The Brief: Trade wars and the climate supply chain

Greetings Agents of Impact!

🔌 Plug In: Better, cheaper and faster climate impact. Stonly Blue and his colleagues at Third Sphere have raised four early stage climate funds and backed over 100 companies (and notched at least 10 exits) with a focus on hardware, deployment and resilience in climate tech. Today on Plugged In, Blue joins ImpactAlpha contributing editor Sherrell Dorsey, live on LinkedIn, to talk pipeline, valuations and the outlook for climate tech investing, at 10am PT / 1pm ET / 6pm London. Join directly. 

In today’s Brief:

• Trade wars and the climate transition
• Digitalizing microfinance institutions
• Expanding green hydrogen production 

Featured: Climate Transition

As trade wars heat up, climate investors look to back homegrown ‘challenger technologies.’ Products essential to the energy transition swing between scarcity and oversupply. To protect the fledgling domestic supply chain for electric vehicles, solar panels and other key clean energy inputs, the Biden administration this week slapped hefty tariffs on cheap Chinese imports. Supplies of other key materials, such as cobalt, lithium and graphite remain unstable, scarce or problematic to produce. Material-intensive cleantech “relies on the free trade environment that has prevailed since the end of the Cold War,” write Anil Achyuta and Tina Tosukhowong of climate tech VC firm TDK Ventures in a guest post on ImpactAlpha. “Unfortunately, the global economy is trending in the opposite direction.” The increased tariffs on many Chinese-made clean energy products makes even starker the impact of trade disruptions on the roll-out of climate technologies. The deglobalization trend has TDK looking for “challenger technologies” and overlooked pathways that are not as reliant on global supply chains – and not yet dominated by incumbent global producers.

• Curbing imports. China’s exports of cheap electric vehicles, solar cells and lithium-ion batteries may tank US manufacturing – and save the planet. President Biden this week quadrupled tariffs, to 100%, on Chinese electric vehicles. Other levies, including on solar cells and lithium-ion batteries, are aimed at building a US supply chain for green technologies. But the research firm Wood Mackenzie warned that China has been largely responsible for the plunging cost of solar and wind energy and battery storage. “Without China at the table, aggressive cost reductions we have become accustomed to are over,” the firm wrote in February. The estimated added cost of the “not made in China” scenario: $6 trillion. “Moreover, the length of time it would take to catch up to China’s production scale would push back a transition which is already running far behind schedule,” says Wood Mackenzie.

• Challenger technologies. Wave energy and fusion power are not yet economical, but technologies like compressed-air energy storage for long-term clean energy storage and perovskites-silicon tandems for solar photovoltaics have near-term commercial promise. TDK and advisory firm Lux Research assessed more than two dozen challenger technologies for their potential viability. Sodium-ion batteries rose to the top in North America. The US has the world’s largest natural reserves of trona, from which soda ash is derived (sodium carbonate is to sodium-ion batteries as lithium carbonate is to lithium-ion batteries). Sodium-ion’s energy density falls short of lithium-ion’s today, but BNEF believes it will soon catch up and says sodium-ion could displace some 272,000 tons of demand for lithium-ion, or about 7% of the market, by 2035.

• Low-cost energy. A new generation of nuclear power also holds promise. Small modular reactors, as their name implies, are not as large as traditional nuclear reactors. Their modular design allows for off-site manufacturing, potentially streamlining construction, while their smaller footprint makes them easier to site and minimizes environmental impact. Similarly, ammonia has the potential to replace fossil fuels in combustion turbines and fuel cells. That could help decarbonize aviation, shipping, and long-distance trucking in cases where switching to electric power poses challenges. Ammonia combustion can also serve as an efficient heat source for industrial and residential purposes. “The investment community,” write the authors, “has an opportunity and responsibility to lead the way in identifying, investing in, developing and, with government action, scaling the solutions that can help individual regions find their pathways to clean energy transition.”
  
• Keep reading, “As trade wars heat up, climate investors look to back homegrown ‘challenger technologies,’” by TDK Ventures’ Anil Achyuta and Tina Tosukhowong on ImpactAlpha.

Dealflow: Financial Inclusion

Accion raises $152.5 million to upgrade emerging market financial institutions. Before the fintech boom, microfinance, rural finance, and small business finance agencies were the key channels of financial inclusion for hundreds of millions of un- and underbanked businesses and households worldwide. Accion’s Digital Transformation Fund is helping such institutions reach more customers with tech updates for underwriting, loan disbursement and management. “Fintechs have done a fantastic job reaching scale in urban areas, but reaching rural and digitally illiterate customers is a much tougher job,” Accion’s Njord Andrewes told ImpactAlpha. “Traditional microfinance banks are well positioned there.” The nonprofit impact investor has raised $152.5 million for the fund, which will make equity investments in up to a dozen companies in Africa, Asia and Latin America. Backers include Mastercard, IDB Invest, the International Finance Corp., and the development finance institutions of the UK, Netherlands, Austria and Sweden.

• Hands on. Accion will take board seats at each company and help them develop a digitalization roadmap. The work builds on Accion Advisory’s support for microfinance institutions. Its first investments are in India-based Annapurna Finance and IKF Finance. The Digital Transformation Fund is helping Annapurna build a mobile emergency-loan service that uses GPS to help customers get cash quickly from the nearest agent. Established financial institutions can leverage simple digital tools to “be more hands on and useful for rural populations,” said Andrewes.
  
• Check it out. 

Momentus Capital closes $171 million fund for growth-stage companies in underserved communities. Momentus Capital launched its Equitable Prosperity Fund in 2022 to bring institutional capital to social enterprises that have struggled with access to traditional capital (see, “Collateralizing small business loans to bring institutional capital to local impact”). The fund is the first for Momentus, the umbrella brand for a family of financial services companies that includes Capital Impact Partners and CDC Small Business Finance. The fund “is a game changer,” says Momentus’ Ellis Carr. This is “a fund helping underestimated communities, led by a diverse team of investment professionals, that takes a far different approach than traditional venture capital or debt financing.”

• Healthy communities. The Equitable Prosperity Fund provides non-dilutive growth capital to businesses that are increasing healthcare and healthy food access in underserved communities, with a focus on diversity and employee ownership. Its 10 portfolio businesses include 4P Foods, a Virginia-based company that works with local farmers to make healthy food more accessible to underserved communities. SameSky Health, a Los Angeles-based health services firm that merged with Tampa-based GroundGame Health, is closing healthcare gaps in hard-to-reach communities. 

• Return on inclusion. Momentus Capital’s fund secured commitments from nearly two dozen investors, including the Kresge and Marguerite Casey foundations, Northwestern Mutual, Truist, US Bancorp Impact Finance and Charles Schwab Bank. “The Equitable Prosperity Fund is sorely needed capital that isn’t blind to the financial impacts of structural racism,” said Kresge’s Erika Brice, and “ensures that overlooked, but talented entrepreneurs receive investments that resonate with and center their communities.”
  
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Plug Power secures a $1.7 billion loan guarantee to develop clean hydrogen facilities. Plug Power is a leading manufacturer of electrolyzers, which split water in hydrogen and oxygen and are used for clean hydrogen power production. The company’s modular stacks are designed to run on renewable sources of electricity to produce emissions-free hydrogen (for context, see, “With incentives and investment, ‘green’ hydrogen gains momentum”). A $1.7 billion conditional loan guarantee from the US Department of Energy’s Loan Programs Office will help the Latham, NY-based company build six new hydrogen production facilities in the US. The loan “will support an integrated and resilient commercial scale clean hydrogen fueling network across several regions of the United States,” the LPO’s Jigar Shah said in a statement. Plug Power is working on a Community Benefits Plan for local engagement on facility siting. Each location is expected to create 100 to 300 construction jobs and 50 full-time jobs on-site. 

• Green hydrogen investments. Massachusetts-based Electric Hydrogen last week inked $100 million in credit from HSBC, JP Morgan, Stifel Bank and Hercules Capital to build its 100-megawatt electrolyzer plants. The company has also secured funding from the US DOE. In Australia, Hysata raised $111 million in Series B equity financing led by bp Ventures and Templewater to expand its electrolyzer manufacturing facility in the town of Wollongong, New South Wales. The company is aiming to boost manufacturing capacity to a gigawatt.
  
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Dealflow overflow. Investment news crossing our desks:

• D.light secured $3.4 million in grant funding from Private Sector Foundation Uganda and Energizing Development to help 10,000 South Sudanese and Congolese refugees in Uganda acquire solar home systems. (d.light)
  
• Norrsken VC reached a final close of €320 million for its second fund, which invests in impact-focused climate tech, energy, biotech, AI and healthtech ventures. (Tech.EU)
  
• British International Investment provided a $50 million loan to BRAC Bank in Bangladesh to lend to small and women-led businesses (for more on BRAC, read about its work in Liberia and Sierra Leone).

Short Signals: What We’re Reading

💧 Hydrological impact. The US bipartisan infrastructure law earmarked a much-needed $55 billion for water quality and access projects. Continued investment at those levels could shrink the water funding gap – projected to swell to $2 trillion by 2043 – by $125 billion in the next two decades. (US Water Alliance) 

🛢️ Oil and gas bond risk. Global oil majors have been lengthening the terms of their bonds, in some cases to 30 years or more, well past the point when experts project oil and gas demand will plummet. The longer bond maturities are “extending investors’ exposure to these businesses at a time when their long-term viability is most in question.” (Anthropocene Institute)

😧 Climate finance slowdown. Climate funds are taking 19 months or longer to close, four out of 10 climate fund managers report. A third are closing at less than 75% of their targets. Nearly 40% expect to mark their portfolios down this year, according to a survey by CREO. (CREO)

🇨🇦 Scaling Canadian impact. A group of impact investors have made 18 recommendations for mobilizing impact capital in Canada. They call for investors to increase and diversify the opportunities for impact, foster collaboration between stakeholders, and engage in policy advocacy. (Newswire.ca)

Agents of Impact: Follow the Talent

👋 The Call: A guide to investing in livelihoods and access for emerging market households. On our next Agents of Impact Call, IFC’s Wagner Albuquerque de Almeida, BII’s Martina Castro, FMO’s Juan Dada, Elevar Equity’s Amie Patel and Citi Social Finance’s Borja Garcia Fernandez will offer practical guidance for investments in emerging markets that boost incomes, improve livelihoods and expand access to essential goods and services, Wednesday, May 22 at 8am PT / 11am ET / 4pm London. RSVP today. 

Andrea Longton is taking her book, “The Social Justice Investor,” on tour, with planned stops at Calvert Impact in Bethesda (June 5), Oakstop in Oakland (June 18), Busboys & Poets in Arlington, Va. (June 26), Wild Goose Festival in North Carolina (July), New Media Ventures Summit in San Francisco (July), and Trillium Asset Management in Boston (Sept. 6). See, “Five women who invest for social justice.”

Donna Daniels, previously with the Heron Foundation, is named CEO of Possibility Labs… WaterEquity is on the hunt for a finance director in New York… New Ventures Mexico seeks a financial analyst in Mexico City… RMI is hiring a senior associate of climate intelligence for carbon markets… Generation Investment Management is recruiting a growth equity associate in San Francisco… Conscious Investment Management has an opening for an investment analyst or associate… Temasek Trust is looking for a Singapore-based manager for the Center for Impact Investing and Practices. 

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

Thank you for your impact!

– May 15, 2024