ImpactAlpha, March 28 – The bad news about the oceans has finally started to generate some good news for investors looking for investments in the blue economy.
A growing recognition that oceans are in crisis – from global warming and acidification to plastics pollution and depleted fisheries to “dead zones” caused by chemical runoff from agriculture – has spurred a search for private sector solutions to threats to marine and coastal environments.
From tech-driven startups to ocean-focused public equities strategies, investors have a wider range of options for getting ahead of regulatory mandates and other imperatives to protect and restore marine habitats and resources. Stricter emissions standards are coming to the shipping industry, there’s a new push to establish additional marine protected areas, and state and national renewable energy targets are bringing new attention to offshore wind projects.
“There are companies that are positioned to perform well when governments, investors and other entities take meaningful action to combat climate change, and I think we’re starting to see that,” says Rockefeller Capital Management’s Rolando Morillo. “You will get to the intersection where these companies become much more widely viewed as opportunities, rather than as a niche.”
Morillo is lead equity analyst for a $45 million public equities Ocean Strategy, Rockefeller’s first foray into solutions-oriented investing. The fund made one of its first investments in Denmark’s DONG Energy, now known as Ørsted, the largest offshore wind farm company in the world.
The “blue economy” represents global economic activity estimated at $3 trillion to $6 trillion per year. If it were a country, the oceanic economy would be the seventh largest in the world.
Ocean-themed impact funds have largely focused on companies working in marine and coastal-based industries. Netherlands based Aqua-Spark has built a portfolio of sustainable aquaculture assets, while Encourage Capital’s Pescador deploys strategies for sustainable seafood production. Althelia Ecosphere’s Sustainable Oceans Fund last year made its first investment, $5 million in equity, in Kampachi Co., a La Paz, Mexico-based ocean aquaculture outfit raising sushi-grade tuna.
But opportunities in the blue economy are much broader, encompassing investments in green ports and shipping, offshore wind, water and wastewater management, conservation and ecotourism, and waste management and recycling.
Rockefeller Capital, founded in 1882 as the family office of John D. Rockefeller, manages $13.3 billion in assets for family offices, institutions and high-net-worth investors. The idea of creating a portfolio dedicated to ocean investment came out of a meeting seven years ago with The Ocean Foundation. The Washington, D.C.–based marine conservation nonprofit screens potential investments as a strategic consultant on the fund. Offshore wind energy has become a major focus.
“What we’ve found is that the market has essentially under-appreciated the potential for offshore wind,” Morillo says. “It has the potential to be one of the most viable sources of utility scale renewable energy in the world.”
In the U.S., East Coast states such as New York, New Jersey and Massachusetts are leading the way when it comes to setting offshore wind development goals. The U.S. only has 30 megawatts of offshore wind capacity currently installed, but if goals are met and announced projects are built, the East Coast could have nearly 9 gigawatts of capacity by the 2030s. Global offshore wind capacity is forecast to grow by more than 80 gigawatts through 2024, a compound annual growth rate of more than 25%, according to a recent study by Global Industry Analysis.
Like other renewable energy technologies, offshore wind has seen steep price declines. In the U.S. project costs have fallen 75% since 2014, when a deal was struck for the country’s first commercial project, the Block Island Wind Farm in Rhode Island. Wind turbines are also growing both in size and power, and when it comes to turbines, size matters. Bigger turbines harvest more energy more reliably, and they’re easier to integrate into the grid. European technicians are testing turbines as tall as the Eiffel Tower. The industry is also constructing the farms further off-shore, which reduces the coastal impact and pushback from local residents, who have sometimes objected to offshore projects.
Mark Huang, co-founder and managing director of SeaAhead, a network of technologists, scientists, startups, corporations, governments and others working on ocean solutions, sees opportunities to apply disruptive technologies developed in other industries. Smart sensors, virtual reality and other technology can be useful in managing offshore wind farms, tracing farmed shellfish and electrifying port operations.
“We believe the time is now to really focus on catalyzing more venture based innovation tied to ocean sustainability,” says Huang. In January, SeaAhead, a benefit corporation, partnered with the Cambridge Innovation Council to open the Bluetech Innovation Hub in Boston and is tracking more than 75 regional startups. Marlinks, for example, helps wind operators monitor their undersea cables, while Wind Power Lab helps them detect windmill blade defects.
Access to funding with acceptable terms remains a key obstacle for innovative businesses, a European Commission study found last year. Huang is working with corporate partners and impact investors to create a venture capital investment vehicle focused on such “bluetech” innovation.
“Timing is everything,” Huang says. “There are certain sectors that are seeing economic growth because of end-user demand or a multitude of regulatory drivers that are forcing investment and innovation, and in the meantime you have declining cost curves in tech.”
Boats and ports
SeaAhead sees opportunities for VC investment in blue tech is ports and shipping, which are under regulatory and industry pressure to clean up their operations and improve efficiency.
PortCall.com, based in Durham, N.C., digitizes ports that typically run through manual coordination by phone and email. The service synchronizes schedules and operations to increase efficiency, saving money and reducing greenhouse gas emissions by decreasing the amount of time ships spend waiting to dock.
In January, 2020, the International Maritime Organization (IMO) will begin enforcing new emissions rules, which will require the shipping industry to reduce sulfur emissions by more than 80%. Shipping companies can achieve this by switching to diesel fuel, which is cleaner than the heavy fuel oil used by 80% of the industry, or by installing exhaust gas cleaning systems, known as “scrubbers.” Scrubbers enable the shipper to continue to burn the cheaper heavy fuel oil by washing the exhaust gases to reduce the sulfur oxide emissions.
“The issue of marine environmental compliance, while only in its early stages, is going to be part of the industry long-term,” says Rockefeller Capital’s Morillo. The new regulations and calls for eco-friendly ships has boosted demand for companies that supply scrubbers, such as Finland’s Wartsila Marine Systems, which already has sold out of scrubbers for this year. “We have a positive long-term view on Wartsila because of their ability to provide equipment such as scrubbers and ballast water systems,” Morillo says.
Resilience and recovery
Althelia’s Sustainable Oceans Fund is taking a broad view of blue economy opportunities. Althelia, now part of Mirova, launched the oceans fund more than two years ago to complement its $120 million land conservation and forestry fund. The fund reached a first close of $37.5 million last July and is targeting $100 million by the end of this year.
Many ocean investments will require patient capital to allow time for a depleted natural resource, such as a fish population, to recover. Althelia’s next investment, one of four in the pipeline, will finance a public-private partnership created to operate roughly 5,000 square miles of protected marine habitat in the Dominican Republic, the first Caribbean country to create a public-private partnership for a marine protected area.
A non-profit operator expects to generate income from user and entrance fees paid by fishermen and tourists, as well as other tourist-related revenue. The triple-bottom-line goals include new job opportunities for local populations, conservation of critical ecosystems, and a financial return for investors. Althelia’s ocean fund will finance the operator through a collateral-free loan. The structure is still being negotiated but is expected to have an eight- to 10-year term with an annual coupon.
“We think there’s a lot of opportunity inside the ocean sector. Most of the missing piece has to do with structuring the deals correctly and sourcing the right level of risk capital,” says Althelia Ecosphere’s Simon Dent. “The pools of capital have to be positioned correctly to undertake these types of investments.”