The Brief | October 11, 2023

The Brief: Rethinking water, on-site solar in South Africa, German energy efficiency, overcoming antibiotic resistance, pricing climate risk

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Greetings, Agents of Impact! Many thanks to the hundreds of you who came out for yesterday’s State of the Field call. We’ll post a recap and replay on Friday.

Featured: Water Infrastructure

Come hell or high water: Building community resilience to floods, droughts and contamination. Water – too little, too much or too dirty – isn’t simply emerging as a climate consideration. It’s forcing its way into the conversation. “This is water’s moment,” declared Radhika Fox, the Environmental Protection Agency’s assistant administrator for water, at a Rethinking Water event at last month’s Climate Week NYC. Fox was previewing the EPA’s announcement of $500 million in technical assistance to help disadvantaged communities invest in drinking water, wastewater, and stormwater services. As if on cue, a mass of saltwater migrated up the shrunken Mississippi River and may reach New Orleans’ drinking water reserves within weeks. And a state of emergency was declared in New York City as a powerful rainstorm caused flash flooding, shutting down highways, schools, one airport, and the entire regional transit system. “Water is a thread through the discussions of climate in a way it wasn’t a few years ago,” Fox said. 

  • Water equity. More than two million Americans currently live without access to running water or a working toilet, according to the nonprofit Dig Deep, which has developed working water systems for communities on the Navajo Nation, Appalachia, and along the Texas-Mexico border. The “water gap,” says Dig Deep’s Julie Waechter, will be exacerbated by a changing climate. Black and Latino households are twice as likely as white ones to lack indoor plumbing, while Native American households are 19 times as likely. “There’s a huge role for private investors to act as catalysts,” she said.
  • Building capacity. A flood of federal funding could help, including $50 billion over five years for drinking and wastewater infrastructure allocated under the bipartisan infrastructure bill. But many communities are not prepared to access it, warns Olga Morales-Pate of the Rural Community Assistance Partnership, a nonprofit network. “Building the capacity to take advantage of the opportunity doesn’t happen overnight,” she says. The Milken Institute’s 10,000 Communities and philanthropic coalitions such as Invest in Our Future and Build US are among the initiatives looking to help rural, tribal and disadvantaged communities navigate the flood of federal funding.
  • Keep reading,Come hell or high water: Building community resilience to floods, droughts and contamination,” by Andrea Riquier on ImpactAlpha.
  • Get involved. The US Water Alliance is organizing “Imagine a Day Without Water,” Thursday, Oct. 19. 

Dealflow: Just Transition

Adenia takes a majority stake in South African solar provider Enfin. By the end of this year, South Africans will have faced 250 days of rolling blackouts in 2023. The country’s ongoing power crisis will have cost the economy $13 billion. Enfin finances, develops and operates on-site solar power for businesses, farms and schools. It wants to expand its solar project portfolio from just over 2.5 megawatts today to more than 100 megawatts in the next five years. Africa-focused private equity firm Adenia Partners took a majority stake in Enfin as the first investment from its fifth fund.

  • Energy crisis. South Africa’s 59 million people depend on coal for more than 75% of their power – and face up to 10 hours of rolling-blackouts daily. At COP26 in Glasgow two years ago, South Africa became the first country to ink a Just Energy Transition Partnership plan to accelerate the country’s shift away from coal. Progress on the JETP has stalled. South Africa secured $8.5 billion in commitments from US, UK, EU and European countries to pay coal plant owners to shut down; the country estimates that it needs nearly $100 billion to achieve its JETP goals.
  • ESG boost. Adenia takes controlling stakes in mature African countries, and then seeks to improve environmental, social and governance strategies as well as growth. Its “theory of change” is based on improvements in job quality, diversity and sustainable business operations. The firm is looking to raise $400 million for its fifth fund, which has backing from development finance institutions, including the IFC, DFC, and European Investment Bank.
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VARM raises early funding to make German homes more energy efficient. Two-thirds of Europe’s homes and buildings are deemed energy inefficient. VARM tackles a simple improvement – better insulation – that needs to be addressed before bigger electrification projects. The Berlin-based company trains workers to install confetti-like “blown in” insulation. It says the work can be done in a day and costs €2,000 on average, compared to two weeks and €20,000 to install traditional insulation. Government subsidies are available to cover some of the costs. 

  • Multifamily buildings. VARM’s digital booking system is designed for single-family homeowners. Pre-seed funding from Foundamental, A/O, Thermondo and Vidia Equity will help the company expand to multifamily housing properties. It is also developing a training academy to address the shortage of skilled insulation workers.
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Dealflow overflow. Other deals crossing our desks:

  • Advantage Capital, an investment firm focused on job opportunities in underserved communities, backed Las Vegas-based Goodwrx, a tech-based staffing service that is addressing the hospitality industry worker shortage (for context see, “Bringing capital to entrepreneurs of color“). (Advantage Capital)
  • Switzerland-based LimmaTech raised $37 million to develop vaccines to counter  bacterial infections that are increasingly antibiotic resistant. (LimmaTech)
  • UK-based Lottie raised €20 million ($21.2 million) to help seniors and their families connect with home care resources and assisted living facilities. (EU Startups)

Signals: Muni Impact

Mispriced risks in bond markets mean Black communities pay more for climate resilience. A community’s racial makeup, irrespective of economic variables, affects its cost of capital in the $4 trillion US municipal bond markets, while its physical climate risk does not. A large-scale, peer-reviewed study by Duke University researchers suggest muni markets are mispricing climate and race risk at a large scale, creating a systemic barrier to building climate resilience in vulnerable communities. “Physical climate risk not being priced represents an opportunity for Black communities to make resiliency upgrades without being penalized for their high climate risks,” lead researcher Erika Smull, now at Breckinridge Capital Advisors, tells ImpactAlpha. But, she adds, “if they are being penalized on account of their racial makeup, then they are less likely to be able to make those upgrades.”

  • Spread penalties. Smull’s study looked at credit spread, which is the gap between the interest rate cost to the issuer of the bond and risk-free benchmark rate. The larger the spread, the greater the perceived risk of the bond. The analysis of 700,000 municipal bonds found no meaningful spread penalty for increased physical climate risk. In contrast, the researchers found that “percent Black” in a community is “significant and meaningful” for spreads, even after controlling for issuer location, credit rating, and economic variables including per capita income, confirming the “Black Tax” described by Stanford’s Destin Jenkins and others (see “‘Black Tax’ plagues small municipalities. Can bond banks help?”). The study estimated that higher costs amount to a $900 million annual penalty for Black communities.
  • Cost of capital. Issuers as well as investors face financial and welfare losses, say the researchers. Race alone should not influence municipal credit spreads. Known climate-related risks to infrastructure, property value, and business interruption should. From a climate justice perspective, they say, “racial bias could further amplify the cost of and reduce capital market access for climate-related and other infrastructure needs for Black communities.”
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Agents of Impact: Follow the Talent

Harvard University’s Claudia Goldin wins the Nobel Memorial Prize in economics for her research on gender gaps in the workplace… Kelsey Jarrett, ex- of ESG and impact consulting firm Malk Partners, joins SJF Ventures as director of impact… Nuveen seeks an impact investing associate in Singapore… SVX is recruiting an impact investing intern in Canada… Sitawi Finance for Good is hiring an analyst in Sao Paulo. 

The Aspen Institute has an opening for a policy director for its economic strategy group in Washington, DC… Toniic is hosting a webinar today at 11am ET to present research papers based on its T100 study of impact investment portfolios… HP and the Aspen Institute’s Accelerating Digital Equity Global Summit will take place virtually, Oct. 17-19.  

👉 View (or post) impact investing jobs on ImpactAlpha’s new Career Hub.

Thank you for your impact!

– Oct. 11, 2023