Our Criteria for Defining a
"Climate Solution Stock"

Overview:

Our Climate Solutions Collection of stocks contains our filtered list of every company building solutions to climate change traded in each region. Each year's update takes over 1,000 hours of research, writing, and analysis to compile. We begin with an inclusionary filter, finding every publicly traded company in these regions that we believe is building (or even just might be building) a climate change solution listed in Project Drawdown or the IEA’s Net Zero 2050 Report.

Next, we applied an exclusionary filter, removing any company that did not generate at least half of its revenue from climate solutions. We also removed companies that have been credibly accused of fraud. For some sectors, we passed companies through a set of stricter inclusion criteria, specifically: utilities, yieldcos, waste management, biofuels, carbon capture, water distribution, and LEDs.

Step 1: Inclusionary filter.
Find every publicly traded company building a climate solution.

We build the Climate Solutions Collection and include it in our portfolios because we cannot solve climate change by simply divesting from “bad” companies. We also need to significantly increase investments in solutions.

According to the Climate Policy Institute, we globally invested ~$632 billion into climate solutions in 2020. That is good but far from enough. To be on track to avoid catastrophic warming, we need to be investing 5-8x more, ending up with over $5 trillion in annual climate investments by 2030.

We need to install a lot of solar panels. And electrify a lot of buildings. And change over to a lot of electric cars. All of that takes investment. And until we built this collection, we could not find any way to invest in those companies building solutions to climate change.

More companies every day are building the climate solutions found in Project Drawdown.

There is no single solution to climate change. From now until 2050, we must dramatically transform our global infrastructure to run without fossil fuels while preserving and protecting as many natural ecosystems as possible. Luckily, more and more companies are stepping up to build these critical solutions. The first part of building the Climate Solutions Collection is to aggregate all of them that are trading on US public stock exchanges: large and small, pure-play and conglomerate.

It’s more than just solar and wind companies.

When people think of companies building climate solutions, the first thing that often comes to mind is renewable energy. That’s because we’re going to need to transition our entire global electrical system to running without emitting carbon dioxide. Most of this transition will need to happen from 2020 - 2030.

But to solve climate change and remain below 1.5ºC of global warming, humanity must implement far more solutions than just clean energy. We need our global fleet of buildings to be energy retrofitted, our electrical grid infrastructure to be significantly expanded and reinforced, our cars and trucks to run on electricity and green hydrogen, and much more. This is why we use comprehensive frameworks like those built by Project Drawdown and the International Energy Agency. They present clear paths on how we solve climate change.

The Results.

Our inclusionary filters whittled down the global stock market to about 2,000 companies that we flag for a "deep dive" as they seem involved, at least to some degree, in building and scaling climate solutions.

Step 2: Exclusionary filter.
Remove the companies that generate less than 50% of their revenue from climate solutions

Just because a company is building a Drawdown solution does not mean that they are oriented toward solving climate change. In our second step of building the Climate Index, we dig into each company to analyze the extent to which they are supporting the transition to a zero-carbon world.

Separate out the “pure-play” companies.

First, we make it easy on ourselves by separating out the “pure-play” companies. If a company is just manufacturing solar panels or selling electric cars, we label them pure-play and include them in the index. After this is done, what remains are the companies that have multiple product lines and sources of revenue. For these, we dig further into the numbers.

Look closer at the companies that make products/services for many industries.

For these remaining companies, we dig into their financials to find the answers to the following questions:

• What % of their revenue comes from their main climate solution product
• Do they also build other climate solutions?
• Do they make at least 50% of their revenue from those products/services?

We only use the past year's revenue in this calculation. We do not take stock of any future projects around climate commitments as actions are far more powerful than words.

For some companies, their revenue reporting was not detailed enough to make a clear distinction. These companies are excluded from the collection, using the 'Lacks Proper Information' tag.  

One note: Many companies sell a given product line to multiple industries and can include oil and gas. For example, an LED lighting manufacturer makes industrial lighting. Some of its customers own warehouses, some are from the fossil fuel industry. Outside of military applications, we do not discriminate based upon who a company is selling its climate solutions to. It only matters how much of their revenue comes from those solutions. Even fossil fuel companies are installing solar panels on their offices.

Exclude the companies that make less than half of their revenue from climate solutions companies.

Finally, we remove any company that did not meet the threshold of generating at least 50% of their revenue from climate solutions. We use revenue as the leading metric for exclusion because greenwashing is a reality in this space. Many companies want to appear as if they are aligned with solving climate change while, in actuality, taking little meaningful action. A 50% revenue threshold differentiates between the companies that are committed to building solutions and those simply dabbling in it. Such a target also gives the opportunity for those dabbling to be included in future updates as they increase their revenue from climate solutions.

Also, at this stage, we also remove any companies who have been credibly accused of committing fraud. There are companies out there that are capitalizing on the global rush to build climate solutions. Those that have been caught making clearly fraudulent claims will also be removed at this stage.

Step 3: Refine.
A number of sub-sectors need more specific criteria.

Some categories of companies are harder to classify and need more specific criteria. For each of these, we pass the companies through additional exclusionary filters specific to their industries.

Criteria for electrical utilities

There are hundreds of investor-owned utilities around the world. While many of them have some form of carbon reduction/neutrality commitment, there is a broad range of historical investments in renewable energy and follow-through on these commitments.

In order to be included in the Climate Solutions Collection, an investor-owned utility must meet some very strict criteria must generate at least 90% of its electricity from zero carbon electricity sources.

Criteria for waste management companies

There are three Drawdown solutions related to waste management: recycling, composting, and landfill methane capture. All of the publicly traded waste management companies collect materials for recycling. Municipalities, not waste management companies, decide to collect compost. Therefore, we opted to use landfill methane capture as the deciding factor. In order to be included in the Climate Solutions Collection, a waste management company must capture methane at over 50% of the landfills it operates.

Criteria for biofuel companies

Biofuels are combustible fuels that can be used in internal combustion or jet engines but are not derived from fossil fuels. Instead, they are produced from fermenting biological matter. While burning them does release emissions, biofuels can emit far less, and more importantly, they can exist as part of the natural carbon cycle of annual uptake and release instead of emitting previously sequestered carbon. Most biofuels, though, are not necessarily better for climate, at least not yet. Mostly ethanol-based fuels are mixed with gasoline; the emissions reductions from these are fairly marginal.  

Advanced biofuels, on the other hand, are made primarily of crop waste/and “used cooking oils” offer a complete drop in replacement for fossil fuels and can offer significant emissions reductions. For a biofuels company to be included in the Climate Solutions Collection, advanced biofuels must make up more than 50% of its biofuel production.

Criteria for carbon capture & sequestration companies

For humanity to truly solve climate change, it will need to capture historic atmospheric carbon emissions and secure them in some form. There are many methods of doing this, but one is to separate CO2 from the air and sequester it as a gas underground or in other secure places. Up and coming, non-public companies like Climeworks are working to scale such technologies for ambient air. There are a number of publicly traded companies that provide carbon capture services, but for a different industry: fossil fuels. Companies like Fuel Cell and Babcock & Wilcox generate a significant amount of their revenue from generating “blue hydrogen” by separating hydrogen and carbon from methane (natural gas).

We classify revenue from such activities as “fossil fuel revenue” for two reasons:

1. There have been no at-scale demonstrations of any company’s ability to sequester such captured CO2 from fossil fuels despite significant investments in it.
2. This lack of viable sequestration has led to significant greenwashing, enabling fossil fuel companies to paint themselves as part of the clean energy transition without taking real steps to curb emissions from their products.

For a company to be included in this sector, it must generate more revenue from a Drawdown solution that does not serve the fossil fuel industry than the revenue it generates from generating blue hydrogen for the fossil fuel industry.

Criteria for water companies and water utilities

Water conservation and moving water more efficiently are important climate solutions. There are many companies in the water industry, from monitoring to treatment to distribution, but not all are helping advance climate solutions related to water. So, to be included, a water company must generate at least 50% of its revenue from the following activities:

• Create and/or deploy technology that detects leaks
• Improve energy efficiencies for transporting water (pumps, etc.)
• Create and/or deploy water recycling technologies

Criteria for plant-based diet companies

Plant-based foods can create the same number of calories with far fewer emissions than those produced from animals (with some rare exceptions). So which companies should be included in the Climate Solutions Collection? Beyond Meat seems obvious, but what about Dole? They make the vast majority of their revenue from selling canned plant-based foods (beans, pineapples, etc.).

In order to qualify for the climate index, a plant-based food company must only sell plant-based products and must be accelerating the adoption of plant-based foods. They need to offer some kind of replacement or expansion of the menu to make it easier to switch, not just provide the raw ingredients for it. We also exclude a company in this section that generates revenue from selling flavor enhancers to cigarette companies. They make other plant-based foods as well, but this fails our consumer staples tobacco filter.

Criteria for LED companies

LEDs are an important climate solution. They enable us to do the same thing (create light) with significantly less electricity than incandescent or fluorescent. But not all LEDs are used for lighting. LED components are used in the screen for your smartphone, computer, TV, and even stadium "jumbo-tron." To be added into the Climate Solutions Collection, an LED company must generate over half of its revenue from lighting products that replace existing energy-intensive options (or other climate solutions).

Criteria for defense filter

Many companies build products that are used in the defense industry. We exclude those that sell a product to the defense industry that is not in a Drawdown solution category.

For example: CREE makes LED lighting, a Climate solution. They also make products used in RF communication (not a Climate solution) which are used for military communications. Therefore CREE is excluded from the 2023 Climate Solutions Collection.

Criteria for telepresence

Many companies are engaged in making virtual work and telepresence possible, from the internet provider to your email platform.

To be included in the Climate Solutions Collection, a company must generate at least 50% of its revenue from activities that replace a physical task that historically has required travel (going to the office, a meeting, signing a document, etc.) with something digital (video meetings, teleconferences, e-signatures).

For example: 100% of Zoom and DocuSign's revenue comes from products that enable work to be done virtually that previously would have required physically moving people and things.

Criteria for critical mineral companies

In 2020, humans extracted 7,575 Mt of coal from the ground and then burned it (Source: IEA)

In 2020, humans extracted ~7.5 Mt of critical minerals for clean energy/EV’s. like cobalt, copper, and lithium (Source: IEA)

By 2040, humans must be extracting ~45 Mt of critical minerals annually to be on track to transitioning away from coal and electrifying everything.

There are not enough copper, lithium, nickel, cobalt, graphite, and other rare earth elements above ground today to transition to 100% carbon-free electricity and electrify everything at the same time.  

While any mining and resource extraction is environmentally destructive and unsustainable in the long term, there is no way around it to achieve the more pressing near-term goal of avoiding catastrophic warming. Therefore we include companies that generate >50% of their revenue from mining critical materials. We exclude any of these companies that have a credible human rights or environmental complaint lodged against them.

The IEA estimates that by 2040, recycling already extracted-critical materials could meet up to 10% of global demand. The advantage of critical material mining is that the material is above ground, and it can be recycled and reused almost indefinitely. Meaning there is a theoretical point where we have “enough” mined materials and do not need more circulating in the economy.

Step 4:
Remove Companies Who "Lack Information"

Some publicly traded companies do not publicly disclose a sufficient breakdown of their revenue to make a call.

For example, a company that makes electrical wires could make wiring for the grid (a climate solution), but also wiring for consumer electronics (not a climate solution). But the revenue total is just "wiring" without a breakdown of the end use.

We mark such companies as "lacking sufficient information" and will revisit them in future updates. You can sort for these companies using the filters we provide.

Step 5:
Finalize

We upload the finalized lists to this website each time we update them. We hope you find this list valuable. If you ever would like to chat with us about it, reach out to hello@carboncollective.co.