III. Methodology
New Considerations
The GHG impact equation comprehensively covers all variables that are applicable to solution unit emissions, incumbent unit emissions, and solution volumes. However, there are a variety of topics around which investors have not achieved full consensus or have not yet established how they fit within the core GHG impact formula. In this chapter, we discuss two associated topics: optional adjustment factors, rebound effects, and actions and reactions across systmes.
Optional Adjustment Factors
There are GHG impact variables, called adjustment factors, that sit outside of unit impact and volumes and shouldn’t be mathematically blended into their underlying variables. These factors broadly fall into two categories: how various solutions work together to achieve GHG impact and how capital comes together to enable a solution or solutions.
Basic Procedures
Key considerations that broadly apply to all adjustment factors and their presentation in analysis and reporting are described below.
Validate that the factor cannot be clearly accounted for through unit impact or solution volumes
Before treating a variable as an adjustment factor, the analyst should validate that it cannot and should not be quantified as a part of unit emissions or solution volumes. Examples of factors that do not necessarily need to be folded into adjustment factor are below.
Reevaluating incumbents over time: If EVs become more affordable, they may divert resources away from public transportation. If the analysts excluded public transportation among incumbents or may not have considered the longer-term implications of divestment from public transportation systems in areas where they seek to pursue market share, they can reevaluate that decision by considering a wider set of incumbents in quantifying net unit impact.
Considering negative effects of resource efficiency: For example, efficiency improvements may result in EVs being used more than ICE vehicles are today. This dynamic can be factored into the GHG impact formula in specific ways.
Distinguish GHG impact from adjusted GHG impact
Adjustment factors are considered a layer of analysis that is distinct from the core GHG impact formula. Analysts should distinguish adjustment factors from unit impact and volumes where they are applied and transparently show the final adjusted GHG impact value if it affects investment decisions or strategy. Reporting should distinguish values for GHG impact and adjusted GHG impact.
Document and share use cases
Investors should maintain records of where and how the core GHG impact equation limits the quality of analysis in our efforts to address climate change. Frame is committed to advancing methodological guidance when the existing guidance falls short in real world situations.
A Note On Impact Attribution
The 2023-24 Content Working Group revisited the topic of attribution and while it continues to be hotly debated, the group developed the following updates to help with clarity. The Project Frame methodology guidance does not provide a recommendation as to whether or not investors should attribute impact in their reporting. However, this iteration provides terminology and a new framework for articulating attribution if the investor chooses to do so.
According to Frame’s 2022 Focus Group feedback, 40 percent of respondents listed attribution as a factor in pre- or post- investment reporting. Interestingly, when asked the same question in 2024, only 35 percent reported attribution as a factor in pre-investment diligence and 32 percent listed attribution as part of their post-investment reporting.
Value Chain Attribution
Previously introduced as Horizontal Attribution, Value Chain Attribution is an adjustment factor that apportions emissions impact across contributors along the value chain. The core Frame formula focuses on GHG impact attributed to a direct product solution being analyzed. However, direct component solutions contribute to the impact of the whole product.
The value chain refers to how these direct components relate to the direct product. For example, if an investor is looking at an EV battery, rather than the whole vehicle, how should they approach quantification? While Frame does not currently have guidance for quantification, the following steps are common:
Quantify the GHG impact of the whole product, such as the EV. If the battery is meant to replace an existing incumbent EV battery, the analysts should consider multiple incumbents as defined by market profiles.
Map out each of the solution components in the EV solution system.
Distribute percentages to each component according to the investor’s own process.
Apply the component’s percentage as an adjustment factor to the total GHG impact value. In other words, if the investor believes that the battery is responsible for 50% of the GHG impact, then the adjusted impact will be half of the total GHG impact.
Challenges
Introducing value chain adjustment into the decision making process can invite analysts to look at how climate solutions work together and inspire coordinated investments across solutions. But impact in complex systems cannot be discreetly segmented by individual parties. For example, if you remove the battery, the EV does not have 50 percent less impact; it may have none at all! The same is also arguably true for the drive motor, converters, and the steering wheel, which are not considered climate solutions.
Without detailed qualitative explanation, values can mislead readers on how collective or systemic impact works and unintentionally disincentivize investment in essential components. In the absence of consensus on how to quantify it, Frame recommends investors focus first on qualitatively and transparently documenting the value chain around the solution they are considering for investment, including which components are core to GHG impact and why.
The reader should also fully understand when the data used is tied to a different solution. For example, it should be clear when the direct product solution is the foundation of analysis but not the solution being considered for investment.
Capitalization Attribution
Previously introduced as Vertical Attribution, Capitalization Attribution apportion GHG impact or carbon footprint impact across the capitalization stack of a company. Investors use this to report on impact attributable to their firm to LPs and determine impact linked compensation amounts for investment managers. There is no consensus on how to apply it.
Reporting to LPs
LPs may seek to understand the “impact per dollar” to compare their investments. The most commonly discussed method to answer this need is apportioning percentage by ownership share. However, equity alone doesn't represent all the financial interests, such as government grants, bank loans, and customer capital. These are all part of the solution. Ownership for late-stage companies may also underrepresent the role of early-stage capital without which many new solutions would not materialize.
Impact Linked Compensation
In impact linked compensation, investors might use this factor to reward investment managers for taking a higher ownership share in companies that ultimately have bigger impacts. In this case, investors should be transparent that the primary use case is for investment managers in relation to their direct peers in the firm. For example, while forms of capitalization like debt or catalytic capital are essential, they may not be applicable if that firm itself does not deploy multiple forms of capital and accordingly apply the same compensation incentives across the team. As such, capitalization attribution might be tied only to equity ownership amounts.
Designing for Purpose
Examining how quantitative data incentivizes and disincentivizes decisions is important when designing methodologies. For example, how could oversimplified capitalization attribution steer capital away from critical needs? Should investors who have led bigger investments for high impact companies benefit more in comparison to investors who have led smaller investments for companies with even higher impact? And where do impact analysts fit in, if they are different from investors?
In the absence of consensus on approach to quantification, Frame does not advocate that investors claim a share of credit in public reports, due to the ways it can mislead audiences regarding the roles that investors play in achieving impact. We also recommend that teams consider scenarios in which the data could incentivize unintended outcomes and involve impact focused decision-makers in the process to ensure that financial motivations do not influence outcomes.
Arguments Against Specific Attribution
Attribution, whether along the value chain or among capital providers, may offer clarity in carbon footprinting, but it falls short in the context of forecasting and fostering future GHG impacts. It oversimplifies the intricate and interdependent nature of environmental solutions, potentially masking the real impact of investments and diverting focus from the most effective solutions. Attribution, focused on individual parts rather than the whole, could lead to fragmented investment strategies that fail to capture the essential interactions and synergies crucial for holistic emissions reduction.
Project Frame's commitment to a broader approach, one that embraces the collective dynamics of technologies, industries, and consumer actions, is critical for catalyzing meaningful and widespread environmental progress.
Overcoming Limitations of Single-Component Focus
System-Level Challenges and Opportunities: By moving away from attributing emissions reductions to single components, investors can focus on larger, system-level challenges. For example, the integration of renewable energy sources with EV charging networks requires a holistic view that transcends individual technologies or companies. This approach allows investors to recognize and contribute to the interconnected solutions needed for substantial emissions reductions.
Encouraging Collaborative Solutions: Avoiding strict attribution fosters a collaborative environment where different sectors and industries can work together on integrated solutions. This collaboration is crucial for addressing complex challenges like the transition to a low-carbon economy, where success depends on the interplay of various technologies and infrastructures.
Encouraging Comprehensive Innovation Across the Value Chain
Spurring Innovation Across Sectors: Broad investment across the value chain encourages innovation in all sectors involved in emission reduction solutions. For instance, investment shouldn't just focus on EV battery technology but also consider the power grid enhancements necessary to support the widespread adoption of EVs. This ensures that the entire system evolves in harmony, preventing potential bottlenecks or infrastructure limitations.
Balanced Investment Distribution: A non-attribution approach promotes balanced investment across different components of the value chain. It prevents over-concentration of capital in certain areas while neglecting others, ensuring a more uniform development of the entire ecosystem.
Adaptability to Emerging Technologies: This approach allows investors to be more adaptable and responsive to emerging technologies and market shifts. It offers the flexibility to support new and innovative solutions as they arise, which might be critical in the rapidly evolving landscape of emission reduction technologies.
Simplifying Investment Decisions and Broadening Investor Appeal
Reduced Complexity in Investments: By avoiding strict attribution, the investment process becomes less complex and more accessible, especially for investors who may not have deep technical expertise in every component of a solution.
Attracting a Diverse Range of Investors: A holistic approach can appeal to a wider range of investors by emphasizing the broader impact potential of their investments rather than intricate details of specific emission reductions. This can lead to increased capital flow into sustainable technologies and solutions.
Moving away from strict attribution of emissions reductions allows investors to address broader, system-level challenges and opportunities. This approach encourages investment across the entire value chain, supporting comprehensive innovation and collaboration. It simplifies the investment process, making it more accessible and appealing, and ensures that capital is evenly distributed across various sectors and technologies. Ultimately, this holistic approach is more aligned with the multifaceted nature of the challenges posed by climate change and is likely to be more effective in achieving significant emissions reductions.
While Project Frame does not endorse attribution as a primary method in its guidance for estimating future GHG emissions impact, it acknowledges the diverse needs and perspectives of different stakeholders.
For those who deem attribution necessary, Project Frame provides guidance on implementing correct factors to address these concerns. In such instances, the fundamental analysis—determining the unit impact and commercial volumes—remains consistent. A correction factor is then applied to the final planned or potential GHG impact result. This approach allows for the generation of two distinct values: a planned GHG impact reflecting the initial analysis, and an adjusted planned GHG impact that incorporates the attribution adjustment factor. This dual-value system ensures maximum transparency, catering to a range of stakeholders while maintaining the integrity of the underlying emissions reduction analysis. It represents a balanced solution, accommodating those who choose to incorporate attribution without compromising the core principles of Project Frame's methodology.
Rebound Effects
Rebound effect generally refers to the ways in which technology that increases efficiency in use of a resource, such as energy, can cause the resource to be used more in total. This can lessen or cancel out the positive environmental benefits of efficiency. It can even make things worse. This topic continues to be one of the most hotly debated areas amongst the content working group and will be revisited.
Rebound effects are well known phenomena, though often overlooked. The Frame community fully agrees that rebound effects should be considered in assessing GHG impact. However, the community has not yet achieved consensus on how to integrate it into our methodology.
Rebound Effect Origins
Rebound effect is also often referred to as Jevons paradox. This naming goes back to 1865, when economist William Stanley Jevons observed that increasing the efficiency of coal use in James Watt’s steam engine led to a dramatic increase in coal consumption. Efficiency encouraged more coal use, not less, as the unit price effectively went down.
Rebound effects have both direct and indirect consequences. For example, improving the fuel efficiency of a car makes each trip less expensive, and this may lead to the direct effect of people driving more or purchasing a larger, less efficient vehicle. An indirect result would be that people use the money they save from their fuel efficient car to, for example, to travel by plane.
An in-depth discussion of the rebound effect (including a methodology for estimating rebound effects) is included in Chapter 2 and Annex 1 and 2 of the report by the European Council for an Energy Efficient Economy, titled “Energy Sufficiency and Rebound Effects.”
Given that Frame's goal is to use analysis to make better investment decisions for the planet, when analysis reveals a significant rebound effect, what should the investor do, especially given that efficiency-based solutions are a significant focus in climate investing?
While we don't have formal guidance, rebound effects illuminate three insights that should and can directly inform how climate investors think about their work and engage in system change:
Focus on solutions that contribute to fully shutting down top polluters and pollution sources: The priority must remain doing everything we can to get off of coal, oil, and gas. Efficiency improvements may be a necessary byproduct of this focus, without being the primary goal.
Climate investors should actively support policies that regulate markets: Rebound effects from efficiency improvements can be minimized when efficiency improvements come in response to regulations or policies, such as carbon pricing.
Rebound effects and reaction across systems are not instantaneous: Depending on lag times, there may be times where a short term efficiency solution is valuable as long as broader efforts to regulate markets and decarbonize the energy system are simultaneously in motion.
As a best practice, Frame recommends considering potential and actual rebound effects during pre- and post-investment reporting. If a rebound factor is included in the impact calculation, it should be clearly stated and the rationale for the factor should be explained.
Action and Reaction Across Systems
GHG impact involves an orchestra of human systems and behaviors. While value chain attribution accounts for climate solutions that work in sync, not all systems or behaviors are in coordination or work towards the same goals. In complex systems, climate investors who seek to make intentional changes are also working against forces that seek to maintain or advance the status quo. Uncoordinated human and institutional behaviors resulting from market forces, including climate solutions, may also have an overall negative effect on GHGs. Opposition and behavioral economics are also often related.
Investors seeking to go deeper in systemic analysis may look to consequential LCA (CLCA) for inspiration. Consequential LCA considers the system’s potential changes in response to decisions or how impacts change as a consequence of a decision or policy. For example, in CLCA, the assessment of a new type of electric car would consider how this car might influence electricity demand, shifts in resource extraction, and changes in the transportation market.
Examples of Potential Action/Reaction Effects
Opposition: There is extensive evidence that carbon removal technologies, such as carbon capture, could lead to higher fossil fuel production or stymie its phase-out. Analysts may choose to use adjustment factors to explore how these technologies could lead to increased oil and gas production and to account for any additional emissions that might result.
Policy: Having a robust voluntary carbon market with strong standards or protocols could make it easier for policy to expand the mandatory market or adopt carbon pricing. Conversely, having cheap, affordable point source capture technology may also slow policy mandates to shift to more sustainable production processes that are low-carbon without carbon capture.
Infrastructure: Increased vehicles, including cheaper EVs, could lead to more and bigger roads at the expense of green space. Through adjustment factors, can the analyst consider GHGs associated with fewer trees and more roads as important to analysis?
Challenges
Considering broad systemic factors is extremely complex and can take a great deal of time. Added complexity also does not necessarily imply greater accuracy and integrating nuanced feedback loops inherent in human decisions increases the opacity and reproducibility of modeling. Any forms of added complexity and opacity can increase the risk of greenwashing.
But Frame’s responsibility is to uncover where quantitative values can ultimately lead to decisions that fail to address—or worsen— climate change. Systems analysis helps demonstrate the complexity of markets, where markets may not be the answer to the climate crisis, and how markets can be manipulated to work against the intentions of climate solutions. It is essential for investors to consider these dynamics.
In the absence of consensus on how to approach quantification, Frame recommends investors begin considering qualitative reflections on potential consequences of decisions in investment memos and provide real world examples to Project Frame. These narratives will spark critical discussions that may inform strategy, even if they may not ultimately be integrated into modeling.
Additional Resources
