Climate Impact Measurement Framework
GenZero, an international asset management company, has released a climate impact measurement framework aimed at measuring the climate impacts generated by investment activities and improving the efficiency of responsible investment.
GenZero believes that the total global climate financing over the past five years has exceeded $1.5 trillion, and in order to achieve net zero emissions, at least $150 trillion in climate investment is still needed by 2050. Therefore, measuring the climate impact of these investments is an urgent issue for the financial industry.
Climate Impact Measurement
In the past five years, global net zero investment has increased from $266 billion annually to $425 billion, with an average growth rate of 10%. However, many investors are not aware of the true impact of their funds on climate.
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The disclosure of climate impacts is different from traditional carbon emissions disclosure. Carbon emission data tracks greenhouse gas emissions, with different disclosure standards such as Scope 1 2 3. Climate impact tracks greenhouse gas reduction and avoidance, and is related to climate change mitigation and adaptation.
Factors for Measuring Climate Impact
In measuring climate impact, GenZero focuses on the following factors:
Different climate affects. GenZero believes that climate impacts occur in three ways:
- Direct Climate Impact refers to the impact of investment targets on production and services, such as environmental projects and solar energy projects.
- Indirect Climate Impact refers to the infrastructure or technology provided by the investment target that can affect the climate, such as companies producing solar panels.
- Transformational Climate Impact refers to the company providing technology or solutions for future climate transformation, such as more advanced carbon reduction technologies.
Ownership of climate impact. When different investors are in the same project, the climate impact generated is related to each investor. To reduce double counting, climate impacts should be allocated according to ownership, that is, when an investor holds 50% of the investment, they should also receive 50% of the climate impact.
Duration of climate impact. Due to the long lifecycle of climate related projects, there is also a long measurement time for climate impacts. GenZero believes that when investors exit a project, they should not continue to calculate its climate impact. This approach can enable investors to focus more on early-stage climate financing and support the development of emerging companies.
Marginal cost of climate impact. GenZero believes that as time goes on, the marginal cost of climate impact will continue to increase, because the carbon price will rise over time. This calculation method can objectively reflect the cost that investors will pay for future climate impacts.
Contents of Climate Impact Measurement Framework
GenZero believes that the framework for measuring climate impacts should be concise, applicable, and have sufficient explanatory power. Following the previous requirements, the framework is divided into three parts, measuring direct, indirect, and transformational climate impacts.
- In direct climate impact framework, investors can adopt both quantitative and qualitative methods. The cost paid by investors is the total investment divided by the amount of carbon emissions reduction for that investment.
- In indirect climate impact framework, investors need to consider the proportion of their investment in the entire value chain. The cost of investors is the product of the directly affected cost and the proportion of the value chain.
- In transformational climate impact framework, investors need to consider the substitutability of future technologies to existing ones, including the proportion of substitutions and the climate impact of current technologies. The final outcome of the transformation impact may be related to investors’ assumptions about future technological development.
GenZero believes that the climate impact measurement framework will be an important part of net zero investment and encourages global investors to incorporate it into the investment process, enhancing market practices for climate financing.
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