For a flowchart, see Documentation
This contract expresses three foundational ideas:
The legal agreement sets out the terms of commitments made by various entities that are linked in a value chain. The commitments themselves are about contributions these entities plan to make towards the transition.
The media, climate scientists, government officials and private sector executives use the term “transition” to capture the principal facets of a net-zero, sustainable future. Many observers think of it in three parts: 1) decarbonization; 2) nature positive solutions; and 3) climate resilience. Transition-related contracts at the core of the S3MM can be used in all three contexts. In the discussion below, we focus on decarbonization.
Broad agreement exists among governments, companies, research institutions, and the public at large that the transition will require amounts of capital that are too large for governments alone to deliver. Private sector actors – from both the capital markets and the real economy – must be involved.
Consensus also exists that the transition must be dramatically accelerated. Transition-aligned technologies exist in almost every sector, but they are usually still too expensive for mainstream market adoption. In other words, a “green premium” still exists. In many cases, economies of scale hold the key to closing this premium, but no co-ordinating mechanism exists to guarantee large enough purchase orders to allow large capital expenditures (such as investment in a new factory) to be made.
The S3MM was designed to solve these problems simultaneously. In the sections below, we walk through an example. The name of the contract at the center of the S3MM is a Sector Transition Acceleration Contract (STAC). It comes in two types: a Pre-Funded STAC (PF STAC), or a Purchase Order STAC (PO STAC).
For a flowchart, see
Documentation
Many companies are under pressure to reduce the carbon intensity of their operations. “Carbon intensity” refers to the emissions associated with each unit of a company’s output. This pressure may come from evolving government regulation, from providers of financing, such as banks or shareholders, or from customers. In sum, companies in most sectors now believe failing to decarbonize will impair enterprise value.
Several of these companies have established formal Science-Based Targets (SBTs) to communicate their intention to operate in a way that is aligned with a 1.5-degree world. SBTs also help companies to track their progress, so that they can be confident of achieving net-zero by a given date. For most of these companies, the key to hitting targets lies not just in cutting Scope 1 and Scope 2 emissions, but Scope 3 emissions too.
Let’s take the example of a large technology company, which we’ll call LargeTech. This company buys products and services from builders of offices and data centers. These construction companies can choose to build with “green” steel, or with regular steel (emissions of X).
LargeTech needs to demonstrate decarbonization in its supply chain, and is willing to pay extra for green steel in its new office — but only if the builder can demonstrate the volume of emissions reduced versus the mainstream steel alternative.
LargeTech communicates this requirement to TowerBuild, a building company. TowerBuild in turn sets about buying steel from suppliers, and decides to use a Purchase Order STAC (PO STAC) in its negotiations.
The PO STAC sets out how much steel it is willing to buy, at what price, and the amount of decarbonization it requires from its supplier, VerdeSteel. Given LargeTech’s requirement for large volumes of steel, and its willingness to pay extra, it now becomes economically viable for VerdeSteel to invest in a factory with electric arc technology to make low-carbon steel. In some cases VerdeSteel may also benefit from government subsidies to do so.
For a flowchart, see
Documentation
VerdeSteel has to deliver two things to TowerBuild: the volume of steel required, and proof that it was manufactured in a low-carbon-intensity way. The second part is in some ways more challenging. To generate the proof, VerdeSteel must comply with a set of principles, which in turn acknowledge the sector-specific details of making green steel.
These principles are laid out in the PO STAC. Adherence to them is checked by an expert technical review group, and performance against the contract is audited by a third-party auditor, similar to the way in which corporate financial accounts are audited.
Once the STAC has been agreed between VerdeSteel, TowerBuild, and by extension LargeTech, a STAC Certificate is issued by Scope 3 Impact Delta to each entity. This certificate can be used by VerdeSteel as collateral to help secure bank financing, if needed.
For a flowchart, see
Documentation
Just as companies in the so-called real economy now appear to believe that a failure to transition will impair enterprise value, so banks are also under pressure to “green” their balance sheets.
A large, signed purchase order increases a bank’s willingness to finance a project, whether or not it is transition-related. For transition-related companies, STACs are intended to increase the flow of financeable projects.
In cases where a supplier is seeking to access capital that is specifically designated for the transition, STACs offer a secondary benefit, which is robustly documented decarbonization claims.
For a flowchart, see
Documentation
In some cases, even a purchase order from a large company might not be enough to close the green premium. In this setting, governments have a role to play, and STACs can help them.
More than any other actor, governments will bear the costs of an unsuccessful or partial transition. They have capital to accelerate transition, and they (in some cases, anyway) understand that decarbonization later is costlier than decarbonization now.
To this end, several governments have joined together to form vehicles like the Mitigation Action Facility. This is a source of capital for suppliers seeking further support to bring their products to price parity.
To ensure that funds are responsibly spent, governments need an auditable framework against which to dispense funds and progress on national transition goals. And they also need a scalable mechanism for funding across sectors. The S3MM is designed to meet these requirements.
For a flowchart, see
Documentation
The list of entities outlined above is not exhaustive.
Other applications of STACs exist, potentially, for example, among two non-profit organizations, supplying transition related services.
If your organization does not fit in any of the categories above, we would welcome the opportunity to learn more about your use case.
For a flowchart, see
Documentation
The S3MM’s credibility rests on three sets of third parties.
The first is a technical expert group, which is equipped with sector-specific transition-related expertise. In VerdeSteel’s case, this group would be familiar with the carbon-intensity of steel today, and what the carbon-intensity of steel made with new technology would be. As part of the agreement of the STAC between buyer and seller, a workflow is created which requires sign-off from the review committee before the STAC is issued.
The committee itself will follow the Oxford Net Zero Principles, as revised from time to time, to ensure that it is remaining current with evolving best practice, scientific understanding, and technological progress.
The second is an audit firm, which assesses whether the supplier has indeed delivered the environmental benefits it claims. Again, the approach taken by the auditor may evolve as best practice changes.
The third is S3ID itself, which issues STACs once the requirements for any given STAC have been met. S3ID’s responsibility is to communicate what is required of each party to a STAC, and in some instances to manage aspects of the workflow associated with the issuance of a STAC.
