History says, don’t hope on this side of the grave. But then, once in a lifetime that longed-for tidal wave of justice can rise up, and hope and history rhyme.” – Seamus Heaney 1939-2013
The world has reached a point in time where, as the poet says, hope and history might just rhyme.
For several decades, scientists, researchers, entrepreneurs, and venture capital investors across the globe have been incubating real solutions to the problems of climate change, and many of these are ready to scale.
However, scaling climate solutions in the real world, as opposed to scaling technology companies in the digital world, requires considerable amounts capital. The most effective way to access these larger pools of capital is via institutional investors, and those investors seek to generate non-concessional returns for their pensioners and for their beneficiaries. At The Rise Fund, we have created a pathway for institutional investors to invest at scale behind the solutions to some of the world’s most pressing problems by building a diverse portfolio of over 35 collinear companies: companies whose product and services deliver both financial and impact returns.
Our approach over the past five years has shown that delivering positive impact alongside market rate returns is indeed possible, but before a single dollar was deployed by Rise, we needed to ask (and answer) an important question: How can we be confident in the impact of a given investment both at the time of investment and in the future?
In the world of financial decision-making, we back up every investment case assumption with detailed evidence and evaluation. This same approach can and should be true for understanding impact. Whether estimating the effect of students using an edtech software product or how many tons of CO2 a company can avert, impact decision tools should enable the same level of rigor.
The unlock to doing this well and understanding the nature and magnitude of impact is to tap into the wealth of scientific, health, economic, and social science research that exists but is rarely pulled explicitly into investing decisions. We have assessed the impact of over 400 companies in the course of helping the $US 5 billion Rise Funds to build their portfolio, and we use this research to estimate an impact return on invested capital. It is a depth of understanding of each investment which enables us to now study a company’s carbon emissions avoidance through a decision tool we developed called carbon yield, which measures the estimated tons of carbon dioxide equivalent emissions avoided per dollar invested.
More simply put, carbon yield is a decision tool that allows us to construct a portfolio of companies that can enable carbon aversion in a measurable and quantifiable way.
Across the world, many scientists have dedicated their lives to understanding these issues. Bringing their research into decisions enables us to have much greater confidence in the impact of an investment. Examples of this kind of academic research include a study from Delft University in The Netherlands which assesses the impact of EV charging stations on consumer decisions over whether to purchase an electric vehicle, and research into alternative proteins, which demonstrates the greenhouse gas emissions per kilogram vary widely for beef, poultry, and pork production and across different regions of the world. And this approach can be similarly applied to understand the impacts of a company on other climate and environmental pathways, such as water conservation, pollution reduction, or health improvements. Measurement and accounting in the field of climate change has been a vexed issue but is increasingly beginning to align for better measurement of greenhouse gas emissions reduction and targets.
Understanding the carbon avoidance potential and return on investment of a climate solution is the other side of the same coin. It is not to be netted against reduction targets, but rather is a parallel measure of how much real action we are taking to scale the solutions that will allow us to achieve our collective reduction goals. These approaches should and can continue to improve to ensure that we invest with an eye to the impact return and scale solutions with the urgency we need.
As the unit economics of numerous climate solutions have become cost competitive, and others are increasingly so as they scale, climate investing no longer needs to be about making a financial trade off to help the world. It can be a good investment – full stop. By leveraging research and evidence into investment decisions, we can greatly increase confidence that those investment dollars will deliver meaningful climate impact alongside their financial returns.
By Maryanne Hancock, Chief Executive Officer, Y Analytics - TPG’s Impact & ESG Performance Capability