Guidelines for GHG impact calculation and assessment of Climate Tech for investors and startups

The Ministry of the Environment has developed the “Guidelines for GHG Impact Calculation and Assessment of Climate Tech for Investors and Startups” as a framework for investors and startups to calculate and assess the environmental impact of Climate Tech startups during investment screening.

Overview

The Ministry of the Environment has been promoting the practice of “Impact Finance,” where financial institutions and investors develop their own strategies for creating positive impact through investments and loans, and communicate these strategies themselves. In July 2020, they published “Basic Concepts of Impact Finance,” and in March 2021, they released the “Guide to Impact Assessment Starting with Green.”

To promote investment in climate change-related technologies (Climate Tech) and contribute to solving climate change issues through finance, it is considered effective to implement “Impact Finance” approaches that evaluate environmental impact (GHG impact in the case of Climate Tech) during investment screening, manage it after investment, and expand positive impact. Particularly in venture capital investments in Climate Tech startups, environmental impact assessment could lead to evaluating the potential market value of the startup’s technology, and international discussions on assessment methods are progressing.

Given this background, the Ministry of the Environment has developed these guidelines based on international discussions and expert committee deliberations.

These guidelines focus on the environmental impact of Climate Tech startups, particularly their future GHG reduction effects (GHG impact). They compile concepts and procedures for calculating and evaluating GHG impact, intended as a reference for investors during investment screening. Additionally, these guidelines can be useful for startups when calculating their future GHG impact and explaining it to investors.

Calculating the future GHG impact of business operations and understanding how much they contribute to medium and long-term climate change goals (Paris Agreement, industry-specific GHG reduction targets, etc.) helps improve the resolution of understanding about the business’s significance and future value, including the feasibility of business plans. It also leads to objectively understanding and evaluating the business’s competitive advantage within the industry.

Significance of Calculating and Evaluating GHG Impact

Quantifying and assessing the future environmental impact of a startup, particularly its GHG impact, offers numerous advantages for both investors and startups:

For Investors and Startups:

• Enhanced Understanding and Resolution: Assessing the potential contribution of a technology towards achieving climate targets (e.g., Paris Agreement) improves comprehension of the business case and its feasibility. It also provides a more nuanced understanding of competitive advantages within the sector.
• Risk Assessment: Evaluating the future GHG impact allows for proactive identification of potential risks. For instance, a technology might reduce operational GHG emissions but have substantial emissions associated with its manufacturing, potentially offsetting its overall benefits.

For Investors:

• Transparency with Limited Partners (LPs): It facilitates transparent communication of the GHG impact of investment portfolios to LPs, a growing area of interest for institutional investors.

For Investors and Startups (Post-Investment):

• Enhanced Support and Growth: Investors can actively support portfolio companies in calculating, verifying, and improving their future GHG impact. This can be instrumental in attracting further investment, fostering partnerships with large corporations, and driving market adoption.

Framework of the Guide

The guide adheres closely to the Project Frame’s methodology and is organized into three core chapters:

• Chapter 1: Unit Impact: This chapter establishes the foundation for calculating GHG impact by focusing on the environmental impact of a single unit of the technology. It involves defining the solution’s scope, setting system boundaries for the analysis, selecting appropriate units for measurement, obtaining relevant emission factors, and constructing a baseline scenario against which to compare the solution’s impact.
• Chapter 2: Potential GHG Impact: This chapter introduces a top-down approach to estimate the potential long-term GHG impact of a solution. It leverages market analysis, considering trends, size, and expected technology adoption rates. The key components involve calculating the Total Addressable Market (TAM), Serviceable Addressable Market (SAM), and Serviceable Obtainable Market (SOM). These market metrics are then combined with the unit impact to derive the Potential GHG Impact.
• Chapter 3: Planned GHG Impact: This chapter adopts a bottom-up approach to calculate the planned GHG impact based on the company’s specific business plan and projections. It relies on the company’s commercial forecasts, including sales projections and growth estimates, to calculate the Planned Impact over a defined period. The chapter also addresses the challenge of estimating long-term impact beyond the typical forecasting horizon, often requiring a blend of bottom-up and top-down approaches.

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