Impact Measurement and scoring

In short

At Vidia, we score climate impact potential based on quantitative and qualitative factors. The resulting metrics lay the foundation for assessing the standalone impact and long-term relevance of a climate solution, and our investor additionality. Using this model, we can focus on quantifying the impact effectiveness or carbon return of every Euro invested over the holding period. At the same time, we can properly account for direct and indirect contributions of specific value chain actors to the overall GHG emissions impact (see Vidia Impact Perspective Part I). Regarding the “quality of contribution”, our qualitative assessment scrutinizes the importance of a product or service within a climate solution’s functionality and performance as well as our investor additionality, i.e. our value-add vs. business as usual. Thus, for a case to be submitted to Vidia’s investment committee, it needs to pass clear thresholds for climate impact.

The Vidia climate impact scoring

Vidia has developed a bespoke climate impact scorecard for the screening and investment process. As we progress through the screening process towards a final investment decision, our assumptions and inputs are updated and substantiated on every step along the way leading to a thoroughly assessed climate impact score. The main parameters and weighting currently used to determine the score are detailed below:

1. Standalone impact: The quantity and quality of impact of a climate solution (carbon handprint) on a standalone basis, which takes into account:

a) the scale of avoided emissions (across the value chain) p.a. per mEUR invested over a hypothetical holding period,

b) the share of climate solution business at the time of investment,

c) the quality of contribution.

2. Additionality: The quality of Vidia’s potential to create additional investor impact vs. business as usual:

d) A steeper green growth trajectory,

e) Greater improvements in terms of efficiency and competitiveness,

f) A faster/steeper reduction of a company’s carbon footprint,

I: For more details on the Vidia perspective on investor additionality please refer to part 3 of this series.

3. Outlook: The long-term impact relevance of the climate solution technology for the #racetozero

From a portfolio management perspective, we are looking to maximise a deal’s “carbon return” on equity invested.

Focus: Scale of avoided emissions

A key indicator to measure the impact of a climate solution is the contribution to the annual amount of “avoided emissions (across the value chain) in tons CO2e”. Corresponding impact efficiency metrics can be derived by relating the avoided emissions to the respective capital requirements: “avoided emissions (across the value chain) in tons CO2e p.a. per mEUR invested”. From a portfolio management perspective, we are looking to maximise a deal’s “carbon return” on equity invested. We therefore use an impact efficiency metric based on “equity capital” to guide our screening and investment decision-making process.

Figure 1 shows how estimates for annual avoided emissions (carbon handprint) per mEUR invested roughly compare within and across asset/project categories, such as renewable energy projects, nature-based solution projects, or industrial decarbonization through carbon footprint reduction. Estimates for typical ranges of avoided (or removed) emissions per mEUR (net first cost) are based on data from Project Drawdown. We appreciate that this indicator is difficult to compare across different categories (e.g. project finance directly funds project-related activities whereas equity investments fund various combinations of ownership transfer and business activities related to the sale of products and services). However, we believe that it can help to facilitate the prioritization within categories. Interestingly, indicator values vary significantly. The final (weighted average) portfolio-level performance can therefore fall within a relatively wide range, depending on the differentiation between “diversified companies“ vs. “pureplay” climate solution companies (see Part II for further explanations on the two types of companies), the prevalence of climate-positive ”outperformers“, equity ticket size and other factors. At Vidia, we work with a minimum threshold for this KPI as well as target KPIs for an invested portfolio to assess the carbon return of investments.

Figure 1: Annual avoided emissions per mEUR invested

Focus: Quality of contribution to avoided emissions

At Vidia, we are aware of the importance of enabling and supporting climate solutions for generating avoided emissions across the value chain. While avoided GHG emissions essentially represent the collective (typically multiplicative rather than additive) impact of several climate solution providers working together across the entire value chain, their individual contributions can be difficult to attribute. In part, this is due to the varied quality of contribution (see Figure 2 below). To effectively promote systemic and collective climate impact we invest in climate solutions that contribute to avoided emissions (across the value chain) at least to a “substantial” degree, meaning that the product or service cannot be easily substituted without a significant loss of impact performance.

Figure 2: Quality of contribution

So what?

Impact measurement is key to maximizing the carbon return or impact effectiveness of investments. However, estimates of emissions avoidance are typically based on numerous assumptions with varying confidence levels and safety margins. To see the whole picture and further inform our screening, selection and portfolio management process, we use quantitative measurements complemented by qualitative elements. This helps to ensure that we invest in companies with meaningful climate impact meeting a defined set of targets. Considering the challenges related to attributing impact to a particular value chain link, we are cautious that neither we as investors nor our portfolio companies make overly attributional or potentially misleading impact “ownership” claims. The Vidia Impact Methodology rests on a multidimensional approach to the assessment of a climate solution’s standalone impact and long-term relevance, and our investor additionality.