In 2019, the Commission d’enrichissement de la langue française defined the expression “greenhouse gas emissions compensation” as “all technical or financial measures that make it possible to offset, in part or in whole, the emissions of anthropogenic greenhouse gases into the atmosphere that could not be avoided. »

The first key point to note is that compensation only applies to emissions that cannot be avoided. Only after calculating one’s carbon footprint and making the necessary efforts to reduce it as much as possible can the irreducible balance be offset.

The underlying principle of carbon offsetting is quite simple: the impacts of a ton of carbon emitted somewhere can be neutralized by sequestering or reducing another ton of carbon elsewhere. In other words, the reduction of one ton of CO2 emitted thanks to a project to improve cookstoves in Rwanda has the same climatic impact as a reduction achieved by a clean energy project in France. On the other hand, there is one major difference, the cost of implementation, which is largely in favour of the cookstoves project - giving it a better ecological return (defined as the amount of emissions avoided for each euro invested).

In practice, how does it work?

Each ton of GHG emission avoided by an offset project, expressed in CO2 equivalent Ton (TeqCO2) is certified by the issuance of a carbon Certificate. Individuals, companies, local authorities and events can thus voluntarily offset all or part of the emissions they have not been able to reduce by buying these carbon Certificates.

But beware, there are strict rules to be respected in order to claim effective offsetting.

• additionality: this is obvious, but it is better to remember that the financing provided by the sale of the certificates must be indispensable for the project to be carried out;
• permanence: likewise, emission reductions must be permanent (at least 100 years);
• measurability: a methodology validated by a third party independent of the project developer must exhaustively describe how the reduction compared to the “business as usual” scenario is calculated;
• verifiability: an independent auditor verifies on the ground that emissions have actually been reduced.

Compliance with all of these requirements is verified by certifiers through labels. The two major labels are Gold Standard, founded in 2003 by WWF, and Verra, a non-profit organization created in 2005 on top of the original UN label by UNFCCC launched in the scope of the Kyoto Protocol.

What types of projects are eligible?

The projects submitted for certification are diverse in nature. They may include the development of solar and wind energy, afforestation and reforestation, transformation of methane into clean energy, improvement of energy efficiency, etc. As things stand, virtually all human activities generate carbon and are therefore potential sources of reduction. Let us illustrate this with three examples:

• the construction of deep wells in areas where drinking water is scarce avoids boiling water to purify it…and thus reduces wood collection and associated emissions,
• the delivery of improved cookstoves reduces the amount of wood used in traditional cooking practices (very often, an open hearth around 3 stones, knowing that more than 2 billion people in the world use wood or charcoal to cook food),
• the covering of open landfills allows to capture methane (a GHG with a warming power30 times greater thanCO2) which we then transform into clean electricity.

We worked for many years in financial institutions. Jérôme and Marc have a combined experience of more than 25 years in carbon finance. They were leaders of the emergence of impact finance within Société Générale, in particular with the creation of Orbeo, the joint venture dedicated to carbon-offsetting projects within the framework of the Kyoto Protocol. Meanwhile, Jérémy was working on the creation and development of YOMONI, the leading roboadvisor in France.

We combined our expertise in 2019 to create Judo CARES, the first carbon offset one-stop shop dedicated to financial institutions. Our ambition is to enable them to offer all investors the opportunity to play a role in the fight against climate change.

Our vision is that the climate emergency is the main challenge of humanity for the years to come; investors and financial players have a leading role to play in addressing this challenge.Fortunately, companies are becoming increasingly aware that actions must be taken, without waiting for states to agree on strong measures. These companies are voluntarily reducing their carbon footprint today. They promote the consumption of renewable energies and are implement measures to reduce their emissions. Moreover, they are willing to endorse even greater responsibility for their emissions by compensating them with carbon-offset projects.

The principle of these projects is to finance actions that capture or reduce greenhouse gases’ emissions. This can involve for example improving the waste management or the energy efficiency of certain household equipments, or building small-scale renewable energy production facilities. Thus, by providing financing without which these projects would not exist, a company compensates the residual negative impact of its activity on the climate.

How can managers and savers also take action?

But how can an asset manager or a bank also contribute to the fight against climate change? As a shareholder or a lender, it might be in a position to influence the management decisions of the companies it lends to or invests in, and thus contribute to GHG emission reduction strategies.

In addition, a financial portfolio manager is able to choose his/her investments according to his/her views on environmental issues and to the corresponding guidelines he/she has established. Such selection policy will have a long-term impact on the behaviour of companies in the same way that individuals influence brands through their consumption choices.

The above-mentioned actions do have a positive impact on climate change, but their effects are slow and indirect, and will not be sufficient to address the urgent climate-related issues. So what can the asset managers do? Their difficulty of addressing the climate-related challenges sometimes translates into an ESG investment offering that tends to be too broad and based on imprecise criteria; this is particularly the case on the subject of environmental impact, even though this is at the heart of investors’ concerns, as studies on the topic have shown.

This is where Judo CARES comes in. This is the first carbon offsetting one-stop shop for asset managers and banks. Our purpose is to enable our clients to offer a simple and clear solution to their investors: for each type of funds or investment solution (retail funds, institutional liquid funds, life insurance units, private equity and private debt funds,) in their range, they can now propose a carbon-offset option to their investors.

How does Judo CARES work?

Judo CARES is a fully integrated solution which automatically measures the daily carbon footprint of an investment portfolio by aggregating the emissions of the underlying companies or assets. In a second step, thanks to its architecture open to the world of project developers, we offer a pre-selection of offsetting projects chosen for their environmental impact and their relevance with respect to our client’s objectives, and following the best international standards. We then invest in the projects on behalf of our client. Depending on our client’s needs, we can manage the global offsetting strategy over the life ot the investment portfolio. All this is transparent, fast and easy for the portfolio manager, since the daily calculation of the portfolio’s carbon footprint can be automated and Judo CARES manages all the interactions with the project developers.

Why the name Judo CARES?

Because Judo means “the way to flexibility” in Japanese. And that our ambition is to offer flexible CArbon REduction Solutions that use the immense leverage of finance to combat climate change; a leverage whose power also lies in the sum of the individual wills of its investors.

The basic principle

The idea is to extend the responsibility for the carbon footprint to the holding of financial assets. Indeed, having invested in a stock or bond, the manager is financing activities that emit GHGs.

How to transpose the carbon offsetting methodology to financial portfolios?

Carbon offsetting is only justified in a multi-stage process. First of all, the carbon footprint must be measured, then measures must be taken to reduce it over the long term, and finally the balance, which is currently irreducible, can be offset. How can this be transposed to an investment portfolio?

The first step is to calculate the portfolio’s carbon footprint by cross-referencing the manager’s daily positions with the emissions levels of each invested company. Next, structural measures must be taken to reduce GHGs. For example, players with sufficient weight in a company’s capital or debt will be able to promote those changes through the company’s governance instances. A carbon reduction strategy can also take the form of policies to exclude the sectors that emit the most (coal for example) or investment choices that overweight the firms that make the most effort to adapt their model to the future carbon-free economy (Best in class approaches). This is a sensitive subject because it can have an impact on the portfolio’s performance and risks. As these choices by definition reduce the investment universe, the portfolio may become more concentrated and therefore more volatile.

Finally, the remaining carbon footprint of the portfolio is to be offset. This can be done through investments in selected offsetting projects (at least certified by Verra or Gold Standard or UN) that have the greatest impact in the fight against climate change.

A necessary contribution to the fight against climate change

When following these steps, the carbon offsetting of a portfolio contributes to reducing our GHG emissions with immediate effect. Bearing in mind that the carbon budget remaining to be spent to limit the rise in global temperatures to 2 degrees by 2100 is 1000 billion tons and that at the current rate we will have consumed it in 25 years, such offsetting strategies have a significant part to play.

Based on the principle that you can only control what you measure, the World Resource Institute (WRI) and the World Business Council for Sustainable Development (WBCSD) launched the GHG Protocol initiative in 1998. Its objective is to define principles for measuring and reporting the carbon footprint of an organisation (and a company in particular).

This led in 2001 to the publication of the first Corporate Standard, which organizes the accounting of GHGs (greenhouse gases) of the Kyoto Protocol (CO2, Methane) into three mutually exclusive perimeters (scopes 1,2,3):

Scope 1

These are direct GHG emissions from company-owned sources. They are mainly the result of the following activities:

• Electricity, heat or steam generation,
• Physical or chemical treatment; e.g. production of cement, lime, adipic acid, nitric acid and ammonia,
• Transportation of materials, products, wastes and employees on the company’s sites; for example, use of mobile combustion sources such as trucks, trains, ships, aircraft, buses and cars.

Scope 2

It includes any indirect emissions associated with the production of imported or purchased electricity, heat or steam.

Scope 3

Often referred to as “broader scope”, it includes all other indirect emissions that result from the reporting company’s activities, but which come from sources owned or controlled by another company, including :

• employee business travels,
• transport of products, equipment and waste,
• subcontracted activities, contract manufacturing and franchises,
• emissions from waste where it originates from sources, or occurs in installations, which are owned or controlled by another company, for example, biogas emissions from landfills,
• emissions over the life cycle of products and services,
• employee commuting,
• production of imported materials.

The diagram below shows the direct, indirect and extended scopes:

Crédit : carboncredentials.com

It then becomes clear that calculating Scope 3 is no easy task, since the entire value chain must be taken into account with life-cycle analyses of the products and services sold: extraction of the energy and non-energy raw materials needed for manufacturing, distribution, use, collection and disposal to end-of-life chains, as well as all transport phases.

Depending on the type of company, the weight of each scope can vary greatly. For example, Scope 3, through the emissions of cars sold, accounts for 99% of Renault’s carbon footprint. On the other hand, an energy producer like Air Liquide or Engie will have a large part of its footprint included in scope 1.

By promoting the use of common standards, the GHG Protocol methodology makes a decisive contribution to the dialogue between political, economic and societal actors and to the necessary fight against climate change. However, as it deals with an eminently complex subject, it must be regularly improved, particularly for the calculation of the Scope 3. Hence the publication in 2011 of The Corporate Value Chain (Scope 3) Standard, which breaks down the scope of expanded emissions into 15 sub-categories.