Research level: Master

Suitable disciplines: Business administration, focus on Finance and Controlling

Project start: Flexible

Project length: ca. 3 months

Achieving the targets of the Paris Agreement requires a considerable shift of capital towards Paris-aligned activities. For companies and financial institutions, this means that investment options that are Paris-aligned, and thus support their established transition strategies, need to be distinguishable from investment options that are not Paris-aligned.

The X-Degree Compatibility (XDC) Model is an economic climate impact model that calculates the contribution of a company, portfolio or any other economic entity to global warming. Results are expressed in a degree Celsius (°C) number: the XDC. Using an investment option’s economic and climate related performance as input, the XDC Model can measure to what extent the investment is Paris-aligned.

In the XDC Model, economic performance is defined as gross value added (GVA), which in the case of a company, is comprised of EBITDA plus Personnel cost. In the case of investments, two methodologies for defining the GVA have been identified, each dependent on the nature of the investment:

1. Cost-saving investments: in collaboration with the controlling department of one of right.’s clients, the ‘total cost reduction’ KPI was identified as a possible substitute for GVA.
2. Expansion investment: in a research project conducted by right. the ‘Revenue less Cost of Goods Sold (COGS)’ approach was applied which is also used in Cost-Benefit Analyses.

Both methodologies are promising, yet unverified. Hence, the aim of this Master thesis is to determine practicable and standardized approaches for calculating the GVA of the above-mentioned investment cases.

As a first step the researcher should verify whether the methodologies already developed correspond to the definition of GVA on company level, and whether the data needed to calculate GVA is readily available with existing accounting standards. The verification method can be chosen by the researcher. If the existing methodologies are deemed inadequate, a second step would be to identify alternative methodologies that better fulfil the criteria used in the verification method. As investments can differ by case and have various impacts on a company, the researcher is also welcome to identify approaches for defining the GVA of additional investment cases not covered by the two cases above.

Verified definitions of GVA on investment level, based on available data, will help companies quicker adopt the XDC as an internal investment KPI and thus more efficiently manage their transition into Paris-aligned companies. It would also entail that the XDC Model could be used as a supplement to the EU taxonomy for sustainable activities – a classification system introduced in 2020 to enable the scale up of sustainable Investments and support the objectives of the European Green Deal.

Besides regular support from a dedicated supervisor at right°, the following resources will be provided as part of this research project:

• Documentation on the X-Degree Compatibility Model methodology
• Documentation of current methodologies to calculate GVA for an investment
• The EU taxonomy

Research level: Master or PhD

Suitable disciplines: Business administration, Finance, Risk Management

Project start: As soon as possible with a deadline latest end of 2021

Project length: ca. 4 – 6 months

By way of requiring companies to report their impact on the environment, the EU commission’s double materiality responds to the acknowledgement that a low impact on climate change is key for future business success.

The double materiality combines two perspectives on climate-related risk:

1. the impact of climate change on a company, referred to as the outside-in perspective and
2. the impact of a company on climate change, referred to as the inside-out perspective.

The current position of the EU Commission is that a company’s impact on the environment can be a financially material risk for the company. By financially material, the EU refers to a risk that significantly could reduce a company’s financial performance. To exemplify, a company whose operations contribute to, or are at risk of contributing to, a high impact on climate change (inside-out), is consequently at risk of being affected by the outside-in risks of climate change. These outside-in risks refer to physical risks such as drought, flooding or forest fires, and transition risks such as changing consumer behaviours or the introduction of carbon pricing mechanisms.

To understand if a company’s impact on the environment is indeed a material risk, it is crucial to define meaningful thresholds for the impact. Such thresholds could be identified using the X-Degree Compatibility (XDC) Model. The XDC Model is an economic climate impact model that calculates the contribution of an economic entity to global warming. Results are expressed in a degree Celsius (°C) number – the XDC – which states what degree of global warming we could expect, if the whole world would operate with the same emission intensity as the entity under consideration. In this context, a threshold could be determined as an XDC value that shall not be surpassed in order to avoid additional financial risks due to a high impact on climate change.

So far, there has been no attempt to operationalize the double materiality and define such thresholds. The aim of this research project is thus to create guidance on how to define a threshold using the XDC Model. Such guidance can take the form of concepts for quantitative thresholds, qualitative quality criteria to be considered when defining thresholds or sector-specific deep-dives. As solving this issue will be crucially important for shaping future accounting standards, this research topic touches on very timely matters.

The approach to define thresholds should be oriented along established methodologies defining risk thresholds in the corporate and financial world. Two general approaches describe alternative starting points for this project:

A. Praxis-oriented approach

1. Design expert interviews with experts within the corporate and financial risk management space aimed at understanding the requirements with regards to operationalizing the inside-out perspective of double materiality.
2. Conduct interviews and scientifically analyse results.
3. Distil results into requirements for a meaningful operationalisation of the inside-out perspective of the double materiality.
4. Apply the XDC Model to those requirements by using the XDC Scenario Explorer.

B. Desk research approach

1. Conduct targeted desk-research on relevant risk management frameworks, such as the TCFD and MaRisk.
2. Distil results into requirements for a meaningful operationalisation of the inside-out perspective of the double materiality.
3. Apply the XDC Model to those requirements by using the XDC Scenario Explorer.

The research would contribute to satisfying the needs of both corporate and financial actors by providing them with a more profound approach to analyse the link between the climate impact of a company and financial risks. This would be useful to meet current and upcoming stakeholder and regulatory requirements related to financial (risk) reporting, risk management and strategy development. Accordingly, climate strategies would be assessed against their potential to control such financial risks, which would result in higher management attention for the importance of designing sound climate strategies. Ultimately, the climate impact of a company could become a decision relevant KPI.

Besides regular support from a dedicated supervisor at right°, the following resources will be provided as part of this research project:

• Documentation on the X-Degree Compatibility Model methodology
• The software ‘XDC Scenario Explorer’ to be used for calculating XDC values
• Financial data from right°’s external data provider FactSet
• Emission data from right°’s external data provider Urgentem
• Summary of the EC guidelines on reporting climate related information. European Commission, 2019
• Guide on climate-related and environmental risks: Supervisory expectations relating to risk management and disclosure. European Central Bank, 2020
• Adams, C.A., Alhamood, A., He, X., Tian, J., Wang, L. and Wang, Y. (2021) The Double-Materiality Concept: Application and Issues, published by the Global Reporting Initiative

Research level: Master

Suitable disciplines: Business and Finance with a focus on Accounting

Project start: Flexible

Project length: Ca. 3-4 months

The X-Degree Compatibility (XDC) Model is an economic climate impact model that calculates the contribution of a company, portfolio or any other economic entity to climate change, answering the question: How much global warming could we expect by 2050, if the entire world operated at the same economic emission intensity as the entity under consideration? Results are expressed in a degree Celsius (°C) number: the XDC. To calculate the XDC, a set of input parameters and assumptions are needed, one of which reflects the economic performance of the economic entity. For a company, this is defined by the gross value added (GVA) which in turn is comprised of earnings before interest, tax, depreciation and amortization (EBITDA) and personnel costs.

The EBITDA of a company is calculated on the basis of a company’s financial statement. Depending on the accounting standard that has been used by the company, e.g. GAAP or IFRS, the value of EBITDA may or may not differ, which in turn might influence the output of the XDC Model. This would mean that the XDC metric partly would be dependent on the accounting standard chosen, as opposed to the actual economic performance of the company. To increase the transparency on this matter, it would be necessary to understand which accounting standards that provide full comparability when it comes to EBITDA.

This Master thesis will contribute to establishing this transparency by addressing the question of whether the use of different accounting standards, in this case IFRS & GAAP, leads to a change in EBITDA, what the reason for this potential change is, and whether the potential change leads to significant changes in the XDC metric. The results would enable a standardization of how EBITDA should be calculated when used as input in the XDC Model calculation.

Different approaches can be applied to answer the question:

1. The researcher could translate financial statements from one accounting standard to another to see whether this causes a change in the value of EBITDA.
2. The researcher could identify companies that have switched from one accounting standard to another and see how the XDC value has changed over time.

Regardless of the approach that is taken, it is important that the analyzed sample of companies includes a representation of different sectors. This is because different sectors may be subject to different accounting guidelines as part of the accounting standard that is used, and hence the change in EBITDA and consequently the XDC value may be more or less significant depending on the sector.

Besides regular support from a dedicated supervisor at right°, the following resources will be provided as part of this research project:

• Documentation on the X-Degree Compatibility Model methodology
• Financial statements, either from right.’s external data provider FactSet or retrieved by the researcher from other public data sources.
• Emission data from right.’s external data provider Urgentem
• The software ‘XDC Scenario Explorer’ to be used for calculating XDC values

Research level: Master

Suitable disciplines: Climate science (or related). Some experience of, or a desire to learn, Python programming.

Project start: Flexible

Project length: Ca. 6 months

The Earth’s climate system includes numerous feedback processes, such as water vapor and cloud, that influence how the surface temperature responds to external climate forcings. The combined response of these feedback processes, including the “no feedback” Planck response, is described by the climate feedback parameter which together with its reciprocal, the climate sensitivity parameter, often are assumed to be constant. Research on the climate sensitivity parameter has however shown that the climate sensitivity changes strongly, with expected increases in the future. This research has mainly consisted of quantifying the changes, using idealized 4xCO2 experiments in complex climate models, and attempting to understand the reasons behind the changes. Only a few studies apply this knowledge in practical applications.

This Master thesis will attempt to do so by assessing whether changes in the climate sensitivity parameter should be considered when quantifying the climate impact of an economic entity using the X-Degree Compatibility (XDC) Model. The XDC Model is an economic climate impact model that calculates the contribution of a company, portfolio or any other economic entity to global warming using the simple climate model FaIR to translate emissions into a degree Celsius (°C) number – the XDC. The XDC states to what extent the Earth surface temperature would warm up by 2050 if the entire world operated at the same economic emission intensity as the entity under consideration.

Currently, the XDC calculation is based on the assumption that the climate sensitivity parameter stays constant. However, considering recent scientific findings, it would be necessary to assess to what extent the climate sensitivity parameter changes over the policy timescales used in the XDC methodology (10-30 years), and consequently how much these changes affect surface temperature. Depending on the results, the changes in the climate sensitivity parameter may need to be accounted for in the XDC methodology to improve the accuracy of the calculation output.

As a first step, a thorough literature review should be conducted to understand why the climate sensitivity parameter changes, how it changes, and whether and how these changes can be modeled in a straight-forward way to enable an integration with the FaIR model. In a second step, a simple expression for the climate sensitivity parameter that accurately models its changes should be developed and integrated with the FaIR model. Finally, the XDC Model should be run with this changing climate sensitivity to assess how much the XDC values are affected.

Besides regular support from a dedicated supervisor at right°, the following resources will be provided as part of this research project:

• Documentation on the X-Degree Compatibility Model methodology, including documentation on the usage of FaIR
• The XDC Model source code and the FaIR code (Python)
• Parameters and scenario data used in the XDC Model
• Millar, R. J., Nicholls, Z. R., Friedlingstein, P., and Allen, M. R. (2017): A modified impulse-response representation of the global near-surface air temperature and atmospheric concentration response to carbon dioxide emissions, Atmos. Chem. Phys., 17, 7213-7228, https://doi.org/10.5194/acp-17-7213-2017.
• Smith, C. J., Forster, P. M., Allen, M., Leach, N., Millar, R. J., Passerello, G. A., and Regayre, L. A. (2018): FAIR v1.3: A simple emissions-based impulse response and carbon cycle model, Geosci. Model Dev., https://doi.org/10.5194/gmd-11-2273-2018, 2018.

Research level: Master
Suitable disciplines: Economics, partially Climate Science
Project start: As of end of 2021
Project length: ca. 6 months

The X-Degree Compatibility (XDC) Model is an economic climate impact model that calculates how much a company, portfolio, or any other economic entity contributes to climate change. This calculation reveals the extent of global warming we could expect by 2050 if the entire world operated at the same economic emission intensity as the entity in question. Results are expressed in a degree Celsius (°C) value: the XDC.

Three XDCs are calculated in this context:

1. The Baseline XDC: The degree of global warming the company is currently comparable with under baseline assumptions.
2. The Sector XCD: The degree of global warming the sector is currently comparable with under baseline assumptions (making use of the median of a minimum of 30 companies).
3. The Target XCD: The sector specific target temperature to which a company must orient itself in order to align with the below 2°C warming scenario.

The XDC calculations make use of sector-specific data, for example the sector-specific emission budgets defined by organizations such as the International Energy Agency (IEA), which take into consideration the inherent differences in emissions intensity and cost-optimized capacity to reduce emissions of distinct economic sectors. Currently, sectoral information is not applied to the growth rates of GVA or emissions, which are based on country or regional values. Adding sectoral information to the growth rates would improve the precision of the XDC model’s calculation by enabling a better reflection of sector-specific assumptions, including the evolution of each sector over time.

Thus, the main aim of this research project is to lay the groundwork for a methodology to estimate these sectoral growth rates. To achieve this aim, an approach for this research project might look like this (based on an extensive literature review at the beginning of the project):

1. Identification of data providers for growth rates
2. Identification of alternative sources of information and methodology adaptation
3. Identification of the data required for the development of the methodology.

In addition to regular support from a dedicated supervisor at right., the following resources will be provided as part of this research project:

• XDC Model methodology documentation

Research level: Master
Suitable disciplines: Business Administration, Finance, Accounting, Controlling, Economics
Project start: October 2021
Project length: 3 months

The X-Degree Compatibility (XDC) Model is an economic climate impact model that uses financial and emission data to calculate a company’s impact on global warming. Results are expressed in a degree Celsius (°C) number: the XDC. The central financial Key-Performance-Indicator (KPI) that the XDC Model relies on is the Gross Value Added (GVA). Until now, GVA has been calculated in economics to measure the value of goods and services produced in an area, industry, or sector of an economy.

To calculate a company’s XDC, it is necessary to first calculate the GVA on a company level. GVA is not a commonly reported KPI. It therefore has to be approximated from other financial KPIs. right. is currently following the definition from Randers (2012) who suggests approximating GVA by summing EBITDA and all personnel costs.

However, in addition to using a company’s GVA as an appropriate KPI to measure economic success, other KPIs, such as revenue or EBIT are also possible in this context. Therefore, this R&D project will search for further arguments that support the use of the GVA as an appropriate KPI to measure economic success. A starting point might be the EU Green Deal, which is based on the decoupling of GVA and emissions.

In addition, the project should further identify alternatives for calculating/defining the GVA, beyond the Randers (2012) approach of summing EBITDA and personnel costs. For instance, there is research that proposes calculating/defining GVA by subtracting Cost of Goods Sold (COGS) from revenue (e.g., O’Connor, 2018).

Thus, the main aim of this R&D project is to identify additional insight on how a company’s GVA can be derived from standard financial accounting KPIs. More precisely, the research project aims to compare different approaches for defining the GVA on a company level. The identification of the differences between the approaches as well as the identification of determinants or reasons for a preferred approach, such as better data availability, are important elements in this context.

Should other approaches to calculating GVA besides calculating the EBITDA plus personnel costs be identified, it should be tested whether (1) the calculated GVA is the same and where any differences come from, and (2) whether the different calculation methods have a noticeable effect on the companies’ XDC.

Besides regular support from a dedicated supervisor at right°, the following resources will be provided as part of this research project:

• XDC Model peer-reviewed paper
• Financial data from right.’s external data provider FactSet
• Emission data from right°’s external data provider Urgentem
• O’Connell (2018)
• Randers (2012)
• EU Green Deal

right. based on science GmbH (right°)

right. based on science GmbH (right°) is a climate tech company that provides transparency on the climate impact of economic activities – plain & simple in °C

right°’s software and metrics enable decision makers from the real economy, finance, and real estate to plot pathways to 1.5°C alignment and to let their climate-related decisions be guided by the best available science and data.

right° was founded by Hannah Helmke and Dr. Sebastian Müller in 2016 and is a pioneer of so-called ‘temperature alignment’ or ‘implied temperature rise’ (ITR) metrics. Its unique X-Degree Compatibility (XDC) Model is science-based and peer-reviewed. It has been available for free use to academia since 2019 through the project right° open. At the end of 2021, it was released it under an open license (open source).

The interdisciplinary team of nearly 40 experts is dedicated to continuously improving and expanding the XDC Model. right° also offers comprehensive services around the implementation and application of its software. The aim is to help shape a future, in which economic success is no longer dependent on emissions.

In 2020, right° was awarded the prestigious Next Economy Award. Hannah Helmke received the Digital Female Leader Award (‘Sustainability’ category) in the same year as well as the Female Founders Award by AmCham Germany in 2021.

The XDC Model is the only methodology of its kind to integrate a climate model (the FaIR Model, also used by the UN Intergovernmental Panel on Climate Change (IPCC)). The XDC Model is science-based, transparent, and has been available for use in academic research since 2019 through right. open. The fundamental methodology is peer-reviewed and was published as Open Source project in 2021.

With the vision of a future in which science, business, finance and policy work together to address the challenges of global warming, right. launched the right. open community in May 2019. Through right. open, students, researchers and decision makers are provided with the tools, knowledge and network of support needed to co-develop science-based responses to global warming. The work centers on transdisciplinary R&D projects that leverage the full potential in the X-Degree Compatibility (XDC) Model by applying it across industries and disciplines.

All researchers that register for right. open on our website are invited to the right. open Dropbox. This contains resources about right. open, the XDC Model, previous research projects, relevant literature, and frameworks and agreements that will be needed during the research process. All researchers whose research proposals fulfill the quality criteria are also welcome to request access to the software ‘XDC Scenario Explorer’ which can be used to calculate XDC values. Other resources such as financial and emission data from Urgentem and FactSet, XDC data calculated by right., the XDC Model source code and the technical documentation on this etc. are only provided on a case-by-case basis to researchers that address the research topics in this document and whose proposals have been approved.

Student researchers interested in using the X-Degree Compatibility (XDC) Model to conduct research outside the scope of the outlined topics may also submit research proposals. Successful applicants will receive access to our software, ‘XDC Scenario Explorer,’ for calculating XDC values. While we cannot provide direct supervision to out of scope research, we will be happy to offer our support in monthly Q&A sessions and the possibility of supervision by a right. open alum.

Once a research proposal has been submitted, the right. open team will evaluate it based on the quality criteria stated in the research proposal framework. For proposals related to the research topics in this document, right. open will also ask the team at right. based on science who will be supervising the research project for a second review. If the quality criteria are fulfilled, the researcher will receive a confirmation within four weeks from the submission of the proposal. For research topics not included in this document, the evaluation is only done by the right. open team and hence the time between the submission of the proposal and the final decision will be shorter than four weeks.

The disciplines stated in the introduction to each research topic are simply suggestions of disciplines for which the research topic might be interesting. As we encourage interdisciplinary and transdisciplinary research, we welcome researchers from other disciplines as well.

Neither supervised, nor unsupervised right. open research projects are financially remunerated by right. based on science.

Yes. For those who need one, we can assemble a Memorandum of Understanding (MoU) which will be signed by right. open’s Project Lead, right. based on science’s Founder, and In-House Lawyer.

For further questions regarding right. open or the research topics in this document, please feel free to reach out to Franziska Neumann, Research Project Coordinator for right. open via f.neumann@right-basedonscience.de.