The Brief | October 13, 2020

The Brief: Opportunity Zones’ second act, Europe’s clean energy startups, wildfire sensors, investor pressure on corporate emissions, four energy scenarios

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Featured: Impact Voices

More Opportunity Zone funds are targeting operating businesses – and measuring impact. The U.S. election campaign has put a spotlight on Opportunity Zone incentives aimed at drawing investment into low-income communities. Proponents point out the capital-gains tax advantages have raised tens of billions of dollars. Critics note the bulk of that capital has flowed to real estate projects, some of them backed by politically connected bigshots and many of which would have been completed even without the tax break. The chief complaint: Few funds are backing the kind of operating businesses that create jobs and wealth in undercapitalized communities (see, “Opportunity Zone capital flows to real estate but not to small businesses – or impact). That may be changing, says NES Financial’s Reid Thomas in a guest post on ImpactAlpha. In a survey, clients and prospects of the firm, which helps administer Opportunity Zone and other funds, indicated that half of new funds in the second quarter of 2020 focused on operating businesses. “Despite the short runway and problematic rules, operating businesses — and operating business/real estate hybrids — did come to fruition,” Thomas writes. Case in point: Arctaris Impact Investors’ $40 million investment in downtown Erie, Penn.

Greater regulatory clarity is helping. Guidance from the IRS on what businesses qualify for the incentives wasn’t finalized until December 2019. “To judge the initiative’s efficacy with operating businesses as a resounding failure feels misleading,” says Thomas. Making it even more difficult to get a true picture of the impact of Opportunity Zone projects – real estate, operating businesses, or otherwise – is the failure of legislators and regulators to mandate rigorous impact measurement. Without such a mandate, Opportunity Zone fund managers and investors “fear that measuring impact themselves will be an added burden,” says Thomas. Impact measurement approaches like Howard Buffett’s Impact Rate of Return or the Opportunity Zone Reporting Framework from the U.S. Impact Investing Alliance, the Beeck Center and the Federal Reserve Bank of New York can save time and money, he says, and “help further immunize Opportunity Zones to critiques.” 

Keep reading, “Opportunity Zones can deliver social impact. We just have to measure it,” by Reid Thomas on ImpactAlpha.

Dealflow: Follow the Money

Rockstart raises €21 million to back energy startups in Europe. The Amsterdam-based impact accelerator has added a venture capital arm to support Europe’s early-stage energy companies with co-investments of at least €100,000 ($118,000). Dutch pension fund ABP, De Hoge Dennen Capital, the Netherlands Enterprise Agency and unnamed Dutch and German investors backed the fund. Rockstart’s energy fund follows an €18 million agrifood fund launched in January. The accelerator runs tracks in health and emerging tech as well, and has supported more than 200 companies since 2011. 

  • High energy. Participants in Rockstart’s past energy cohorts include Lightyear, which is developing self-charging electric vehicles; solar crowdfunding platform Zonnepanelen Delen; and indoor air quality tech startup Vebbu. 
  • Read on

Dryad Networks raises €1.8 million for wildfire sensors. This year’s California wildfire season is the worst on record. Australia’s fires early in the year devastated New South Wales and Victoria. Berlin-based Dryad’s network of connected sensors aim to provide early detection of wildfires. The company has tested its use of “multi-hop mesh networks,” which can cover forests even without mobile connectivity, in forested areas in Germany. Dryad’s seed financing was backed by STIHL Group’s corporate venture arm, German energy firm LEAG, impact investor ISAR AG and Brandenburg Kapital. Check it out

Alt-plastic maker Newlight Technologies clinches $45 million. The Huntington Beach, Calif.-based company has developed ocean-friendly, biodegradable straws, utensils and packaging since 2003. Newlight says its AirCarbon material stores more greenhouse gases than it emits, making its products carbon-negative. Valedor Partners and existing investor GrayArch Partners invested in Newlight’s Series F funding round. 

Signals: Ahead of the Curve

Four scenarios for the energy transition in the age of COVID. The pandemic “has caused more disruption to the energy sector than any other event in recent history,” reports the International Energy Agency in its annual energy outlook. Global energy demand will drop by 5% this year and CO2 emissions by 7% – and energy investment by 18%. Oil investments have fallen by a third and producers have written down $50 billion worth of assets, in what the IEA calls “a palpable expression of a shift in perceptions about the future.” Strategic keywords: low cost, low emissions and diversification of energy sources. What happens next hinges on the duration of the pandemic, its economic fallout, and the ways clean energy and sustainability are built into recovery strategies.

  • Scenario planning. In two of the IEA’s four scenarios, humanity fails to take steps to prevent catastrophic warming. In two others, a sweeping transformation of the energy sector drastically reduces emissions and delivers the cleanest air in years. “We are entering a critical decade for accelerating clean energy transitions and putting emissions into structural decline,” IEA’s Fatih Birol writes in a foreword to the 400-plus page report. 
  • King Solar. As oil and coal consumption declines, renewables will see a slight rise in 2020. Solar is “at the center of this new constellation of electricity generation technologies” in all four of the IEA’s scenarios. Solar power is cheaper than new coal or gas-fired power plants in most countries, making it “some of the lowest cost electricity ever seen.” Even with current policies, renewables are expected to account for 80% of the growth in global energy demand over the next decade. 
  • Net zero. Sustainable recovery plans like those proposed in the European Union, the U.K., Canada, Korea and New Zealand could set a trajectory to net-zero emissions by 2050. In its sustainable development scenario, the IEA calls for an additional $1 trillion in annual investments in efficiency, low-emissions power and electricity grids, and sustainable fuels. More than 70% of that will come from private capital, the IEA says. In a funding shift, the Oil Age’s’ equity and balance-sheet investing is giving way to debt-based financing based on renewable energy’s predictable cash flows.
  • More.

Investors ratchet up pressure on big corporate carbon emitters. More investors are pressing more companies to cut more emissions. One effort, Climate Action 100+, sought commitments from 161 big corporate emitters to meet the Paris climate agreement’s goals of keeping temperature increases below 2°C. The new Business Ambition for 1.5°C campaign is urging more than 1,800 high-emitting companies to set science-based emissions targets to achieve net zero emissions by 2050 at the latest. U.K.-based nonprofit CDP, which is leading the effort, has warned that large companies face $1 trillion in risk from climate impacts that are likely to hit in the next five years. Among the 137 investors representing $20 trillion in assets are AXA Group, Legal & General Investment Management, Nikko Asset Management and Generation Investment Management. “Companies that are failing to set targets grounded in science risk losing out – and causing greater damage to the world economy,” said CDP’s Emily Kreps. 

Agents of Impact: Follow the Talent

Generate Capital, Mosaic, Nautilus Solar Energy, Sol Systems and Volt Energy are among the members of Renewables Forward, an effort to improve diversity in green energy and invest in under-resourced and minority communities… MSCI is hiring an ESG climate specialist in New York… ioby is looking for a finance operations senior associate… Capshift seeks an impact investing fellow. 

The American Heart Association is recruiting a portfolio manager for its social impact fund in the San Francisco Bay Area or Seattle… The Pisces Foundation has an opening for a climate and energy program associate in San Francisco… Impact Entrepreneur is hosting, “Innovating Investment for Underserved Entrepreneurs,” with Agnes Dasewicz of Kauffman Foundation’s Capital Access Lab and Ross Baird of Blueprint Local, Thursday, Oct. 15, at 12pm ET. 

Thank you for reading.

–Oct. 13, 2020