About the author: James Leaton is Research Director, Sustainable Development Investments Asset Owner Platform (SDI AOP)
Climate has dominated the ESG agenda in recent times, but with so much focus on climate risk, decarbonisation pathways, temperature alignment and green/brown definitions, the opportunities side of the coin can be neglected.
As investors seek to deliver on the widely-adopted net zero commitments, we believe it is important to capture the growth areas of climate solutions in order to present a fuller picture of the state of progress towards these targets.
Exhibit 1: The importance of climate solutions for achieving climate objectives
How do climate solutions relate to targets and reporting frameworks?
- The Net Zero Asset Owner targets include a quadrant on Financing the Transition:
- Report on progress on climate-positive investments
- Focus on renewable energy in Emerging Markets, Green Buildings, Sustainable Forests, and Green Hydrogen, among others
- Contribute to activities enlarging the low carbon investment universe and building solutions
- The Net Zero Asset Managers Commitments:
- Facilitate increased investment in climate solutions
- Provide asset owner clients with information and analytics on net zero investing and climate risk and opportunity
- UN PRI reporting framework climate indicators:
- Governance, Strategy & Metrics relating to climate opportunities
- The TCFD recommendations:
- Highlight revenues aligned with climate-related opportunities as a key metric
- Include prioritized opportunities as a key element of a transition plan strategy
- EU SFDR Article 8 requirements:
- Where a financial product promotes, among other characteristics, environmental or social characteristics…. information on how those characteristics are met
Our asset owner community is using the information on climate opportunities to recognise and reward entities which are contributing; and engage with those that aren’t. This will contribute to investor targets such as enlarging the low carbon investment universe. The focus of the SDI AOP on positive impacts and the use of revenues data is also strongly aligned with disclosure requirements such as UN PRI, TCFD and SFDR.
Climate interwoven through the SDGs
As ever with the SDGs the complex picture creates overlap between climate and other goals, such as technologies to reduce air pollution delivering clean industrial processes, providing health benefits, and creating sustainable cities. This is evidenced by the range of SDGs which contain carbon, climate or energy related targets, which makes it challenging to compartmentalise solutions.
Exhibit 2: The range of UN SDG targets which are connected to climate change
SDG13 Climate Action also includes the overarching target on national climate policies, strategies and planning, which cannot be delivered without many of the solutions identified elsewhere in the revenues data. However, the public policy focus of target 13.2 makes it difficult to assign corporate revenues to. Another aspect is the feedback effect of physical climate change on sustainable development. The effects of climate change also exacerbate achieving some of the SDGs, contributing to water scarcity and ocean acidification for example.
Revenues demonstrate climate opportunities
We recently reviewed how the SDI AOP SDG classification can help identify revenues which come from climate solutions, contributing to investor actions in this area. Our focus on products and services also brings a different dimension to the traditional operational emissions performance. For many entities, the majority of their potential contribution to tackling climate change lies in their products and services, not in their own scope of operations. Utilising audited revenue data which is widely available also presents a distinct advantage over trying to reconcile incomplete emissions datasets reported using different scopes and methodologies.
There are obvious clusters of products around renewable energy, electric vehicles, and energy efficiency/emissions reduction, which are the most common areas of climate opportunities revenue currently identified by the SDI classification process. However, the AI approach used does not just identify the most obvious activities such as utilities or auto manufacturers. We are directing the data analysis to collect revenues from industrial companies which are manufacturing components for solar panels or wind turbines; or batteries for electric vehicles.
In our most recent dataset, over US$900 billion of revenues was detected which aligns with product categories associated with climate change. This subset focuses on technologies and services which contribute to climate opportunities. This figure does not include revenues from existing renewable energy operations of the utility sector, which constitute an even larger portion of the revenues included in the SDI approach.
Our analysis identified over 1300 revenue streams from over 650 different entities which related to the full range of climate opportunities. This means that around a third of the entities classified as SDI have revenues from providing climate solutions, in addition to over 100 utilities producing renewable power. This diverse group of revenue streams, includes activities such as videoconferencing services, bicycles, building insulation, smart grids, design consultancy, and flood control.
Exhibit 3: Distribution of revenues across climate-related products and services
We are also monitoring the energy transition to identify the next group of technologies we need to monitor, which may not be generating significant revenues yet, such as Electricity Storage, Hydrogen or Nuclear Fusion. Some activities may also be confined to a handful of specialist companies, such as those producing meat alternatives or flood control.
Climate is inextricably linked with the UN SDGs, so an integrated strategy which considers all of the indirect contributions to sustainable development targets provides a more complete picture than focusing on just the obvious sectors. It is essential in today’s market that fiduciaries are able to demonstrate how they are contributing to climate opportunities, not just how they are reducing exposure to climate risks. The SDI AOP approach enables investors to capture the climate opportunities side of the energy transition which is a core part of their investment strategies and a requirement for many reporting frameworks.