ImpactAlpha, Oct. 26 – Investments in climate solutions are crucial. Purchase orders can be transformative.
Hertz’s order of 100,000 Model 3s underscored the power of corporate purchase agreements to accelerate the adoption of new technologies and propel pioneering companies to scale. The rental car giant’s $4 billion order did more than just push Tesla’s stock market capitalization past the $1 trillion mark. It was an unmistakable sign that the proverbial hockey stick in electric-vehicle adoption is at hand.
Hertz, which was founded in 1918 with a rental fleet of a dozen Ford Model T’s, placed the largest-ever purchase of EVs. Ford’s market value yesterday: $63 billion.
Corporations are increasingly using their purchasing power to green their operations and accelerate the transition to a low-carbon economy. Breakthrough Energy Catalyst is helping broker such offtake agreements (see below) for critical climate technologies like carbon capture and sustainable aviation fuel. American Airlines, ArcelorMittal, General Motors, and Microsoft are among the corporations that have committed to help drive such technologies down the cost curve with demonstration projects and advance purchase commitments.
The Brazilian personal care products maker Natura will act as offtaker of forest-based products in a new model to support sustainable producers in the Amazon. The LEAF Coalition has signed up companies including Airbnb, Bayer, Delta Airlines, Nestlé and Amazon to purchase carbon offsets to protect tropical forests.
The scramble by such incumbents to retool for the net-zero future could launch the industry giants of tomorrow.
“The next 1,000 unicorns,” declared BlackRock’s Larry Fink this week, will be “businesses developing green hydrogen, green agriculture, green steel and green cement.”
Capital is abundant. The models are proven. The threat is urgent. And the opportunities are massive. There are no longer any excuses for investors to sit out the climate transition.
ImpactAlpha’s Call No. 33 today will explore the tools being deployed by impact investors to de-risk hard-to-fund climate solutions and accelerate the low-carbon transition. The new models aim to close persistent capital gaps for early stage climate tech, small-scale green infrastructure projects, commercial demonstrations, emerging-market climate adaptation and climate justice.
Wealthy governments have punted on their long-promised $100 billion a year to help developing countries adapt to and mitigate climate change (they now hope to meet those promises in 2023). Impact investors can take the ball and run with it.
“It’s time for blended finance to reach its full potential and meet its promise of attracting private capital into emerging markets at volumes never seen before,” writes Joan Larrea of Convergence, the blended-finance matchmaker, in the organization’s State of Blended Finance report being released tomorrow. “We’re into the last decade of the 2030 agenda and we are nowhere near the trillions we will need to achieve it.”
Advance purchase agreements can accelerate decarbonization technologies to scale and demonstrate viability to investors who view climate tech startups as too risky or capital-intensive.
That’s how Tesla itself was seen a decade or so ago, when it received one of its earliest investments from the $75 million Bay Area Equity Fund, an impact fund spun out of JP Morgan that was backed by the Ford, MacArthur, Annie E. Casey and F.B. Heron foundations with program-related investments. That fund became part of DBL Partners (originally for ‘double bottom line’), which this year raised a $600 million fourth fund.
To build out its first manufacturing plant in 2010, Tesla also received a concessionary loan of $465 million in 2010 from the Department of Energy (under the same program that also financed Solyndra). Without those catalytic investments, Elon Musk might have never gotten Tesla off the ground.
Today’s Agents of Impact Call No. 33 will range over the full landscape of catalytic capital tools being deployed to accelerate climate solutions. Participants may find helpful a glossary of key terms, starting with catalytic capital itself: Investment capital that is patient, risk-tolerant, concessionary or flexible and aims to support impact-driven enterprises and organizations and unlock additional capital from institutional and other commercial investors (h/t Catalytic Capital Consortium, the sponsor of ImpactAlpha’s ongoing coverage of catalytic capital).
Some other common terms, in alphabetical order:
Blended finance. A structuring approach that uses catalytic capital from public or philanthropic sources to increase private sector investment to realize the Sustainable Development Goals, particularly in developing countries. Blended finance can enable organizations with different objectives and risk profiles to invest alongside each other while achieving their own financial return or social impact objectives.
Concessionary investment. A loan or equity investment made with the expectation of below-market risk-adjusted returns, in order to facilitate specific impact-related outcomes.
First-loss guarantees. The commitment by an impact investor to absorb first losses in an investment, project or loan, as a way to de-risk the investment for commercial investors. Closely related: risk insurance that similarly enhances the credit profile of an investment.
Offtake agreements. Advance agreements by corporations or other entities to make large future purchases of a product or service, like EVs or carbon offsets. Such advance purchase agreements guarantee demand for innovative products and mitigate the risk for producers and investors.
Program-related investments. A PRI is a loan, equity investment, or financial guarantee made by a philanthropic foundation to pursue its charitable mission (and not primarily to generate a financial return). Investees can be nonprofits like low-income housing developers or community development organizations, or for-profit enterprises, such as early-stage climate or biotech companies.
Technical assistance: Grant funding to help with business design, training, or structuring can help ensure the success of an investment and reduce risk for investors.