Distribution rules
Official requirements in the Protocol
Once the total of Climate Dividends is issued and registered in the public registry, the Contributing Entity can proceed to the distribution. The distribution rules have changed between the second and the current version of the Protocol: it now includes the debt in the split, inspired by the PCAF recommendations and market best practices.
Each shareholder receives an amount of Climate Dividends defined as:
# Climate Dividends received=Attribution Factor×Climate Dividends issued
The attribution factor is determined according to the logic of the PCAF Standard, Part A for Financed Emissions.
It can differ depending on the asset class that is considered (e.g. unlisted equity, listed equity, project finance). The overall approach for the attribution factor is as follows:
Attribution Factor=total # shares# shares of the investor×total equity + debttotal equity
The number of shares is defined as non-fully diluted. The valuation of equity and debt differs. Debt is considered at book value, based on the latest balance sheet. For listed companies, equity is measured as market capitalization, based on the current share price. For unlisted companies, equity is based on the most recent company valuation, typically from the latest capital raise or the last balance sheet entry reflecting a known valuation.
Definitions
Climate Dividends issued
The number of Climate Dividends "issued" is the total number of Climate Dividends a company generates, after completing the Climate Dividends process (see below), including the audit of its claim by an accredited independent third-party.
The Climate Dividends are "issued" once the the audit is positive and the claim is logged in the Climate Dividends' public registry. The date on which the claim is logged in the registry is the "issuance date".
The issuance date serves as the cutoff point for calculating attribution factors, reflecting the company’s capital structure (equity and debt) and ownership information as of that date.
This ensures that Climate Dividends align more closely with the principles of financial dividend distribution, rather than relying on fiscal year-end data.
Climate Dividends Issued are allocated to equity and debt holders in proportion to each asset class’s relative weight in the company’s capital structure.
The debt fraction is currently not distributed to debt holders since this is not the focus of the Climate Dividends initiative. However, pilots might be initiated in the near future to further include debt in the process, possibly leading to an equivalent of Climate Dividends.
Attribution Factor
The "attribution factor" is the formula used to calculate the share of the total Climate Dividends "issued" that is distributed to a particular investor.
The fundamental thing about the attribution factors is that the sum of all attribution factors for one given company must always amount to 100%.
Defining the volume of Climate Dividends for each equity investor
The Attribution Factor can be expressed as follows:
Choosing the right "equity" and "debt" values
Here, we focus on the second term of the product i.e. EVIC or Total company equity+debtTotal company equity , as it represents the proportion of the capital structure composed of equity.
The choice of the denominator ("EVIC" or "Total company equity + debt") depends on the type of asset:
listed companies must use the EVIC
unlisted companies must use the "Total company equity + debt"
The considered values for debt and equity are mostly dependent on if the company is listed or not - both the numerator and the denominator must be determined consistently - c.f. the recap table below:
Numerator
Total company equity
Market capitalization of ordinary and preferred shares
Denominator
Total company equity and debt
EVIC
Definition
For Climate Dividends, EVIC is calculated as the sum of the market capitalization of ordinary and preferred shares (at Climate Dividends issuance date) plus the book values of total debt and minority interests. No deductions are made for cash or cash equivalents to avoid the possibility of negative enterprise values.
Justification
The calculation of EVIC for Climate Dividends follows the same methodology as outlined in the PCAF Standard, in line with the EU Technical Expert Group (TEG) definition. Both frameworks calculate EVIC as:
The sum of the market capitalization of ordinary shares
The market capitalization of preferred shares
The book values of total debt and minority interests
The only difference, but an important difference, is that, under Climate Dividends, the values are based on the Issuance Date rather than the Fiscal Year-End used in the PCAF Standard.
Additionally, in both cases, No deductions of cash or cash equivalents are made to avoid the possibility of negative enterprise values
Issuance date vs fiscal year-end
In order to be closer to the financial dividends mechanism, Climate Dividends' attribution factors are calculated at issuance date, and not at year-end!
This is a very significant difference with the PCAF definition since:
for a listed company, the market capitalization of ordinary and preferred shares may vary significantly between the fiscal year-end and the issuance date
for an unlisted company, a liquidity event (e.g. a fundraising round) can significantly change the valuation of the company
as the company repays its debt to debt holders during the year, the amount of total debt may differ between fiscal year-end and issuance date
👉 the total debt is defined as the "the book values of total debt" including all debt as listed on the company balance sheet (which also includes non-interest-bearing debt).
As precised in the PCAF definition, no deductions of cash or cash equivalent are made.
In compliance with IFRS and GAAP norms, the book value of the debt doesn't include future interests payments.
Sources:
PCAF Standard - Part A
EU - Technical Expert Group on sustainable finance
Definition
👉 the value of the total equity is defined as the last known valuation of the company
👉 the value of debt is all current and long-term debt on the balance sheet of the company
The Climate Dividends definition of "total equity" differs from the PCAF definition
👉 in the PCAF standard, total company equity is defined as the value of equity in the company's balance sheet
👉 the Climate Dividends Association prefers to use the last known valuation of the company (i.e. after any liquidity event)
Justification
This choice is motivated by multiple practical arguments, but the most central one being consistency across asset classes - in the PCAF standard, the equity value for listed equity is "the market capitalization of ordinary and preferred shares".
We feel that it is more consistent to use a "market value" approach for unlisted equity as well and keep a consistent philosophy across asset classes to account for equity
There are 2 limitations to using the latest known valuation (typically from a recent capital raise) instead of the value of equity on the balance sheet:
It's not equal to the actual amount of cash injected by an investor in a private company, funding the company's activity
→ This is also true for the value of the equity in the balance sheet.
For instance, a new investor who decides to buy the shares of an existing investor will not inject any cash directly in the company.
It's disadvantageous for debt holders, if the valuation increases and the debt decreases as it is repaid.
→ it can be seen as a way to "reward" the higher risk taken by equity investors compared to debt lenders → we could argue that, as the revenues of a maturing company become more and more stable (and thus predictable), it will be increasingly funded by debt (because it will be less risky) → on the other hand, a pre-revenue company is more likely to be 100% funded by equity and is less likely to be funded by debt, since it would be considered a very risky loan.
This is a tricky debate and the market is still maturing on this topic. We are aware that our approach is not perfect, but we feel that it's the most logical for now.
If you have any thoughts on this topic you'd like to share, feel free to contact us directly!
Defining each shareholder's amount of Climate Dividends
Here, we're looking at the first term of the product in the Attribution Factor i.e. total # shares# shares of the investor
Official requirements in the Protocol
If a company issuing Climate Dividends is financed (in equity) by several investors, Climate Dividends (after the split between equity and debt) are distributed in proportion to the percentage of equity held, following the same principles as the distribution of financial dividends.
The objective is that Climate Dividends enable the traceability of capital allocation (and hence the climate efficiency of an investor's capital allocation)
The notion of an investor's contribution (of its actual impact) is complex. The 3 key components of impact investing are generally considered to be additionality, intentionality and measurability and are not defined by the percentage of capital owned.
Currently, Climate Dividends serve as a reliable, tangible, transparent proof of capital allocation into companies that develop climate solutions with a measured positive impact; but they don't prove any additionality or intentionality from the shareholder receiving them.
Examples
Vinci is not a Climate Dividends user, this example is purely fictive. We're using the 2023 data, as it's publicly available.
For simplicity reasons, let's consider that Vinci has issued its Climate Dividends at fiscal year-end and that therefore the issuance date and fiscal year-end are the same point in time.
First, we need to define the EVIC of the company, which is defined as:
The sum of the market capitalization of ordinary shares at issuance date, the market capitalization of preferred shares at issuance date, and the book values of total debt and minorities’ interests. No deductions of cash or cash equivalents are made to avoid the possibility of negative enterprise values.
Let's begin by defining the market capitalization of Vinci at fiscal year-end.
# of shares - 589 048 647 (source - Déclaration du nombre d'actions)
on Dec-29th 2023 (issuance date = fiscal year-end), share price was - 113,7€ (source - Vinci)
Total market capitalization to take into account is:
Now, let's look at the book value of debt, including all types of debt and without any cash deductions.
In its EVIC definition, the EU TEG refers to “the book values of total debt,” including all debt as listed on the company balance sheet. This is different from some accounting definitions of book value of debt, which exclude some elements like non-interest bearing debt
From Vinci's 2023 financial statements, we can see that total debt is :
Therefore, we can estimate Vinci's EVIC as:
This means that, if in 2023, Vinci had issued 100,000 Climate Dividends, out of these 100,000, only 43,76% would be distributed to the equity shareholders.
Therefore, Vinci would distribute a total of 43 759 Climate Dividends to its shareholders.
Let's use the fictional example of an unlisted company called Acme.
The company was started by 2 founders Founder A and Founder B and they have both put 100$ in equity to start the company, for 50% of the shares each.
At the end of Year 1:
Investor A invests $1m in the company at a $5m valuation for 20% of the shares
Investor B lends $1m in debt to the company
In the beginning of Year 2, the company issues 100,000 Climate Dividends.
The debt/equity split is defined as follows:
Therefore, about 83% of the Climate Dividends will be distributed i.e. 83,333 Climate Dividends. They will be distributed as follows:
Founder A (40% of the shares) receives 33,333.2 Climate Dividends
Founder B (40% of the shares) receives 33,333.2 Climate Dividends
Investor A (20% of the shares) receives 16666.6 Climate Dividends
What about debt holders?
[This section will be completed soon - reach out if you have specific questions about this]
A formal declaration of honor is required, certifying that the company’s capital structure (equity and debt) and ownership information communicated to Climate Dividends are correct.
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