2030 Finance | April 4, 2018

How investors can get the most climate-change impact for their bucks

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By Scott P. Burger, Alicia Seiger, and Sarah Kearney

ImpactAlpha, Apr. 4, 2018 –– By 2050, experts say, the world economy needs to reach “net-zero” in carbon emissions to avoid the most catastrophic effects of climate change. Yet few tools exist to enable investors to assess the long-term climate impact of today’s early-stage technologies.

A new methodology developed by the nonprofit PRIME Coalition and NYSERDA, New York State’s energy innovation agency, helps investors conduct forward-looking climate impact assessments. A company’s “Emissions Reduction Potential,” or ERP for short, describes its potential to reduce emissions over the 30-year period following an investment.

>>MOREPRIME Coalition investments bridge capital gap for early-stage climate solutions

Think of Emissions Reduction Potential as an estimate of a company’s climate impact as it scales its technology and services in the future. Any company that clears an ERP of 100 million metric tons would hold the potential to remove the equivalent emissions of 100 billion pounds of coal. By using a standardized and empirically demonstrated methodology to measure ERP, the method enables the comparison of companies in dramatically different sectors. 

In light of capital and time constraints, impact-oriented investors need to know where to place their bets. Channeling dollars to the highest-impact climate solutions will give us the best chance of achieving the global goals and meeting the 2-degree Celsius warming threshold agreed to in the Paris Accords. Conversely, failing to identify which ventures hold the highest potential for impact could lead us to channel scarce capital to sub-optimal solutions.

Many tools exist for helping later-stage investors understand the current social or climate impact of companies deploying solutions today. But research by PRIME and NYSERDA found that none existed to help investors make decisions based on the potential for impact in the future.

Our findings, published in a January 2018 report entitled “Climate Impact Assessment for Early Stage Ventures,” are based on empirical research and dozens of interviews with early-stage risk investors, state and federal government agencies, incubators, and philanthropists.

Priority investments

Employing ERP has already helped PRIME improve the potential impact of investment decisions. In 2017, PRIME helped lead the Seed investment into Rebound Technologies, a startup revolutionizing the energy-hungry cooling industry by improving the control and efficiency of cold storage warehouse cooling systems. The global “cold chain” keeps products cold as they move from where they are produced to where they are consumed. The buildings along this cold chain are some of the most energy-intensive buildings on the planet.

When PRIME first engaged Rebound, the company was prototyping its product. Traditional metrics for assessing climate impact – such as those taken from the Global Impact Investing Network IRIS database – indicate whether the organization does or does not have a Greenhouse Gas Emissions Strategy, and quantitative measures of a company’s Total Greenhouse Gas Emissions.

These metrics are less helpful in evaluating a startup that is seeking to reduce the emissions of other companies, rather than its own. Given Rebound’s early stage, its current emissions were minimal, and it had no formalized strategy to reduce its own emissions. These metrics, and others like them, yielded little insight as to whether or not investing in Rebound was a good idea from a climate-change mitigation perspective.

With the ERP methodology, PRIME estimated the market size for the technology that the company is deploying as well as the company’s potential future market share. PRIME then coupled that with estimates of the net emissions reduced by Rebound Technologies’ improvements to the efficiency of cold storage warehouses. That yielded an estimate that the company could mitigate over 100 million metric tons of greenhouse gases by 2048. This represents the “base” case estimate for Rebound’s ERP, with the potential increasing by an order of magnitude in high impact cases.

That represents a massive boon to emissions mitigation efforts. Rebound’s ERP is nearly 10 times the ERP of other ventures that PRIME assessed in the cooling space. Casting Rebound’s impact potential into absolute and comparable terms helped inform our decision to prioritize Rebound over other potential investments in the cold chain and other economic sectors.

Valuable waste

Opus 12 presents another model case. Opus 12 converts carbon dioxide (CO2) into valuable industrial chemicals. When PRIME first considered an investment, the company was just beginning to build commercial-scale prototypes.

By using waste CO2 instead of fossil fuels as the main feedstock, Opus 12 displaces traditional pollution producing methods for making these chemicals. Using the Emission Reduction Potential methodology,  PRIME estimated Opus 12’s ERP to be roughly 1,500 million metric tons (Opus 12’s ERP is substantial given the massive size and carbon intensity of the global commodity chemicals industry). 

There is no certainty that Opus 12 will ultimately achieve this emissions impact, but PRIME determined that, in addition to Rebound, Opus 12 was worth supporting, given its enormous potential climate benefit. Here again, traditional metrics failed to inform us of this benefit.

PRIME uses the methodology to set a target and typically only works with companies with an ERP of over 100 million metric tons (we aim to invest in firms with ERPs over 1,000 million metric tons). Other investors might want a different balance of risk-impact tradeoffs. That is, they may want to build a portfolio of risky but very large ERP companies, or less risky but potentially lower ERP investments.

We see ERP serving not only to make PRIME Coalition’s climate impact assessment more accurate, credible and legitimate, but also as a scalable framework to meet the needs of other early-stage investors. The potential for such metrics and tools to improve investment decision making is significant, particularly for investors whose efforts are stymied by the time or technical expertise required to conduct impact assessments.

PRIME is looking to partner with other investors and actors to develop more streamlined software tools for assessing the potential climate impact of promising early-stage ventures. Over the coming year, we’ll work to build out the analytics and data necessary to perform ERP analyses in a rapid, streamlined fashion. This is no small feat, as such a methodology must account for impacts on a global scale and across all industries.

Scott P. Burger is a research associate at the MIT Energy Initiative and a technology investment advisor to PRIME. Alicia Seiger is a lecturer at Stanford Law School and PRIME board member. Sarah Kearney is the founder and executive director of PRIME.