Why the NEC Metric ?

Sustainable Finance Needs a Tool to Measure Environmental Impacts

In today’s global and regional environmental context, it is crucial for financial markets to be able to identify and drive capital towards solutions that contribute to an environmentally resilient economy.

Unfortunately, the indicators available to investors are not fully transparent and, like portfolio carbon foot printing, they have limited value for decision making. Moreover, they only cover large companies even though SMEs represent over half of the world economy.

New tools and solutions are needed to enable investors to invest in activities that encourage the transition towards a greener, more sustainable economy, regardless of size.

The NEC metric was created because…

1. Earth is our most valuable asset

Human prosperity relies entirely on maintaining the health of the ecosystems that keep us alive today. The accelerating rate of environmental degradation caused by human activities is one of the biggest challenges that mankind must face and the global financial system can be a game changer.

2. Environmental regulatory requirements are getting stricter

In 2015, the United Nations adopted 17 Sustainable Development Goals (SDGs) that are becoming recognized as a global framework to measure the attempts to improve the lives and prospects of all people, all over the world. Since 2015, other initiatives have made evaluating environmental impacts a key focus for financial institutions:  a. Article 29 of the French Energy Transition for Green Growth Law b. COP21 c. The TCFD (Task Force on Climate-related Financial Disclosures) d. The European Commission Action Plan on Sustainable Finance (taxonomy, SFDR, …).

3. Sustainability equals long-term profitability

There is a proven correlation between an asset’s long-term profitability and its environmental impacts. Other motivations such as regulations, and competitive edge, are also making low -or positive impact- assets more attractive to investors because of their “future-proof” benefits. The first academic work on the NEC, presented at the12th International Financial Risk Forum in March 2019, shows that the NEC appears to capture this effect of sustainability.

4. The old e-metrics are inadequate

a. Carbon foot printing only measures the annual amount of CO2 equivalent an activity generates, it does not take into account the other environmental consequences of an activity such as water pollution, consumption of resources, and the effect on biodiversity.

b. Most environmental ratings are inadequate, they only demonstrate how a company reports on and deals with environmental issues, but not their alignment with the energy and environmental transition or resilience. They may also be biased by a company’s CSR reporting capacity, its geographic location, or the industry it operates in, so they fail to provide an accurate view of risks or impacts and generally don’t distinguish between different business models within a same industry.
c. No tool existed to help investors anticipate the future, considering whether an activity or sector is transitioning towards a greener, more resilient economic model.

As sustainable finance flourishes, different shades of green have emerged. Much like financial indicators or ratings, environmental metrics guide decision making by providing investors with insight into the risks and opportunities that lie in their portfolios.

Our Solution

In response to the need for better environmental performance indicators, Sycomore AM and its historical partners, I Care & Consult and Quantis, developed the Net Environmental Contribution (NEC) metric between 2015 and 2018. In 2019, after four years of R&D and tests, they launched the NEC metric v1.0. This  metric is now being developed and promoted by an independent multi-stakeholder structure: the NEC Initiative, a mission-led company.

THE NEC METRIC

Measures the extent to which businesses are aligned with the environmental and energy transition. The outcome is a single figure ranging from -100% to 100% that can be applied to all industries and funding types.

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THE METHODOLOGY

The NEC is based on a scientific approach; it is a comprehensive environmental methodology, including impacts on climate, water, resource and waste, air quality and biodiversity.

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