Initiative Climat International (iCI)
With the SEC proposing new reporting mandates around climate governance and greenhouse gas (GHG) emissions earlier this year, the topic of ESG tracking has moved even further into the line of focus for public companies and asset managers alike. It is very timely then, that initiative Climat International (iCI), in collaboration with Environmental Resource Management (ERM), released a new set of GHG emissions accounting guidelines this May. Tailored specifically for the use of private investment managers, these guidelines are intended to bring code and clarity to emissions data collection and reporting procedures—a much-needed push for standardization in an ever-evolving ESG reporting landscape.
What is the Initiative Climat International?
iCI represents a consortium of leading private market investors embracing the global paradigm shift towards sustainable investment and climate change mitigation and adaptation. In 2015, iCI was founded by five French private equity firms following the international adoption of the Paris Agreement at COP21. These founding firms recognized the urgency for widespread action to transition to a net-zero economy and stay below 1.5℃ of warming compared to preindustrial conditions—the threshold identified by the IPCC as the critical tipping point in the global climate system. iCI is not intended to be a regulatory body, but rather a place where private equity firms converge to share best practices, discuss industry trends, and innovate procedures, all in the name of addressing the climate crisis. Currently comprised of over 160 signatory firms, iCI has solidified private equity’s role in the transition to a net-zero economy.
Emissions reduction is a critical step in climate change mitigation and as the old axiom says, “what can’t be measured can’t be managed.” In that vein, we only have the power to reduce the emissions that we track. The world is increasingly recognizing this fact and is looking at financial institutions to do their part. As the guidelines state, GPs “are being increasingly called upon to disclose climate-related data and establish ambitious targets for GHG emissions reduction across their portfolios, although there is currently no agreed standard for aggregating and reporting this information at fund level…Frameworks assume that carbon footprint data is readily available, but many GPs have not yet established robust processes for carbon footprint data calculation, target setting or benchmarking.”
Without standardization, the potential for comparison across industries is slim. From the perspective of an individual firm, the iCI guidelines lessen the need for atomistic, ad hoc approaches to emissions accounting—overall saving firms time and capital. The guidelines bring together industry best practices in a single document to streamline the process of private equity emissions accounting and lessen the cost burden of entry for firms just beginning to adopt ESG monitoring practices.
There are three primary reasons behind the increased focus on emissions accounting within private equity:
Firstly, many governmental bodies have announced regulatory roadmaps for financed emissions disclosure, typically including quantitative (e.g., Scope 1-3 GHG inventories) and qualitative requirements (e.g., climate risk strategy, ESG integration into investment policies). The proposed SEC regulations around climate reporting represent the latest instance of the global call for emissions transparency being solidified into law. Others include the Sustainable Finance Disclosure Regulation in the EU, as well as the UK’s national Net-Zero Strategy mandating large asset managers, pension funds, and insurance companies to align with the Taskforce on Climate-Related Financial Disclosures (TCFD). Leading governmental agencies are expanding their regulatory purview on the finance industry’s role in climate change, and in turn, climate action. A comprehensive appraisal of each firm’s role in the climate arena is therefore becoming a bare minimum.
Secondly, limited partners are placing growing pressure on their GP sponsors for transparent, low-carbon, and socially responsible products. LPs have historically managed ESG disclosures from fund managers via bespoke data requests. Recently, they have aligned under shared frameworks such as the ESG Data Convergence Project, which will require GPs to report portfolio performance across a standard set of core ESG metrics to ILPA, the leading industry association for limited partners. Leading LPs have predominantly integrated ESG considerations into their public statements and policies. Yet despite these tailwinds, limited mechanisms exist for them to mobilize accurate, transparent data measurement across their general partners. For example, a recent report co-published by ILPA and Bain found that over 85% of surveyed LPs have an ESG investment policy for private equity, yet fewer than 20% of their GPs were able to provide Scope 1 and 2 emissions data when requested.
Beyond these public and investor mandates, firms are increasingly driven to embrace proactive climate management from internal motivations. Firms have numerous incentives to want to shrink their carbon footprint, whether from a sense of duty to help mitigate climate change, cost-savings, market differentiation, or tax breaks.
While organizations such as the Greenhouse Gas Protocol and Partnership for Carbon Accounting Financials have laid foundational work on standardizing corporate GHG emissions reporting, no organizational body has yet to singularly address emissions accounting per the particular nuances faced by private equity firms. That is, not until now.
What are the iCI’s Guidelines?
The iCI guidelines are unique in that they were constructed explicitly for, and by, private equity firms. They are intended to bring consistency to emissions reporting procedures in the private markets, which will help firms identify emissions ‘hotspots’ and set evidence-based emissions targets based on a material understanding of their GHG breakdown.
The guide outlines a five-step process for calculating a firm’s GHG footprint, as follows:
1. Define appropriate reporting boundaries
· Firms must choose the parameters to apply to their organizational, operational, and temporal boundaries.
· Organizational boundaries are set by determining which, and to what degree, operations and pursuits are relevant to a firm’s GHG emissions inventory. The guide outlines two approaches—a control approach, and an equity share approach—while noting that the control approach gives a more accurate and comprehensive view of the firm’s emissions impact. Taking a control approach, a firm accounts for 100% of emissions from operations of which it has majority control, where control can be defined in either decision-making terms or financial terms. An equity share approach, on the other hand, weighs each operation’s emissions by the firm’s share of equity.
· An operational boundary covers which emissions scopes a firm will include in its review.
· Temporal boundaries set the time period over which data collection takes place, and how often new data will be reported.
2. Identify emissions sources
· The guide centers on Scope 3 emissions sources, particularly Category 15, Investments, noting that financed emissions were found to be over 700 times greater than the sum of all Scope 1 and Scope 2 emissions from a firm’s internal operations in one study.
· The guide recommends firms undertake a Scope 3 screening prior to conducting a full emissions audit to identify the most consequential emissions sources, based on materiality and relevance.
3. Collect source data
· iCI advocates for total portfolio coverage, suggesting that “GPs plan to collect GHG data from all portfolio companies, regardless of equity ownership” in order to get the most accurate and comprehensive appraisal of one’s emissions.
· Activity data, the most preferred data source, can be collected in a variety of different measurement units, depending on the quantity being measured. The two approaches for gathering activity data are expenditure-based and activity-based, where expenditure-based is measured in currency spent and activity-based tailors the unit of measurement to the good or service being consumed. For example, electricity usage can be reported in kilowatt-hours and transportation measured in miles traveled.
· Firms should use activity-based data as their default for emissions data collection. iCI does recognize, however, the possibility of activity data gaps given the potential complexities of trying to gather direct source data from all portfolio companies, particularly in instances of minority ownership. As such, the guide advises that using spend-based, historical, and/or scaled data could all serve useful as temporary proxies in early reporting cycles for firms.
4. Select appropriate emissions factors
· Before calculating total emissions, each point of emissions data needs to be scaled by an emissions factor, a unit value of emissions generated by a good or service. There are many different resources for emissions factors, many of which are given in the guidelines appendix.
· The guide also notes the importance of including considerations of the varied Global Warming Potential of different Greenhouse Gases into emissions factors. That is, while carbon dioxide is the standard basis for assessing GHG emissions, other substances, like methane, have a multiple of carbon’s effect on the environment. Knowing which GHG is being emitted by a certain process is, therefore, critical is getting an accurate assessment on a firm’s environmental impact.
5. Calculate emissions
· To calculate emissions, you first need to source and identify the appropriate emissions factors. Once relevant emissions factors have been identified and associated with the proper emissions data, calculating emissions is a multiplication computation. This process can either be executed by the GP or done in consultation with an expert like Green Project.
After going through the step-by-step process of private equity emissions accounting, the guide offers a closer look into Scope 3, Category 15: Investments, representing a firm’s financed emissions. Here, it defines exactly what should be included in a firm’s financed emissions calculations as the share of Scope 1 and 2 emissions quantities (as determined by the appropriate attribution factor) at all portfolio companies and articulates two approaches for calculating these values. The first, and preferred method is an investment-specific approach where firms have each portfolio company undergo an emissions survey of their own. The second is an average-data approach, which uses environmentally extended input output (EEIO) to estimate emissions for a given sector or operation. The average-data approach is primarily seen as an effective tool to use in identifying likely emissions hotspots during Scope 3 emissions screenings, rather than during emissions calculation itself.
The iCI guidelines further include best practice recommendations to ensure that firms' reporting is done with integrity and transparency, via use of high-quality, complete, and relevant data. One suggestion of note is to assign each portfolio company with a "quality score," quantifying the quality of the data used, in line with the PCAF data quality hierarchy. The guidelines also discuss how to go about picking an emissions base year for reference, how to handle mid-reporting period acquisitions and divestments, and how to make up for holes in data.
What’s next? And how can Green Project help?
In an era of ESG convergence that has largely focused on public markets, these guidelines are educational, timely, and serve to push us towards constructive standardization within private equity. They are undoubtedly an important milestone.
However, they are also a signal of a beginning. Now, the work to measure, manage, and reduce emissions across portfolios needs to be tackled with vigor. And, as clear as iCI has been, for many firms it’s difficult to know where to start engaging your portfolio companies to complete an inventory in line with their recommendations.
For firms committed to acting who are facing that question, we would love to help. Green Project is positioned to help you capture the climate opportunity and become an industry leader by building a comprehensive, efficient, and compliant ESG accounting practice. Our platform is purpose-built to help you collect environmental information across your portfolio without burdening your team with the challenging, labor-intensive task of managing ESG data in-house.
If we can help with further questions about this framework or the role that GPT can play in preparing your firm to succeed with ESG management, please reach out to our team.