DiPP Methodology

Since the industrial revolution ushered in the large-scale use of fossil fuels, greenhouse gas (GhG) emissions into the atmosphere have increased dramatically, leading to a rise in average global temperatures of 1.1°C compared to pre-industrial levels (NASA). This warming has begun to impact climate stability with damaging consequences (e.g., rising sea levels, drought, wildfires, increase in frequency and severity of storms), and poses a material risk to not only the environment but to society and the global economy.

In 2015, 196 countries came together to sign the Paris Agreement, a legally binding international treaty on climate change with the goal to “limit global warming to well below 2°, preferably to 1.5°C” compared to pre-industrial levels in order to mitigate the most severe consequences of climate change.

Despite the commitments made under the Paris Agreement, Global GhG emissions have increased since 2015, with their seemingly inexorable rise interrupted only by the Covid pandemic in 2020. In order to have been in line with the 1.5°C pathway, GhG emissions would have needed to decline at a rate of at least 4.2% per annum from 2015. Each year that we do not meet this required annual reduction will require more significant emissions reductions in future years. Therefore, there is enormous urgency for companies across industries and geographies to take immediate and concrete actions to reduce their emissions.

The funds available in the DiPP tool, in addition to Sargasso Environmental and “Green Universe,” were identified following the process outlined below.

A list of “Environmentally Friendly” funds was established using primarily the fund screening tool (FSRC) on Bloomberg. The following parameters were used:

• From list of “Environmentally Friendly” funds that came through this screening process, the top four as measured by assets under management (AUM) were selected for inclusion in the DiPP tool.
• The next four largest funds were selected for inclusion, with the added criterion that they are or have a related fund that is a mutual fund or other fund registered in the United States under the 1940 Act. This criterion was added to help include funds that could be readily accessed by US investors.
• Finally, an additional two funds that are well-known and are commonly referenced in the marketplace were included: Parnassus Core Equity, and Generation Investment Management. Generation Investment Management’s holdings were based on the firm’s overall holdings as derived from its 13-F filings.
• The fund selection process was run as of March 15, 2023. Going forward, fund data will be accessed twice a year, approximately 60 days after the end of the second and fourth quarter. Newly accessed data may result in funds being removed and/or added to the list.

• Fund holdings are sourced from Bloomberg.
• The fund holdings data that currently appears in the DiPP tool was accessed as of March 15, 2023. Going forward, fund data will be accessed quarterly, approximately 60 days after the end of the quarter.
• The most current holdings available are used for each fund selected. So, the data for funds that report more frequently (e.g., monthly) will be more current than funds that report only at quarter end.

The “Disclose” graphs reflect the quality of climate change disclosure of a fund’s portfolio companies as assessed by CDP. CDP is a not-for-profit charity that runs a global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts. According to CDP it is “the gold standard of environmental reporting with the richest and most comprehensive dataset on corporate and city action.” In 2022, over 18,700 companies worth half of the global market capitalization disclosed through CDP. This of course means that a significant number of companies do not disclose through CDP. CDP evaluates a company’s climate disclosure on an “A” to “F” scale, based on “the level of detail and comprehensiveness of the content, as well as the company’s awareness of climate change issues, management methods and progress towards action taken on climate change” (CDP Climate Change 2022 Scoring Methodology). CDP defines its grades as follows:

• The DiPP “Disclose” graph has grouped the CDP Climate Change scores and disclosure status into the following three groups:
  • A to B: percentage of portfolio companies that received a score of A, A-, B, B-.
  • C to D, Not Scored: percentage of portfolio companies that received a score of C, C-, D, D- or that disclosed but have not been graded by CDP as some submissions are ungraded, for example, the first year of a company’s disclosure to CDP.
  • Not Disclosing: percentage of portfolio companies that are not disclosing to CDP, including companies that have been asked to disclose by CDP, on behalf of investors, but have not yet done so (which automatically gives a company an “F” score).
• It is important to note that a company may be disclosing elsewhere, for example in its own sustainability report. This information is not incorporated into the DiPP tool’s disclosure analysis.
• CDP Climate Change Scores are scored annually and sourced from CDP. Click here to access the data.
• Anecdotally we have observed that CDP disclosure is more prevalent in developed markets, particularly Europe, where both companies and investors are often more active in addressing climate change compared to, for example, emerging markets. Further, larger cap companies that are better resourced to manage complex disclosures and garner greater investor pressure for climate disclosure often appear to disclose at a higher level and with greater frequency than many of their smaller cap peers. Therefore, the results in the disclosure section may be skewed based on a fund’s geographic or cap-size focus. For example, a fund that is focused on investments in smaller cap companies and/or in companies in emerging markets may exhibit a higher level of non-disclosure.

The “Plan” graph shows how a selected fund stacks up in terms of the percentage of its holdings that have science-based emission reduction targets validated by the Science-Based Target Initiative (SBTi). SBTi is a partnership between CDP, the United Nations Global Compact (UNGC), World Resources Institute (WRI), and the World Wildlife Fund (WWF) that seeks to promote climate action in the private sector by enabling organizations to set science-based emissions reduction targets. As of June 2023, SBTi reported that 2,932 companies have approved targets, which represent more than 1/3 of global market capitalization. This means that a significant number of companies do not have SBTi validated targets.

As the SBTi explains, “Science-based targets provide a clearly-defined pathway for companies and financial institutions to reduce greenhouse gas (GHG) emissions, helping prevent the worst impacts of climate change and future-proof business growth. Targets are considered ‘science-based’ if they are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement – limiting global warming to 1.5°C above pre-industrial levels.”

• The graph categories are:
  • Approved SBTi: percentage of portfolio companies that have set one of the following SBTi-validated near-term emissions targets: “1.5°C,” “1.5°C/Well-Below 2°C,” or “2°C.” In response to increasing urgency for climate action, SBTi raised the bar to 1.5°C and will no longer accept well-below 2°C from July 15, 2022. Companies that have targets approved in or prior to 2020 will be required to update their targets by 2025 to meet this new standard.
  • Committed to Setting SBTi: percentage of portfolio companies that have submitted a letter to SBTi establishing their intent to set a near-term emissions target.
  • Not Committed: percentage of portfolio companies that have not submitted a letter to SBTi establishing their intent to set a near-term emissions target. Companies may have established a non-science-based target, or even a science-based target that has not been presented to SBTi, but in the interest of establishing a consistent comparable metric such targets are not considered by the DiPP tool.
• The SBTi target status is sourced from SBTi. Click here to access the data.
• Based on the 2021 SBTi “Annual Progress Report,” the largest number of companies with SBTi-approved near-term emissions targets are from Europe followed by Asia and North America. By sector, the largest participation in SBTi targets comes from the service industry, followed by manufacturing, food, beverage and agriculture, financial services, and materials. Therefore, a fund’s geographic and industry focus may skew the distribution of the SBTi status data. For additional information on the nature of companies that are seeking out and receiving SBTi’s, we recommend you refer to SBTI’s report and online search tool.

Note: For the above SBTi diagram, Europe includes “Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Jersey, Lithuania, Luxembourg, Netherlands, Norway, Poland, Portugal, Russia, Spain, Sweden, Switzerland, and the United Kingdom. Asia includes Bangladesh, Cambodia, China, India, Indonesia, Israel, Japan, Jordan, Kuwait, Lebanon, Malaysia, Pakistan, Philippines, Saudi Arabia, Singapore, South Korea, Sri Lanka, Taiwan, Thailand, Türkiye, Vietnam and the United Arab Emirates. Africa includes Egypt, Kenya, Mauritius, South Africa, Uganda and Nigeria. Latin America includes Bolivia, Brazil, Chile, Colombia, Costa Rica, Guatemala, Mexico, Paraguay, Peru and Uruguay. North America includes Bermuda, Canada, and the United States. Oceania includes Australia and New Zealand.”

Source: SBTi, SBTi 2021 Annual Progress Report: Science-based Net Zero Scaling Urgent Corporate Climate Action Worldwide, June 2022, P.16 and 18

• The “Perform” graph shows the historical emissions reduction/increase trajectory of a selected fund’s portfolio.
• To allow for comparison across the different funds and data sets, the emissions for 2015 are indexed to 100 and the emissions for subsequent years are shown as a decrease/increase relative to 2015 levels.
• The trend lines shown in the graph are:
  • Global Greenhouse Gas Emissions: shows the trajectory of global GhG emissions between 2015 and 2021 (“latest reporting year”). Actual global emissions from 2015-2020 were sourced from Climate Action Tracker, an independent scientific analysis produced by two research organizations that have been tracking climate action since 2009. Click here to access the Climate Tracker data. Climate Action Tracker data is available only through 2020. Therefore, to estimate 2021 global GhG emissions, actual emissions data for CO2 emissions from energy combustion and industrial processes (sourced from the International Energy Agency (IEA)), which comprise around 70% of global GhG emissions, were used. We then made the simplifying assumption that total global GhG emissions exhibited the same percentage change between 2020 and 2021. Click here to access the IEA data.
  • 1.5°C Pathway: shows the emission reduction requirements between 2015 and latest reporting year to limit global warming to no more than 1.5°C above pre-industrial levels. Specifically, the 1.5°C pathway follows SBTi’s guidelines to companies based on the Absolute Emissions Contraction method for a 1.5°C pathway. This translates to a 4.2% annual linear reduction rate in GhG emissions between 2015 and 2030. Click here to access the SBTi guidelines.
  • Selected fund(s)’s emissions: represents the aggregate Scope 1 and 2 emissions of the selected fund’s portfolio companies on an annual basis between 2015 and the latest reporting year. Scope 1 emissions are direct GhG emissions from the operations owned or controlled by a company. Scope 2 emissions are indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling. The emissions data collection and analysis are based on the following methodology:
    • A fund’s portfolio companies will generally change over time; however, for the purpose of this analysis, the portfolio holdings are based on the most recent portfolio composition available at the time of this analysis (refer to above “How did you identify the portfolio companies held by funds featured in the DiPP tool?”) and were used across 2015 to latest reporting year. A fund may have owned companies that had stronger or weaker climate change performance in the past, but this will not be reflected in the DiPP tool’s figures.
    • The absolute Scope 1 and Scope 2 emissions for each portfolio company are aggregated at the portfolio level. This aggregated absolute portfolio emissions figure was used to calculate the year-on-year change in portfolio emissions.
    • We have equal weighted all the holdings so that portfolios, which may have substantially different numbers of holdings, can be evaluated on what we believe is a more comparable basis. However, equal weighting of the holdings means that a relatively small portfolio holding with large and growing emissions will have the same impact on a portfolio’s emissions performance as a large holding with significant emissions reductions and vice versa.
    • The emissions data is sourced from CDP Climate Change disclosures and includes reported Scope 1 and Scope 2 emissions (market-based if available, otherwise location-based).
    • When CDP Climate Change data is not available for a given company, data from the company’s public disclosures is used (e.g., corporate sustainability reports).
    • If a company’s annual emission data is available for only some of the years between 2015 and latest reporting year, then the year-on-year percentage revenue change of the company was used as a proxy for emissions growth / declines.
    • If emissions data for a company is not available for any of the years between 2015 and latest reporting year, estimates are used for annual emissions, based on the company’s sales data and applying the Scope 1-2 emission revenue intensity from the best available comparable companies as identified by Sargasso. For companies that do not report Scope 1 and 2 emissions and do not have revenue for any of the years between 2015 and latest reporting year, we did not estimate the emissions level and removed them from the graph data in the “Perform” section. Importantly, we recognize that using revenue growth and revenue intensity from comparable companies has limitations, but we believe that it is the best available method to measure emissions with incomplete public disclosure. We believe that making the link between emissions and revenue while clearly imperfect is a not unreasonable approach due to the clear link between economic growth/activity and emissions. We infer that, generally speaking, revenue growth will be accompanied by greater activity (more production, transportation, energy use etc.) which drives emissions. Nonetheless, we acknowledge it is very possible that a company reduced emissions even as revenue grew, making the comparable company emission revenue intensity an inaccurate reflection of the actual emissions. It is worth noting that if a company had in fact decoupled its revenue growth from emissions we would expect them to disclose this achievement. It is also possible that a company has been lagging in its emission reduction efforts and may have a higher emission revenue intensity than comparable companies, thereby leading us to understate a portfolio’s emissions increase.
    • For Sargasso holdings, we may update a company’s recent and historical emissions data as more accurate information becomes available. We also take into account events that may require rebasing of historical emissions. A rebasing event includes mergers, divestiture and/or a change in emissions calculation methodology (e.g., updating grid factor for calculating emissions from purchased electricity based on IEA data) or business scope, that is covered in a company’s disclosure (e.g., adding a country of operations that was previously not disclosed). For holdings of other funds included in the DiPP tool, we used the data provided in the company’s CDP report under question C7.9a (“Identify the reasons for any change in your gross global emissions …”). Only companies with at least a +/- 500,000 metric ton CO2e Scope 1 and 2 emissions change vs. prior year between 2015 and latest reporting year, and more than +/- 200,000 metric ton CO2e Scope 1 and 2 emissions change across the entire 2015 to lastest report year period due to acquisitions, divestments, mergers, change in boundary and/or change in methodology (“rebasing events”) were subject to rebasing. For any disclosed rebasing events, we took the sum of the value of emissions reported in that year and removed/added this value from the Scope 1 and 2 baseline emissions of all prior years covered in this analysis. If a company met the emissions threshold described above but did not disclose to CDP Climate or respond to question C7.9a, rebasing was not conducted for that company.
    • There are many factors that could skew our estimates for non-reporting companies. One example is the grid factor, which refers to the energy mix and associated emissions associated with a particular electricity system. Asia-Pacific, Argentina and Russia have been cited as markets in which it is harder to achieve 100% renewable energy due to limited availability of renewables, higher cost and regulatory barriers (RE100, Annual Report 2020), whereas many European countries have a relatively high percentage of renewable energy available. Therefore, differences in the geographic locations of company operations could cause significant differences in their emissions profiles, which would not be captured in our comparable company emission revenue intensity estimates.
    • The “Perform” section also does not make accommodations for differences across economic sectors. Some sectors (e.g., airline and maritime shipping industries) require new technological solutions to reduce their direct emissions which will take time to develop, while other sectors (e.g., software and data center companies switching to renewable electricity) may have cost-effective solutions readily available today. So, a fund that invests in sectors in which emissions reduction solutions are unavailable may show growing emissions whereas a fund focused on sectors that have emission reduction solutions available may show declining missions.