Let’s ROC and start calculating return on climate impact

One of the first things we learn at business school is calculating future financial returns on investments, but how can we calculate future climate returns on investments? With universal tools to do this, we can make investments decisions that steer financial flows in the direction towards net-zero.

The financial industry’s importance was emphasized at COP26 in Glasgow, one of four main goals has been to mobilize the financial industry to combat global greenhouse gas emissions. By combining public and private capital in the best way possible, we have a opportunity to succeed in the green transition.

However, this also means that investors need better tools for investments decisions and it is time to establish carbon’s own accounting system. We use robust financial models for calculating future potential financial returns, but we need more efficient, standardized models for calculation of greenhouse gas reductions. Today, it is relatively easy to calculate future climate impact for a mature technology, such as land-based wind farms or grid-scale solar parks. However, for new technology in the early stages of development, it is much more difficult.

ROC`n roll-out a carbon accounting system

Let’s use one of our portfolio companies as an example. In 2018 we initially invested NOK 45 million in Otovo, a company that makes it easier to install solar panels on residential roofs. The company has expanded out from Norway into Sweden, France, Spain, Italy, Poland, and recently Germany. The ambitious goal is to have solar panels and batteries installed in every single home in Europe by offering the easiest and cheapest way to go solar.

How do we calculate the potential climate return on our initial investment in Otovo? And an even more complex calculation — what is the climate return in 2030? Meaning, how much reduced CO2 can we expect Otovo’s technology to contribute with in 2030?

To answer this, we calculate how much CO2 is emitted from their daily operations, and from the production and shipping of the solar panels. Next, we calculate and determine the carbon intensity of the power each solar panel replaces with clean solar energy, and what it amounts to in the number of tons of CO2. Finally, we estimate how many solar cell installations there are in 2030.

In Otovo’s third quarter report, the company reported that their installations so far this year will have a net negative CO2 effect of -141 000 tons over the years. If we add up all the Otovo installations installed, the effect will be a reduction of approximately 500 000 tons of CO2. This corresponds to one year of emissions from approximately 300 000 cars.

What would the world look like without Otovo’s technology? Solar panels would still be installed, but with Otovo included in the equation, solar panels are installed faster and on more roofs question that remains is what added effect the introduction of Otovo’s unique technology has on a global scale

If the company reaches their ambitions by 2030, the total emissions reduced will be equivalent to approximately -18 million tons of CO2. The figures are significant, but are not very meaningful without answering out all the assumptions and questions above. Otovo is just one of many examples of projects that can have a major effect on the world’s climate. In addition to return on investment, ROI, we literally need to calculate the ROC — the return on climate impact in metric tons!

The value of a coordinated effort

No matter how thoroughly one calculates and predicts future climate effects, the estimate for 2030 will still run the risk of being more or less inaccurate, and the even more so for estimates for year 2040 and 2050. However, if investors use the same method and disclose what framework they used to calculate, the relative differences between investments will provide valuable information. It can then be a useful tool for making good climate-based decisions when capital is invested. The way forward is to ensure a standardized methodology that is available to everyone. Here, a broad mobilization is needed, because the more companies that use the same framework, the more valuable the carbon calculation system will be for investors and decision makers.

Disclose the climate effect of investment decisions

The EU is in the process of introducing a clear set of rules to define economically sustainable economic activities. This taxonomy is an important step on the way to being able to make qualified assessments of investments. Nevertheless, we need a method to calculate future greenhouse gas reductions from investments made today. Nysnø is working on finding solutions to such future carbon calculations. We are collaborating with academia, other investors, and the business community to find standardized analysis tools for avoided future carbon emissions.

Together with among others Cleantech Scandinavia (that published this introduction on the issue) and the Business School at the University of Stavanger, Nysnø is now refining methods for calculating climate effects. We are a member of the international project FRAME, which aims to close the gap and deliver a common framework for avoided greenhouse gas emissions. Energy Impact Partners is one great exsample of a venture fund that has started to report on potential lifetime carbon savings of their portefolio. In their newly released ESG and Impact Performance Report liftetime carbon savings are an estimated 38 million tonnes CO2e. Commercial service providers, like Climate Point and XIQ, are developing tools for climate impact projections. This development is exciting and will able us to achieve more and do better together.

Exsampel of forward looking climate impact. Energy Impact Partners have estimated lifetime greenhouse gas equivalent savings from parts for their portifolio of Climate Technology. Source: EIP, ESG and Impact Performance Report, 2021.

Second opinion

In order to avoid greenwashing we need to make sure that the future calculated climate effect estimates are made in line with those generally accepted methods (currently under development) and that they are based on sound science. Cicero Shades of Green is a company that have specialized in providing independent and research-based evaluations of green bond investment frameworks to determine their environmental robustness. They recently issued this report to highlight best practice approaches to environmental considerations in various sectors. Perhaps a new line of offering could be second opinion on future climate effect on growth companies’ technology?

To mobilize the financial industry to fight global greenhouse gas emissions, investors must deliver both financial returns and the greatest possible climate effect. My conclusion on how to make good choices for the future is to simply begin with quantifying the future climate effect of investment decisions and do the calculations in line with a commonly agreed framework, and get it on the CFO’s plate!

Roof top solar has a huge potential for avoided GHG emissions in the future. Photo: Elisabeth Tønnessen

Based on original article published in the Norwegian online business newspaper E24.no on November 11th, 2021.

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Nysnø Climate Investments shares insights, stories and thoughts on climate technology.

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Siri

Siri

CEO of Nysnø Klimainvesteringer — a Norwegian sovereign wealth investment company geared toward climate investments

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