Definition of Climate impact

In short

Emphasizing the urgency of the matter, the UNFCCC’s  global “Race to Zero” campaign instigates swift industrial decarbonization across markets and sectors. The large number of climate solutions, of which many are already commercially available, make it necessary to differentiate between two major aspects of a company’s climate impact: carbon footprint (a company’s operations- and value chain-based GHG emissions) and carbon handprint (the direct or indirect impact of a company’s products and services on GHG emissions). This distinction allows for a structured approach to climate impact when channeling private equity into assets and technologies with the greatest near-term potential for net-positive climate impact.

Over time, scope 1 and 2 emissions are usually easier to reduce.

Carbon handprint and carbon footprint

To accelerate industrial decarbonization through private equity investments we define positive climate impact in two ways:

1. Reduced greenhouse gas emissions – carbon footprint

Driven by ESG leadership, a company’s GHG emissions (its “carbon footprint”) can be reduced by decarbonization activities in line with science-based net-zero targets. Following the Greenhouse Gas Protocol, carbon emissions are grouped into three scopes:

■ Scope 1 emissions are generated from sources controlled by the reporting company

■ Scope 2 emissions include the reporting company’s consumption of purchased electricity, steam, or other sources of energy generated upstream

■ Scope 3 carbon emissions are indirect emissions not covered by scope 1 and 2, and occur across the entire value chain of the reporting company, including both upstream and downstream emissions.

Over time, scope 1 and 2 emissions are usually easier to reduce. Often representing the lion share of total emissions, the reduction of scope 3 emissions is more challenging and resource-intensive. These require effective industrial climate policies and deep organizational transformation across the value chain—actions the reporting company has limited control over.

2. Avoided greenhouse gas emissions – carbon handprint

Future greenhouse gas emissions can be avoided using products and services with a positive climate impact (i.e. climate solutions). Avoided emissions describe the comparative impact resulting from replacing a carbon intensive value chain with a low carbon value chain. The contribution of a given climate solution to avoided emissions can also be considered its “carbon handprint”. The carbon handprint includes contributions to removed greenhouse gas emissions (referring to the climate solutions impact of nature-based solutions, sustainable timber, or negative emission technologies, for instance

Note that the carbon handprint may incorporate negative effects or the opposite of avoided emissions, i.e. “unavoided” emissions. This latter account for products and services that directly serve, enable or support the fossil fuel industry, thus delaying or hindering low carbon substitution.

Figure 1: Carbon Footprint and Carbon Handprint

Figure 2 illustrates the difference between avoided emissions (carbon handprint) and reduced emissions (carbon footprint). While the reduction of a company’s carbon footprint – especially scope 3 emissions – is of great importance, the major share of the positive climate impact potential is associated with a company’s carbon handprint and the scale of avoided emissions. For rapid and meaningful decarbonization, it is generally easier and faster to substitute value chains than to transform them.

Figure 2: Decarbonization effect by reducing footprint and scaling handprint

Emission factors are representative values that express the relation between an activity and the carbon emissions it creates.

Estimating Avoided Emissions – Comparative LCA Analysis

In practice, when it comes to estimating the avoided-emissions-impact of climate solutions, we apply the attributional accounting method. Based on a comparative life-cycle analysis (LCA), this method is used to estimate the difference between the life cycle emissions of the climate solution and a reference product or service (most likely to be substituted) (see Figure 3). Wherever possible, we base our estimates on already existing and well established LCA’s that are either directly relevant or that can serve as reasonable proxies. Additionally, emission factors are applied where necessary. Emission factors are representative values that express the relation between an activity and the carbon emissions it creates.

Figure 3: Comparative lifecycle analysis. (Source: WRI, Estimating and Reporting the Comparative Emissions Impacts of Products)

So what?

A narrow view on carbon footprint reduction does not tell the whole story. Taking a structured approach to defining and measuring climate impact of investments requires to consider both carbon footprint and carbon handprint of target and portfolio companies. Applying a holistic approach to carbon footprint reduction and carbon handprint scale-up potential, based on comparative life-cycle analyses, can help to channel investments into the most impactful business models. It is easier and more effective to substitute existing high carbon products and services with low carbon climate solutions, than gradually transforming high carbon value chains by focusing on the footprint of their building blocks.