What are Climate dividends and how to book this new digital asset?

We can predict that the "green revolution" will radically alter business in the same way the digital revolution did. Companies must embrace these changes by transforming their business model to make them less harmful to the environment.  So how did the concept of Climate Dividends come about?

As the climate issue grows more urgent, developing initiatives and projects that decarbonise our global economy is essential. For this to happen, there needs to be a significant investment in decarbonising projects or initiatives whose primary goal is to reduce or capture CO2 emissions through the sale of a good or service, such as, for instance, a business selling a cooling system that uses water instead of highly polluting HFC gas.

For investors and businesses engaged in decarbonisation, there is currently no standardised approach and unified measure of an investment's impact. Furthermore, because they are evaluated primarily on their carbon footprint and not on their decarbonising impact, projects that reduce emissions struggle to be valued and attract investors.

Climate Dividends were developed to encourage investments in carbon-reducing initiatives; they are non-financial instruments that evaluate an equity investment effect and its contribution to carbon global neutrality.

The principle is simple; each year, any company that sells a product/service avoiding or capturing COe2 emissions can evaluate its impact, have it certified by a third independent party and transform it into Climate Dividends that can the be distributed to their shareholders, according to their % of capital.

1 Climate Dividend = 1 ton of CO2e avoided or sequestrated.

There are five steps that businesses need to complete in order to be able to generate Climate Dividends, and this is overseen by the Climate Dividends Association, a neutral coordinator, that validates and guarantees every step of this procedure on an online platform.

Step 1 Verifying eligibility: All activities that are centered on avoiding or sequestering greenhouse gases and that respect the DNSH (Do No Significant Harm) principle, are eligible. Activities extracting or exploiting fossil fuels are excluded.

Step 2 Impact assessment: Step two is the calculation of tons of equivalent CO2 based on a Life Cycle Analysis (LCA) framework created by the Climate Dividend Protocol, to formulate a claim of avoided or captured emissions for a given year. The “protocol” (framework) includes a list of acceptable procedures and guidelines for conducting LCAs and selecting baseline scenarios.

Step 3 Verification: The claim is verified by a third party (document inspection, protocol adherence, relevance, and validity of selected hypotheses), who can then verify the claim (they can also ask for adjustment or refuse the claim).

Step 4 Climate Dividends Emission: The business converts its certified equivalent CO2 emissions into climate dividends.

Step 5 Distribution to shareholders: The company distributes the climate dividends to shareholders in accordance with prorated capital distribution. 

Climate Dividends cannot be used in compensation – they can only be used in an investment capacity, showing the contribution to global carbon neutrality. These enable shareholders in the organisation to demonstrate their contribution to global carbon neutrality. It also helps the organisation issuing them to strengthen their brand image, manage reputational risk, add value to their extra-financial reporting, and potentially hedge against regulation. Climate dividends are great assets to be included in Triple capital accounting methods, as they provide a quantifiable way to gauge the effect of an investment on their present portfolio or make future investment decisions. Investors can use it to distinguish themselves from other financial institutions, demonstrate sustainability, or draw LPs.

In addition, Climate Dividends offer a practical means to put a monetary value on the "environment goodwill," which has the ability to increase the value of the company’s shares and, thus, the potential ROI.

Climate Dividends can also be included in additional financial reporting or in performance reports.

Climate Dividends are becoming viable financial vehicles for international frameworks (“protocol”) adopted at the country level, as a standard accepted and utilised by national governments as well as international regulatory agencies like ISSB and EFRAG. They have already been adopted by ACT4 and acknowledged in funding from ADEME et Carbone4 and the Net Zero Initiative from Carbone4.

Hopefully, more accounting bodies will soon accept them.

Businesses need to act globally with corporations contributing to decarbonising our economy rather than offsetting our footprint. Climate Dividends are a primary asset to accelerate this contribution and tackle climate change.