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Climate Investment Manifesto

*This memo was originally submitted on August 1, 2020 to Chamath Palihapitiya’s Twitter challenge in July-2020, where he challenged anyone interested to submit the following: “In 7 pages (or less) of single spaced prose, propose a framework we can use to buy and build technologies/companies/products that result in a holding company which can more meaningfully advance the efforts of decarbonization/climate change/sustainability. The goal was to create a framework that could be used to deploy billions of dollars into the strategy over the course of a decade+.

integrated climate investing approach & systematic deployment of capital

Investing in climate change should be an integrated approach of accelerating deployment of mature clean technologies, bringing down the costs of developing clean technologies to market parity, and decarbonizing sectors that do not have commercially available low-carbon options. ~25% of mature clean technologies are severely underinvested and under-scaled which could make a meaningful dent into global emissions reductions while ~75% of early-stage technologies that are not yet mass-market scale are prototyped and developed. Of commercial-ready, mature technologies ready for deployment, ~65% relate to buildings and power generation sectors that will be applicable for decades, have numerous “spill-over” effects to other industries, and are only in need of modest technical and business innovation to reach scale.

While it is understood that the technological advances that are needed demand a step change in both the speed at which innovation occurs and the scale at which new technologies are deployed, the same standard has not been applied to private sector approaches to funding the space. Existing financing vehicles today inefficiently finance unrelated, single-point moonshot solutions rather than systemically deploying capital in a way that maximizes technology readiness x total carbon emissions abated. The proposed capital deployment approach emphasizes deploying solutions that are actionable, proven, and focused on massive and growing addressable markets (return on investment – ROI) while ensuring those solutions will have massive positive impacts on decarbonization (return on environment – ROENV).

The general idea is to create a platform of successful businesses today that can grow and scale, which will create the springboard for future opportunities. The cost of these mature technologies should compete with conventional technologies at present without external support. The goal is to create a virtuous cycle of increasing scale and further refinement of technology, processes, and streamlined deployment which then leads to further cost reduction and additional investment in future opportunities.

We’ve crossed the Rubicon on Climate. It’s time to simultaneously attack adaptation and mitigation by commercializing emissions-reducing technologies and developing negative-emissions technologies. The goal of this Climate Change investment thesis is to ensure all components of key value chains are advancing evenly towards their market applications and exploiting spillovers, while the global community works on R&D that requires innovation for technologies not yet developed.

the ‘4 rs’ framework (“4 rs”): reduce, redesign, remove, reimagine

The initial near-term priorities of the 4 Rs framework are investing in resilience and is focused on reducing our emissions profiles and redesigning our world to reduce future emissions. The long-term priorities of the 4 Rs framework is building through innovation and is focused on removing emissions at scale and reimagining our societal and corporate contracts in a way that enables net-zero or negative emissions feedback loops.

4 Rs’ Framework

4 Rs’ Framework

  1. Phase 1 – Reduce: Focus on companies and technologies that can reduce emissions by improving energy efficiency or reducing energy intensity or final energy use. These opportunities are investable today and profitable, often mundane or overlooked.
  2. Phase 2 – Redesign: Focus on companies that are bringing costs down for emissions-friendly technologies to market parity and companies that are focused on integrating climate-risk. These opportunities are massive in the future but the timing may not be opportune until there is broader societal pressure to incorporate climate risk into everyday life.
  3. Phase 3 – Remove: Focus on companies that produce negative emissions – or bypass the need to produce emissions altogether – and can be deployed to sequester carbon at scale. This will be required across all sectors in the future. Many early stage technologies are either stuck in the lab and university or with only limited deployment.
  4. Phase 4 – Reimagine: Focus on companies that utilize waste, predominantly carbon or degraded natural world, into value products and services that can be resold to consumers, utilized in industry or for use in large-scale carbon sequestration. Phase 4 will not be commercially viable until Phases 1-3 progress further.

The 4 Rs focus on mobilizing private sector dollars and influence to bring costs down, accelerate adoption of cleaner technologies, and scale commercially viable decarbonization technologies. While the 4 Rs framework is comprehensive for technology-based, carbon intensity-reducing technologies, it is not exhaustive with regards to broader climate solutions including policy or natural-based solutions. The deliberate exclusion of committing investment dollars to policy is because our focus should be on appreciating our capital in the most time- and impact-efficient manner. Deploying capital to influence policy should be assessed on a case-by-case basis if it can impact the near-term ROI of certain investments.

The 4 Rs are specifically looking for investable areas today that $2-3BN can be deployed over the next few years and where the capital can generate the biggest upfront impact while also having a long runway to compound. By focusing on opportunities that compound our capital, we can invest more cumulative dollars over the course of the next few decades that focus on a wide array of climate technologies as they move from frontier technologies to commercially viable solutions. By creating this self-sustaining, cash flow generative vehicle, we can redeploy a portion of proceeds to natural-based solutions in the future that have incredible cumulative ROENV benefits but do not have many ROI-focused vehicles to deploy in today.

optimizing for roi and roenv

The 4 Rs deployment framework is based on maximizing two parameters: technology readiness level (TRL) and potential impact on abated CO2 emissions. With regards to TRL, we can leverage the IEA’s Energy Technology Perspectives methodology, widely accepted by international community, which evaluates 430+ climate technologies based on commercial readiness (from initial demos and early prototypes, to commercial pilots, all the way to mass-market scale) and importance to net-zero emissions. With regards to cumulative CO2 abated, we can leverage the IPCC’s recommendations that have high agreement and robust evidence from the AR5 and SR1.5 reports as well as Project Drawdown’s hierarchy of 75+ technological and natural solutions in Drawdown 2.0 that force ranks the solutions by cumulative potential CO2 sequestered from 2020-2050.

The majority of climate literature separates climate emissions into the grand five challenges: AFOLU (agriculture, forestry, and land use), Buildings, Electricity, Industry, and Transport. We can map the 4 Rs to this taxonomy in Exhibit A. However, the 4 Rs also include a ‘spill-over’ category for technologies that are cross-sectoral in terms of impact.

Spill-over categories are often overlooked but a vital part of technological progression. Knowledge accumulated in a technology for one sector is often a powerful driver for innovation in other related technologies. The excesses created by novel technologies in one space may create launchpad opportunities for other sectors. As such, they should be a core focus of the capital framework as well.

IEA’s Energy Technology Perspectives list

IEA’s Energy Technology Perspectives list of 430+ climate and Project Drawdown’s hierarchy of 75+ technological and natural solutions force ranked by commercial operations readiness and maximum carbon sequestered, respectively

IPCC’s recommendations from the AR5 and SR1.5 reports

IPCC’s recommendations from the AR5 and SR1.5 reports

decarbonization pathways and near-term ‘investability’ assessment by sector

sector: afolu (~24% of emissions)

  • Decarbonization Pathway: Over next few decades, we need to increase agricultural yields beyond anything historically accomplished while also reducing the environmental degradation caused by modern agricultural practices and for industrial needs.
  • Decarbonization Sector Assessment: Requires significant policy support in the form of mandated agricultural practices and/or subsidies. The challenges and solutions also vary significantly between regions both from a land and behavioral perspective. Investable universe likely revolves around food preservation, alternative agricultural practices, increased agricultural yields, and genetic engineering, but needs a few more R&D cycles before technologies are ready to reach commercial scale.

sector: buildings (~6% of emissions)

  • Decarbonization Pathway: Humans will continue to erect massive energy-intensive buildings in the future and it will be a multi-decade process of retrofitting existing infrastructure. Left unchecked, baseline direct and indirect emissions from buildings will grow exponentially around the globe.
  • Decarbonization Sector Assessment: Investable sector with commercial-ready applications that can be deployed profitably, scale globally, and reduce emissions and energy intensity/demand today. Long time horizon as these technologies will need to be applied in all new buildings as well as modernizing the trillions of dollars of existing infrastructure. No clear market leader.

sector: electricity (~25% of emissions)

  • Decarbonization Pathway: Must decarbonize rapidly via upscaling low- or zero- carbon energy, electrifying road transport and space heating/cooling needs, while also phasing out fossil fuel usage globally especially in developing countries where it is growing.
  • Decarbonization Sector Assessment: Significant progress and investment to date and the sector that needs to decarbonize the quickest. Trillions of dollars of power generation, T&D, resilience, and grid investments to occur. Significant investable opportunities but the space has many well capitalized incumbents and governments.

sector: industry (~21% of emissions)

  • Decarbonization Pathway: Massive need (highest kg of CO2 per $) and currently one of the hardest to decarbonize given uses are so prevalent and leading market inputs are very cheap. There needs to be technological breakthroughs or industry-wide changes in manufacturing and construction processes, improvements in material efficiency, increased recycling and reuse, and reductions in overall product and service demand.
  • Decarbonization Sector Assessment: Solutions in the Buildings sector can be applied to Industry but significant emissions reductions will come form alternative/synthetic materials, carbon capture & utilization, and breakthroughs in electrochemistry and catalysis. Investable via technologies/strategies that apply to both Buildings and Industry but further R&D needed on the core decarbonization efforts.

sector: transport (~14% of emissions)

  • Decarbonization Pathway: Requires breakthroughs in battery and motor technologies (for electrified transport), lightweighting, or fundamental innovation in energy density and production for alternative or Co2-based fuels (hydrogen, methanol, etc.).
  • Decarbonization Sector Assessment: Sector will need assistance from public policy in the form of emissions credits or investment in public transit and clean mobility-focused infrastructure. Some foundational technologies will reach cost parity within the decade (e.g., EV + battery > ICE cars) but are backed by leading incumbents with sizable war chests. Selective opportunities to invest in for smaller pockets of capital.

sector: spill-over

  • Decarbonization Pathway: Per the LLNL, in the US, ~2/3 of energy consumed in 2019 was rejected energy. This number is worse(ning) in developing countries that rely more on coal and natural gas. Commercial and industrial sectors represent ~35-40% of final energy consumption and will continue to be a source of emissions growth in the decades to come without drastic efficiency gains and breakthroughs in agricultural, chemical, construction, and manufacturing processes.
  • Decarbonization Sector Assessment: Many of the cross-sector technological solutions that are ready for commercialization are predominately for the Industry and Buildings sectors. The technologies are largely focused on leveraging industrial IoT (asset retrofitting and ongoing optimization via smart devices) to reduce the energy intensity and final energy use of core heating, cooling, water needs.

capital deployment strategy

Based on the publicly disclosed intentions of creating a holding company, only making control investments, Chamath’s success fundraising via SPAC’s, and the recent $FVAC PIPE, I am making the assumption that this will be a public holding company with initial investments focused on taking majority stakes in private companies or leading PIPEs.

Assuming ~$500M raises (based on SCHH2 and SCHH3 raises) and ~18 month timeline between raises, the ~$2-3BN is likely to be allocated over the next ~6-8 years. While the 4 Rs framework is looking at the multi-decade climate investing opportunity, the prompt and implied timeline would indicate that the first ~5 raises would be focused on Phases 1 (Reduce) and 2 (Redesign) with potential for entry into Phases 3 (Remove) and 4 (Reimagine) if globally coordinated R&D can make rapid technological breakthroughs materialize quickly enough.

Thus, the HoldCo will focus on bringing down costs and accelerating deployment of emissions-reducing technologies available today. This is still crucially important since CO2 molecules abated today are worth considerably more than molecules in the future since emissions today will contribute to many positive warming feedback loops in the future, causing irreparable damage. The initial investments should be in profitable and ready-to-scale technologies with little-to-no science or technology risk.

I propose the initial focus should be on overlooked and underinvested solutions to relatively ‘mundane’ issues that contribute significantly to warming, have spill-over effects to multiple sectors, have long runways for market opportunity, and do not compete against well capitalized incumbents or governments.

Those parameters and goals naturally raise Buildings and Industry as the core thematic opportunities in the near-term, predominately with respect to ongoing connectivity, monitoring, and optimization. Boosting energy efficiency and reducing final energy demand of these two sectors are multi-decade opportunities with massive and growing addressable markets. Technologies that connect and retrofit existing equipment result in energy savings creates a value prop for customers (ROI) and create a benefit for overall decarbonization efforts (ROENV). They later can be optimized for ongoing savings while simultaneously collecting massive amounts of data on equipment, installations, and device setup. In the future, data can be leveraged to customize solutions on an equipment-, building-, or sector-basis with no geographic or technical limitations. Down the road, there will be iterations that involve network effects that can be leveraged to deploy next-gen climate solutions (systematic passive demand response for regions, city-by-city DER management or virtual power plants, etc.).

As public funding is mobilized (US $2TN and EU €500+ current clean energy proposals), global climate policy is established (e.g. carbon price), and additional private capital enters the arena, the HoldCo can expand into more frontier technologies such as DAC, synthetic fuels, hydrogen fuel cells, and bioengineering. These deep tech sectors (namely impacting Agriculture, Industry, and Transport) undoubtedly represent trillions of dollars of market opportunity but solutions need to be tested and modified before commercialization. In some cases, new processes and products need to be developed altogether for deep decarbonization. They should not be considered investable in the near-term for the HoldCo if they are still in the early prototype stage today because of the high level of uncertainty about their performance and possible future commercialization.

illustrative capital deployment by phase

The near-term opportunities for $2-$3BN of capital are much different than the long-term opportunities, so the framework must evolve over time. In the 4 Rs case, the focus of capital deployment would incrementally progress to the next phase – Reduce > Redesign > Remove > Reuse – as the underlying technologies becomes commercially available. To illustrate what this may look like over the course of a few investment lifecycles, I’ve prepared a table that shows the focus of capital outlays by Phase in Exhibit B.

Exhibit A: Climate Solutions by 4 Rs Phase, Sector, and Investable Timeline.

Exhibit A: Climate Solutions by 4 Rs Phase, Sector, and Investable Timeline. Click on image to see higher resolution table.

Exhibit B: Illustrative Capital Deployment by 4 Rs Framework Phase.

Exhibit B: Illustrative Capital Deployment by 4 Rs Framework Phase. Click on image to see higher resolution table.

the 4 rs will drive decarbonization and generate meaningful returns

The 4 Rs are an effective framework to address decarbonization and climate change investment opportunities over the course of the next decade+. By maximizing technology readiness and maximum CO2 abatement, the $2-3BN will be deployed into both actionable and impactful solutions. This strategic focus on resilience first will extend the runway of the capital by deploying into large and growing market opportunities that will create cash-flow generative businesses to compound our capital, maximizing ROI. This capital growth can then be redeployed in emerging investment opportunities as more innovative technologies are commercialized, resulting in more cumulative capital invested in decarbonization and climate change technologies across the lifecycle of these investment vehicles, maximining ROENV. The 4 Rs framework marries climate impact with capital appreciation and is an effective strategy for accelerating the deployment of clean technologies globally in an effort to combat climate change.

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