It is clear there’s much to be done to mitigate the worst effects of climate change. But which solutions will prove the most effective and where would investment have the biggest impact? These are the critical questions that the investment community are grappling with, especially in the wake of COP26’s Breakthrough Agenda, wherein 40 countries committed to “accelerate the development and deployment of the clean technologies and sustainable solutions needed to meet our Paris Agreement goals.”
Investments in clean technology have increased dramatically over the past decade, rising from less than $2 billion in 2010 to $17 billion in 2020. This influx of cash is fundamentally changing private market investing; the sustainable investment industry now accounts for 36 percent of all professionally managed assets across Canada, the U.S., Europe, Japan and Australasia. Predicting the impact of such investments, however, is much more complicated.
“We’re at the infancy of understanding forward-looking greenhouse-gas (GHG) reduction calculations,” says Susan Rohac, vice president of BDC Capital’s Cleantech Practice, which has committed $600 million in the cleantech sector since 2018. “With so many variables and different competing technologies, it’s hard to figure out, for example, what the effectiveness of a company’s technology can be even 10 years out.”
One of the key barriers is a lack of standardized disclosure metrics and effective prediction tools. Without an industry standard, when it comes to assessing the value proposition of an investment, it’s increasingly difficult to compare apples to apples to determine which solutions have the most potential. “We’re trying to do our best to make sure that we invest into the most promising GHG-reduction companies in Canada,” she says.
With the clock winding down on hitting global emission targets, as Rohac says “every investment dollar is important.”
When it comes to talking the talk, pledges are coming in fast and thick. At the COP26 conference earlier this month, dozens of corporations and countries vowed to protect habitats, phase out coal, ramp up production of electric vehicles and reduce GHG emissions. To hit those targets, however, there needs to be clear methods of measuring potential, performing due diligence as well as reporting on progress.
Without standardized tools, the cleantech space can be vulnerable to greenwashing as each investor, consumer and fund are left to do their own interpretations. Indeed, a recent review of the green fund industry conducted by the U.K.-based non-profit InfluenceMap found more than half failed to meet the goals set out in the Paris Agreement.
“There’s currently a lot of noise and a lot of bad data,” says Jason Sukhram, director of impact measurement and management at MaRS. Sukhram, Rohac and other leaders across the sector are calling on public and private governing bodies to adopt a measurement consensus, such as the recommendations set out by The Task Force on Climate-related Financial Disclosures (TCFD), to accurately assess sustainability risks and opportunities.
Ka-Hay Law, lead investor at the Telus Pollinator Fund for Good, says it’s incumbent on investors to not only ensure that “impact is baked into the business model” of the technologies they’re investing in, but to set regular key performance indicators using the business’s core metrics to certify investments are operating within the agreed-upon framework.
The logic being, if impact is a mission that’s critical to a company, then it should make for easy math when it scales up. “Fundamentally,” Law says, “if they sell a unit of product, that unit of product should generate the impact that you’re trying to create.”
Complicating matters, for some cleantech solutions, such as direct air carbon capture, a broadly accepted framework to gauge its long-term effectiveness does not yet exist. The sector is simply too new.
In the absence of global standards, an ecosystem of measurement tools have sprung up, including Manifest Climate, a platform that uses artificial intelligence to determine if a company’s reporting is consistent with TCFD standards, and the Prime Coalition’s Carbon Reduction Assessment of New Enterprises (CRANE), an online tool that aims to simplify climate impact assessment of early-stage companies.
Earlier this year, MaRS used the CRANE tool to identify Canadian cleantech ventures with the highest potential to economically reduce GHG emissions for its Mission from MaRS: Climate Impact Challenge. After a national call for game-changing solutions, MaRS short-listed 36 ventures, which were whittled down to 10 finalists using CRANE’s modelling capabilities to chart their potential trajectory by incorporating such factors as market penetration goals, time horizons and uncertainty levels.
“What we were looking for was a tool that could accurately and reliably forecast or predict, to some degree, the potential for a company to reduce GHG emissions through their technology,” says Sukhram. “What will happen if they scale their business over time, and what impact will that have on GHG emissions 10, 20, 30 years down the line. We needed a tool that is essentially going to help us forecast.”
At BDC’s Cleantech Practice, Rohac and her team have been experimenting with CRANE to help project the GHG reduction potential of its portfolio. “Right now, we individually roll up our sleeves and do our own math on each deal. Tools such as CRANE will make the job a little bit easier,” she explains.
In light of recent greenwashing scandals, heightened investment interest and an increasingly urgent climate emergency, there’s a greater push toward establishing best practices for reporting, prediction and disclosure.
“There’s a strong momentum right now to have different impact investors talk from the same playbook,” says Law of the Telus Pollinator Fund for Good, adding that establishing a common lexicon is the next step in the evolution of an industry that’s barely a decade old. “The sector has reached a stage of maturity. It takes time to get enough people to understand the underlying principles and coalesce around the definition of impact.”
To that end, a number of organizations and coalitions are taking shape.
BDC recently joined Project Frame, an international group of investors and experts in the climate investing field aiming to define industry standards, including a common language, guidelines, access to data and tools as well as share best practices. And at Telus, Law ascribes to the framework set out by The Impact Management Project, a forum for building global consensus on measuring, managing and reporting impacts on sustainability.
Meanwhile, coming out of COP26, the International Financial Reporting Standards Foundation announced the formation of the International Sustainability Standards Board (ISSB) to develop “a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.” Set to launch in 2022, the ISSB will have multiple global offices, including in Montreal.
“If everybody works together and has the same commitment around impact and rigour and subscribing to industry standards,” Law says. “That’s how we’re going to move the needle.”