
Net unit impact should begin overlapping more with traditional GHG footprinting, while still focusing on the comparison between the solution and incumbent. No longer theoretical, it should be validated with observations on how the solution is actually being built, sourced, used, and retired. The analyst uses past monthly, quarterly, and/or annual values for the appropriate volume as they are typically reported alongside up to date net unit impact data and lifespan data.
As soon as actual unit impact and sales data becomes available, investors should start tracking it in order to best understand where and how forward-looking models diverge from or align with the solution in the real world. This includes following up with consumers to reasonably confirm that the units sold are being used and are operating as expected.
Realized impact values should be fully integrated with financial statements by presenting calculations alongside sales figures and including units in operation as appropriate to emphasize operational emissions over the lifespan of the solution or end of life impacts.
Selecting and Integrating Approaches
The three approaches to GHG impact are intended to clarify the limitations of analysis when data is scarce and unreliable; investors should mix methods according to the information available and to best mirrors business planning. For example, top-down approaches are the only option for early-stage solutions. On the other hand, bottom-up approaches are both possible and essential when the appropriate granular business data exists. The level of detail in GHG impact analysis should always mirror the level of detail available in financial and organizational information.
By combining the top-down perspective with bottom-up sales forecast and results, decisionmakers can develop a more accurate and realistic market strategy. For example, business plan projections should hew closely to projected SOM, but they are often smaller. As a solution moves beyond the earliest stages, investors should compare business plans or sales to their original estimates to improve the quality of assessment overall.
Early Stage
Growth Stage
Potential Impact
Encourage New Technology
No reliable unit emissions / volume data, but strong evidence solution will work.
Asset: Venture
Stage: Seed, Series A
Potential or Planned Impact
Building Companies
Reliable business plan describing a path to scale over next ~5 years; detail on unit impact improving but not yet reliable.
Asset: Venture
Stage: Series B or C
Planned or Realized Impact
Pilot/FOAK
Company has sold solution; detail on unit impact data improving but not yet reliable.
Asset: Venture/Private Equity/Debt
Stage: Series C, Debt
Planned or Realized Impact
Pilot/FOAK
Company has sold solution; detail on unit impact data improving but not yet reliable.
Asset: Venture/Private Equity/Debt
Stage: Series C, Debt
Additional Resources
