Case Study: Climate Funding Methodology Schema

Overview

At a time when ESG investing continues to take center stage within the finance world and new ESG funds are created almost daily, allegations of greenwashing and lackluster corporate commitments continue to emerge from NGOs, news organizations, and market participants. The anticipated Securities and Exchange Commission (SEC) ESG ruling is expected to clarify the ESG disclosures required to provide investors with consistent, comparable, and reliable information on climate change.

Concurrently, entrepreneurs and forward-thinking companies are creating new climate-friendly technologies to help mitigate climate change and reduce global warming to acceptable levels. In the past, traditional funding methodologies looked at financial models as the key criteria for investing in climate-mitigation technologies or projects with relatively little concern for the realistic and verified net impact on climate change.

But what if that traditional investing model were to change?

That’s what happened when a subsidiary start-up within a major global climate organization turned to SCS Consulting Services to help develop a methodology that would flip that standard investing practice on its head, focusing instead on a reduction in greenhouse gas emissions as the primary driving factor for project or technology investments. Over the next ten years, the startup is seeking to invest in projects that are proactively mitigating greenhouse gas emissions and stalling climate change, all while delivering a significant financial return.

Problem

On the fast track to investing in leading-edge technology, the startup needed to create a world-class climate-based funding methodology. Due to both internal and external pressures, the methodology had to be created and proven within a 30-day timeframe. This would be a new kind of methodology that had never been created before, nor adapted to from any current methodologies. The start-up team had never created anything like this before and turned to SCS as a company that had nearly four decades of experience writing sustainability standards and providing science-based certifications, innovative market solutions, and sustainability consulting.

Challenge

Working with SCS, the startup needed to generate a methodology that would not only meet their criteria for authentic climate-based funding but also be robust enough to successfully hold up against external third-party audits and anticipate forthcoming climate disclosure rulings. While the methodology would primarily be used by their own internal investing team to gauge a project’s feasibility, it would also be used to facilitate the external audits to ensure that the projects are in fact reaching the stipulated emissions reduction targets that were the basis for the investment. The companies and technologies invested in would be required to show that they are meeting these stated emission reduction objectives and benchmarks to continue to receive funding.

Solution

Working in collaboration with key stakeholders within the startup, the SCS Consulting team provided a comprehensive methodology framework like traditional public sustainability standards, which incorporates background information for the purposes of how to prioritize investments, recommendations for calculations for estimating emission reductions, and the methodical approach for doing this consistently. The methodology is a guide for their company in the evaluation of projects with inclusion of the project’s emissions reduction potential and serves as a guide for external auditors who will be auditing the projects throughout their funding lifecycle. Companies that are seeking funding from the startup are also able to use the new methodology as preparatory material and guidance before full engagement in the funding round to ensure that their own internal calculations for their projects are following the same standardization and criteria.

Results

The climate startup has successfully utilized the SCS Consulting methodology with a test investment project, receiving high marks from the investors that were part of the process as well as from the company whose project is being funded. With a goal of expanding the methodology’s use for additional projects, the startup also has future plans to make the methodology public so other organizations can benefit from the methods used and enable expanded investment in viable climate mitigation projects and technologies. It is anticipated that users of the methodology will be better prepared to meet future proposed SEC climate disclosure.

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