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12/5/2019

Cleantech is back from the dead — Yep, it’s a Halloween leftover

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Until recently, it has seemed that “cleantech VC” was a four-letter word. 

Or perhaps a term reserved for hushed whisphers of digust and distrust thanks to the financial woes in the sector about ten years ago.

But, it appears that the tide may be turning. 

Here are three headlines that might give cleantech entrepreneurs some hope.

#1:
Renewal Funds just raised $145M to invest in cleantech (what?)

Here are some highlights (link):
  • Sectors = Energy, water, smart cities, and food/ag tech, sustainable food system, cleaner oceans, and lowering the carbon footprint and waste generation of the consumer products industry (aka, impact investments)
  • Additional interests = Social impact, supporting diverse management teams


#2:
ArcTern Ventures just raised $165M to invest in cleantech (oh my!)

Here are some highlights (link):
  • Sectors = AgTech, artificial intelligence, energy, FoodTech, consumer hardware, software
  • Perspectives = Cleantech is a “a multi-trillion-dollar opportunity...Our life’s work at ArcTern is to demonstrate to the market that if you solve a big problem you get a big reward. We are chasing the biggest problems that we face — i.e., climate change and resource scarcity.”


#3:
Clean Energy Ventures just raised $110M to invest in cleantech (gasp!)
​

Here are some highlights (link):
  • Sectors =  “Early stage advanced energy with disruptive hardware and materials technology solutions and capital-light business models that have the potential to massively scale”
  • Perspectives = “After more than a decade of investing in the advanced energy sector, it's been gratifying that this first fund, which is focused on investments that address climate risks, was significantly oversubscribed. It's really indicative not only of investors' appetite for innovation in these sectors, but also of the new normal in which this kind of funding is possible without compromising return on investment."

But wait…

Before all of us entrepreneurs get too excited about sending an email to these groups and receiving $10M in growth capital the next day, let’s remember this...

Venture capital firms reject at least 95%+ of all the deals they review
  • This is based on my personal experience at a private equity fund for about a decade, and work now as an investment banker focused on energy and the environment.

Far less than 1% of startups raise capital from VC firms. 

The estimates vary:
  • Inc.com = 0.6%
  • Fundable / Entrepreneur.com = 0.05%

In contrast, the last study above showed that “57% of startups are funded by personal loans and credit, while 38% eceive funding from family and friends.”

These VC firms like low company valuations.
  • Firms like those referenced above tend to invest in companies who value themselves at around $10M, plus or minus. (Source: Pitchbook) But they can make exceptions for gamechangers.

Fundraising takes a ton of time, and will distract you from running your business.
  • You should plan on being distracted for at least six months, plus or minus, with perhaps 20-50% of your time spent on researching, emailing, tracking, calling, visiting, and negotiating with investors. Here’s a good Forbes article overview of the process.
  • To avoid this distraction, you could consider engaging licensed professionals with sector expertise. (Ahem, like us. Subtle, I know.)

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6/3/2019

To Be Bearish or Bullish: Big Oil & Gas Investing Billions in New Energies

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Picture
Photo by Zbynek Burival on Unsplash

By: Dr. Chris Wedding
​

If you think the “energy transition” is just for Democrats or greenies, then consider this quote from a Goldman Sachs natural resource executive:

“I’ve probably spent more time talking with oil company executives about the energy shift and renewables in the last 2 years than the previous 23 put together.”

Last year, $6.4B was invested in hydrocarbons versus $5.8B in renewable energy, according to PitchBook. That’s a pretty tight race.

And a CDP report notes that 2018 expenditure on clean energy sector by the world’s 24 largest oil and gas companies was roughly 1.3% of total budgets vs. 0.7% last year.

On one hand, that’s almost 200% growth year-over-year. Or (slight reframe) its chump change as a fraction of overall investments, with 98.7% of capital still going to conventional energy lines of business.

Plus, over 70% of those investments came from EU-based oil and gas majors. Maybe that’s because the science of climate change is magically different across the ocean. (Yep, sarcasm)

As further evidence that times are changing, here’s a look at three organizations…

  • Saudi Arabia’s Public Investment Fund has divested from oil and gas investments.
  • Vitol, a leading energy and commodity trading company with 5,000+ employees, is now “supportive of the need to move to more renewable sources of energy” and is focusing on investments in wind and energy storage.
  • Ørsted, formerly Danish Oil and Natural Gas Energy and the largest power producer in Denmark, has successfully transitioned from fossil fuels to primarily renewable energy. They publicy note that they can “prove numerically that the profitability of the oil and gas business was lower than the renewable investments” that were made, “when compared to the risk of each investment area.”


Why are oil and gas major making these investments now?

#1. They are already experts in the energy sector.

This is partly a situation of a [very powerful] hammer seeking a nail.

Decades of experience in conventional energy can translate into efficient capital deployment, project development, and new technology commercialization in the new energy sector, too.

Building and operating offshore oil rigs is complicated. The same is true for offshore wind projects, and this is a market expected to reach $60B by 2024. “Have skills, should apply.”

Running gas stations is not rocket science, but profitability is also not a given. So, it makes sense for Chevron to add EV charging to its gas stations, as long as they get the rate tariffs right so they do not drown in pricey demand charges.


#2.  Clean energy investments can be a hedge against softer demand for oil and gas.

When Fitch Ratings talks about the growth in electric vehicles potentially creating an “investor death spiral,” it’s worth listening to their reasons.


#3.  Renewable energy markets are not little runts to ignore anymore.

Bloomberg projects that over 70% of all new power capacity investment between now and 2050 is expected to be in solar and wind projects.

Their research further shows that clean energy sector investment has exceeded $300B globally for the last five years.

Finally, analysis suggests that the advanced energy economy (clean power, alternative transportation, energy-efficient buildings) now exceeds $1.4T, or twice the size of the global airline industry.



#4.  Corporate sustainability reporting is becoming mainstream. “We are watching you.”

At least 85% of Fortune 500 companies now engage in sustainability reporting.

Drivers of this trend include stakeholder demands, global trends towards greater transparency, peer pressure, and a realization that sustainability topics can be material to financial risk and return.

Samples of third-party sustainability reporting include the following:

  • CDP (formerly, Carbon Disclosure Project) — It covers disclosure by companies and cities regarding carbon, water, and supply chain impacts, and is backed by a “network of investors and purchasers, representing over $100 trillion.”
  • GRI (Global Reporting Initiative) — This is the oldest corporate sustainability reporting framework and is used by the majority of Fortune 500 companies.
  • SASB (Sustainability Accounting Standards Board) — This one provides investors with intel regarding a portfolio’s exposure to specific sustainability risks and opportunities, and has over $26T of investor support, including former leadership by Michael Bloomberg.
  • Task Force for Climate Disclosure -- TFCD is focused on “climate-related financial risk disclosures for use by companies in providing information to investors, lenders, insurers, and other stakeholders,” and is backed by the G20 Financial Stability Board.



What kinds of new energy investments are oil and gas majors making in the last two years?

I will only focus on the top four oil and gas majors in terms of their investments in and commitments to lower carbon energy. This includes Total, BP, Equinor, and Shell. (See graph below).

Picture

​I am mostly listing investments by their VC arms, with some other infrastructure investments sprinkled in here and there.

Finally, I am not listing companies that are “kind of” related to clean energy, such as ride sharing or financial settlement technologies for the energy sector.​


Total Energy Ventures
  • AutoGrid — $32M Series D — Big data analytics, distributed generation, energy storage, demand response (Jan. 2019)
  • Sunfire — $29M Series C — Hydrogen fuel cells (Jan. 2019)
  • Tado — $50M Late stage VC (6th round)  — Energy efficiency, smart home (Oct. 2018)
  • MTPV — $18M Series C — Waste heat to energy (Sep. 2018)
  • Ionic Materials — $65M Series C — Energy storage (cobalt-free, solid state) (Feb. 2018)
  • United Wind — $8M Series B — Wind energy (small scale) (Jun. 2017)


BP Ventures (plus some larger corporate deals)
  • PowerShare — Series A (unknown amount) — EV charging (Feb. 2019)
  • C-capture — $4.9M Series A — Carbon capture (Dec. 2018)
  • FreeWire Technologies — $15M Series A — Energy storage, EV charging (Oct. 2018)
  • Voltaware — $3.3M Seed round — Energy monitoring, AI (Jun. 2018)
  • Chargemaster — $170M Buy out — EV charging (Jun. 2018) (link)
  • StoreDot — $20M Late state VC (5th round) — Energy storage, EV charging (May 2018)
  • Lightsource — $200M Private equity growth — Large-scale solar, independent power producer (Dec. 2018) (link)
  • Fulcrum BioEnergys — $51M Late state VC (7th round) — Waste to energy (Nov. 2017)
  • Lightning Systems — $8M Late state VC (6th round) — Electric vehicles (Oct. 2017)


Equinor Technology Ventures
  • Yellow Door Energy — $65M Private equity growth — Distributed solar (Jan. 2019)
  • Scatec Solar — $85M Secondary market transaction — Large-scale solar, independent power producer (Nov. 2018)
  • Guanizul 2A — $95M Buy out — Large-scale solar, operating plant in Argentina (Jun. 2018)
  • Fos4Xy — $9.6M Series B — Wind technology (Jun. 2018)


Shell Ventures (and some bigger Shell New Energies deals)
  • Innowatts — $18M Series B — Digital energy, smart meters, AI, machine learning (May 2019)
  • Aurora (Automotive) — $530M Series B — Autonomous vehicles, machine learning (Feb. 2019)
  • Makani — Undisclosed amount — Wind power, distributed energy (Feb. 2019) (link)
  • Sonnen — Acquisition — Home energy storage (Feb. 2019) (link)
  • AutoGrid — $32M Series D — Big data analytics, distributed generation, energy storage, demand response (Jan. 2019)
  • Greenlots — Acquisition — Electric vehicle charging software (Jan. 2019) (link)
  • Sense — $20M Series B — Home energy efficiency, machine learning (Jan. 2019)
  • Ample — $31M Series A — Electric car charging (Aug. 2018)
  • Sonnen — $71M Late stage VC (5th round) — Home energy storage (May 2018)
  • Axiom Energy — $7.6M Series A — Thermal energy storage, Internet of Things (May 2018)
  • C3 IoT — $106M Series F — Big data analytics, Internet of Things, AI, machine learning (Jan. 2018)
  • Silicon Ranch — $217M for 44% stake — Solar project development and ownership (Jan. 2018) (link)
  • Husk Power Systems — $20M Late stage VC (5th round) — Biomass, solar, microgrids, energy storage (Jan. 2018)
  • SteamaCo — $3M Series A — Renewable energy, off grid (Dec. 2017)
  • SolarNow — $9M Series B — Residential solar, Africa (Dec. 2017)
  • NewMotion — Acquisition — Electric vehicle charging network, EU (Oct. 2017) (link)
  • Glasspoint Solar — $15M Series D — Solar thermal, industrial steam (Sep. 2017)
  • Innowatts — $6M Series A — Digital energy, smart meters, AI, machine learning  (Aug. 2017)
  • Sunseap — Undisclosed amount in late stage VC (3rd round) — Solar, Africa  (Aug. 2017)



How will investing in renewable energy be different than their historic energy investments?

If recent history is a good predictor (not always true), then low carbon investments are likely to be different than conventional energy investments in the following ways:

  • Lower risk and lower reward (i.e., from infrastructure investments)
  • Less commodity volatility (i.e., no oligarchies for sunshine or wind)
  • Fewer geopolitical risks (i.e., excluding debates around cobalt)
  • Better stakeholders relationships (e.g., environmental NGOs)
  • Better shareholders relationships (e.g., the energy sector, largely conventional energy, has produced the lowest annualized return over the last 10 years among all other S&P 500 sectors)



How does the increasing involvement of oil and gas majors create winners or losers in the clean energy sector?

The (potential) winners include:

  • Entrepreneurs who need growth capital or an exit from their venture
  • VC investors that also need an exit to deliver returns to their limited partners

The (potential) losers include:

  • Private equity and venture capital investors who need to place historic amounts of capital ($2 trillion), without a proportional increase in deal flow. Yet these financial investors can not compete for the best deals on a pure financial return basis. There are few ancillary benefits they derive from strategic benefits to other business lines.


Should you be bearish or bullish?

Bearish perspective:
Why these trends can be easily ignored


  • Return risk — If solar and wind projects have lower risk but lower returns, then investors can not make a 1:1 switch from one to the other. (Note: Conventional energy talks a “big return” game, but this version of history tells a different story.)
  • Policy risk — Renewable energy is too policy dependent. It is a roller coaster that will make some people want to yack. (Note: Lazard’s annual Levelized Cost of Electricity report shows that unsubsidized renewable energy projects outcompete most other forms of electricity on cost. See page 2.)
  • Tech risk — Cleantech venture capital investments have too much risk. (Note: While these investments between, say, 2006 and 2011 were nasty, and most all VC and early stage technology investments are risky, keep in mind that early stage investments in clean energy made up less than 3% of 2018’s $332B invested globally in these sectors.)
  • Risk premia — There is a supply vs. demand imbalance, with too much capital chasing solar and wind infrastructure. As such yields (IRRs) have fallen, while interest rates have risen. Where’s the spread, the risk premium?
  • Uh, chump change — Oil and gas majors investing 1.3% of their 2018 budgets into low carbon solutions is only a drop in the bucket, a (bad) rounding error.

Bullish perspective:
Why investors and entrepreneurs should pay more attention


  • Not just a niche for “enviros” — The low carbon sector is now a large and fast-growing market, with over 70% of new power capacity investment projected to go to solar or wind between now and 2050, and over $1.4T in annual revenue for clean power, alternative transportation, green real estate, and related sectors. (By the way, I am one of those “enviros,” trained in environmental science decades ago, so talking about trillion-dollar markets in this debate is a refreshing change of pace.)
  • Obvious reasons for greater involvement by conventional energy companies — Oil and gas majors are the world’s foremost energy experts, based on aggregate years of experience and capital committed. And their skills are largely transferable. (By the way, the same is true for electric utilities.) Moreover, investing in clean energy provides benefits for branding and relationships with stakeholder and shareholders. Finally, these alternative investments provide a hedge against changing consumer preferences (e.g., “I want an EV that costs the same to buy, but also has 50% lower operating costs), regulatory shifts (e.g., current and future carbon markets), and economics (e.g., solar and wind are often the cheapest form new power). So their role in the low carbon economy makes a lot of sense. (Note: Cannibilizing your existing business may, for some strange reason, be viewed negatively by some investors.)
  • Big sand box — There is space for everyone to play, including oil and gas investors, impact investors, VC and private equity investors, and other strategic investors. For some fun math, the UN’s Intergovernmental Panel on Climate Change estimates that $2.4T of investment is needed per year to avoid the worst impacts of climate change. But today the clean energy sector earns just over $300B per year. So, there is a lot of room for all parties to play nicely together. Actually, the real questions are these: “Where will all that money come from? And are we all doomed?”


In conclusion, here are some potential action items

I will describe these as the 3 “C’’s, with questions for you to ask yourself, answer, and do something about over the next 30 days.

(Or just hide under them rug for a while. What could possibly go wrong?)

#1 - Canary

What do these trends mean in terms of “canaries in the coal mine” for your overall investments in the conventional power, oil, and gas sectors? (Pun intended.)

If a Shell executive refers to their “buying spree” in the low carbon sector like this -- “It’s all about survival” — then how or why would your investment allocation to the conventional energy sector be different, and therefore, not face some new risks?

If McKinsey and Mining.com report that electric vehicles will likely reach cost parity with conventional vehicles in the early 2020’s, and if Fitch Ratings talks about how this shift in transportation choices could cause an “investor death spiral,” how might you view current or future investments in the oil sector?


#2 - Clock

Even if you agree that historic changes are coming to energy markets, the key question is this: When?

When do you (or sources you trust) think that these shifts in energy investments will actually affect your portfolio?

By way of analogy, at some point we may live on Mars, but now is likely not the right time to invest in Martian real estate. (Unless you’re a billionaire who thinks that all hope is lost for long-term survival on this planet.)


#3 - Collaboration

There may be winners and losers, but it is not a zero sum game.

This discussion needs a reframe. Let’s consider a newly created 21st century word: “Coopetition” — collaboration between competitors for mutually beneficial results.

For environmentally minded entrepreneurs, how can oil and gas majors be strategic partners, investors, and customers, instead of the enemy, a monolithic group to badmouth for all the world’s problems, the 800-pound gorilla that must be defeated.

For VC or private equity investors, how can oil and gas major’s investment decisions serve as an anchors to derisk your capital allocation alongside them? How can you build relationships with them for a future exit opportunities?


Finally, thank you...

A big shout out to Pitchbook, IPE Real Assets, Greenbiz, Preqin, Bloomberg New Energy Finance, Advanced Energy Economy, Greentech Media, Reuters, CDP, RW Baird, Energy Storage News, Columbia University’s Earth Institute, Oilprice.com, Bloomberg, Mining.com, McKinsey & Company, ThinkProgress, Wind Power Engineering, and Governance & Accountability Institute for their research and reporting on this topic.
​

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5/8/2019

Impact Investing: What does it really mean anyway?

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Picture
Photo by Markus Spiske on Unsplash


By: Dr. Chris Wedding

​
I recently spoke on a panel about impact investing at the UNC Cleantech Summit, where 1,000 good souls joined to talk about opportunities and challenges in smart and connected communities, energy storage, grid modernization, sustainable farming, coastal resiliency, and energy innovation for economic development.

Fellow panelists included these smart folks:

  • Tom Darden — Founder and CEO of Cherokee, an environmental private equity and angel investment firm that has raised $2B and invested in 500+ properties and 150+ companies
 
  • David Kirkpatric — Managing Director and Co-Founder of SJF Ventures, one of the earliest and most well known impact investment firms that has raised $260M
 
  • Josh Humphreys — President and Senior Fellow at the Croatan Institute, an independent, nonprofit research institute whose mission is to harness the power of investment for social good and ecological resilience by working at the critical nexus where sustainability, finance, and economic development intersect
 
  • Pavel Molchanov — Senior Vice President and Equity Research Analyst at Raymond James & Associates

To begin our panel, we talked about the definition of impact investing.

If you can’t describe something, it’s hard to assess where it’s been, where it’s going, who’s involved, what the challenges are, what opportunities are most exciting, and…

[drum roll, please]

...whether impact investing delivers financial returns that are less than, equal to, or greater than other comparable investments in the market.

Starting from the broadest definitions and moving to the narrowest, here we go…


------------------

#1:  
Impact investing =  “Total portfolio approach”

This framing moves away from the magnetism of venture capital and instead points to the obvious: Every investment has some impact.

Accordingly, all bonds, stock, checking accounts, and savings accounts need at least a cursory review for positive and negative impacts, as well as other alternative investment classes such as hedge funds, real estate, infrastructure, and private equity.

In ImpactAlpha, William McCalpin, managing partner of Athena Capital Advisors, with $5.5B under management, put it this way: “Carving out $10M to do a few impact deals is no longer enough for many investors. Institutions want to drive this through their whole portfolio.”

To that end, the impact investment non-profit TONIIC has created its 100% Network, a “global network of high net worth, family office and foundation asset owners who have committed to deploying 100% of their investments in at least one portfolio in pursuit of deeper positive net impact. These investments are made across all asset classes, in alignment with each investor’s social and environmental priorities.” This initiative provides tools, lessons learned, and a community to share best practices.  

Total market size:
  • $200T (per TPG)
  • 100% of all assets globally


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#2: 
Impact investing = “SRI (Socially Responsible Investing)”

Many of us associate SRI with negative screens — that is, public equity investments that screen against (and don’t invest in) “sin industries,” such as firearms, tobacco, gambling, and alcohol. (Though the latter, in moderation, is hopefully not a big sin, lest I need to repenteth.)

This approach to investing goes way back, like hundreds of years, like ancient history, like Biblical times, man. (Insert surfer voice.)

Investopedia will take you back in time to illustrate that SRI is not some newfangled innovation from know-nothing “hippie capitalists” (a term coined by my MBA friends years ago).

Centuries-old SRI includes Jewish law, from about 3,000 years ago in the Pentateuch (first five books of the Bible); Shariah law, from about 1,400 years ago in the Quran; and Methodists’ and Quakers’ beliefs and practices, from about 200 and 100 years ago, respectively, in the U.S.

Despite, or perhaps because of, this rich history, SRI has become an umbrella for many related themes of investor interest, including ““community investing,” “ethical investing,” “green investing,” “impact investing,” “mission-related investing,” “responsible investing,” “socially responsible investing,” “sustainable investing,” and “values-based investing,” per US SIF: The Forum for Sustainable and Responsible Investment.

Total market size:
  • $23T (per JPMorgan)
  • 11.5% of all assets globally


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#3 : 
Impact investing = “ESG (Environment, Social, Governance), aka Responsible Investing”

SRI was version 1.0 of investing for financial and social or environmental motivations, while ESG is supposed to be version 2.0.

However, these two terms are still used somewhat interchangeably in many circles.

For me, ESG is about an active approach and a positive screening process to not just do less bad (e.g., sin industries) in a passive style as in SRI. This includes seeking out companies that excel in the management of social, environmental, or governance issues. The goal is to reduce risk (beta) and increase profit vs. benchmarks (alpha).

The United Nations Principles for Responsible Investment (PRI) may be the most popular group for defining ESG. (So, if you want to be one of the cool kids, you better, like, join now. I mean, totally.)

UN PRI counts 1,900+ signatories from the finance sector, representing over $89T in AUM. Before you get excited thinking that about 50% of the world’s assets are invested according to ESG principles, hold those horses.

These signatories apply ESG practices selectively, not across their entire portfolio.

However, according to the principles to which they publicly commit (see below), the plan is for an evolution to a more all-encompassing approach to Responsible Investing.

UN PRI -- Signatories’ Commitment

“As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time).

We also recognise that applying these Principles may better align investors with broader objectives of society. Therefore, where consistent with our fiduciary responsibilities, we commit to the following:


  • Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
  • Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
  • Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
  • Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
  • Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
  • Principle 6: We will each report on our activities and progress towards implementing the Principles.

The Principles for Responsible Investment were developed by an international group of institutional investors reflecting the increasing relevance of environmental, social and corporate governance issues to investment practices. The process was convened by the United Nations Secretary-General.

In signing the Principles, we as investors publicly commit to adopt and implement them, where consistent with our fiduciary responsibilities. We also commit to evaluate the effectiveness and improve the content of the Principles over time. We believe this will improve our ability to meet commitments to beneficiaries as well as better align our investment activities with the broader interests of society.

We encourage other investors to adopt the Principles.”


To learn more about the segments within ESG and SRI, you can view some great graphics and summary PDFs by by US SIF.

Total market size:
  • Unclear due to ambiguities in market definitions for SRI vs. ESG
  • Unknown percentage of all assets globally, but growing quickly


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#4: 
Impact investing = “Measurable social or environmental impact alongside financial returns”

For this definition, I’ll reference a leading impact investing sector non-profit association, the Global Impact Investor Network, GIIN.

[And if you’re remembering my prior reference to another impact investing industry association, TONIIC, and asking yourself whether investors in this sector actually do love “sin” industries like alcohol (gin + tonic), the answer is...I don’t know. But the more interesting question is this: Does the impact community have a stronger sense of humor relative to other financial sectors?]

In their annual survey of impact investors (n = 229), they report a 13% increase year-over-year in impact investments globally, with total assets under management at about $228B.

Here is a summary of the most popular sectors as determined by the percentage of impact investors investing in each:

  • 57% food and agriculture
  • 49% healthcare
  • 48% energy
  • 45% financial services
  • 45% housing
  • 41% education

GIIN stresses that impact investments should have intentionality (i.e., positive outcomes cannot be accidental) and should require impact measurement (e.g., show me your KPIs).

Now, I love metrics as much as the next guy or gal steeped in finance and science. However, as I experienced when I was co-leading sustainability at a $2B private equity fund, measuring social or environmental impacts is tricky.

To that end, Andrew Beebe, Managing Director of Obvious Ventures — a VC firm “on a mission to help fuel startups that combine profit and purpose,” aka, #worldpositive companies — had this to say about metrics.

[Note: This may be the longest quotation I’ve every used in an article, but bear with me. It’s worth it.]

“We don't require hard metrics in sustainability or impact from our portfolio company for specific reasons. First, it's super hard. When you ask a vegan cheese company, "Please tell us your positive impact each month," how do you figure that out? Is it how many cows didn't have to get milked? Is it how much methane from each cow that didn't get produced? But then, of course, you'd have to offset that with the emissions from your delivery trucks. It's just too hard. That's the practical reason, but there's also a strategic reason: Companies will pivot. And when they change, you have to rejigger all of those impact measures. What we do is simply ask the question, is this company likely — regardless of pivot and because of the value of its leadership — going to continue to have a positive impact on the future of humanity? On the human potential? After that point, our decisions are economically driven.” (Source: Greenbiz)

As for whether impact investors are seeing real impacts from their allocations, 97% of the GIIN respondents report that they are meeting or exceeding their impact goals.

As further validation of this type of measurable impact investing, TPG, one of the world’s largest private equity firms with over $100B in AUM, launched its Rise Fund in 2016 with $2B in AUM. That’s serious amount of capital from a very serious investor, who has no interest in below-market returns.

Combining their deep investment experience with partners champions like U2’s Bono, impact investment experts like Elevar Equity, and nonprofit strategy advisor Bridgewater Group, fundraising has been fairly easy. In fact, they are now raising a second fund targeting $3.5B.

The Rise Fund website provides more detail on the opportunity, the societal need, and their rigorous approach to impact measurement:

“It will take more than $2.5 trillion per year to meet the United Nation’s Sustainable Development Goals...We have defined 30 key outcome areas, aligned with the United Nations Sustainable Development Goals, in which impact is both achievable and measurable through evidenced-based, quantifiable assessment. For each potential investment, we calculate an Impact Multiple of Money (IMM)™, part of our proprietary assessment methodology that allows us to estimate a company’s potential for positive impact.”  

Total market size:
  • $228B+ (per GIIN)
  • 0.12% of all assets globally


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#5:
Impact investing = “Filling a gap”

Finally, some industry professionals restrict the impact sector to investment opportunities that are thought to be unfinanceable — that is, ones that mainstream investors will not, or supposedly, cannot touch due to fiduciary duty, the responsibility to put financial returns above all else.

The problem with this definition is that the boundaries of what investors consider attractive, or not, is always changing.

Consider off-grid funding for small solar energy solutions.

The size of the need (only recently deemed a “market opportunity”) is immense: According to the International Energy Agency, roughly 1 billion people globally lack access to electricity.

I’ve been on the ground in Ethiopia and India doing work d.light and Greenlight Planet, two global leaders in this field, and I’ve seen how life-changing these microsolar products can be.

Five years ago, most investors would have viewed this field as being all about charity, led by foundations and government aid organizations.

However, today we see investments commitments such as these:

  • Investment in Off-Grid Energy Access Totals $1.7B Through 2018 (Wood Mackenzie)
  • Acumen Closes $70M Impact Fund for Clean Energy in Africa (Bloomberg)
  • Engie Leads $20M Investment in Off-Grid Solar Startup Bboxx (Greentech Media)
  • Off Grid Electric announces $45 million debt financing for distributed solar leasing to Africa (Solar Power World)

The other problem is that this definition severely restricts the size of the market. So, as a proponent of the sector, I don’t like it.

But if I put my cheerleading pom poms down for a second, constraining the market size also means that mainstream investors might miss out on emerging sectors, demographic, and geographies that represent new ways to place capital and generate attractive financial, environmental, and social returns in parallel.

Luckily, this is the least common definition of impact investing.

Total market size:
  • Teeny tiny (that’s a technical term, so you might want to look it up)
  • Far less than 0.12% of all assets globally


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Financial Returns: Below or Above Market?

Ah, the most critical question and the most misunderstood: “Does impact investing require concessionary returns, a financial sacrifice in order to do the right thing?”

One of the most authoritative studies on the topic was conducted by Deutsche Asset Management and the University of Hamburg in 2016. They reviewed 2,200 reports to assess the linkage between ESG excellence and the financial performance of companies.

The results?

  • About 90% of the studies showed a non-negative correlation
  • Roughly 60% of the studies showed a positive correlation

For another perspective, we can look at the responses from impact investors in the 2018 GIIN report.
Here were their conclusions:


  • 64% are seeking market-rate returns
  • 91% report that their investments are meeting or exceeding their financial goals

Going one step further than the mainstream might be ready for, as he does so well, Al Gore is championing a new initiative called the Fiduciary Duty in the 21st Century Progamme.

Led by the UN Environment Program Finance Initiative (UNEP FI), UN PRI, and Generation Investment Foundation, it flips this discussion on its head.

Instead of seeing impact returns as being at odds with an investor’s fiduciary duty, it notes that “there are positive [fiduciary] duties to integrate environmental, social and governance factors in investment processes.” That is, to ignore ESG consideration may be akin to slacking on one’s duty to achieve the best risk-adjusted returns for investors.

To put some of this into practice, they have created roadmaps for institutional investors that “address fiduciary training, corporate reporting, asset owner interaction with service providers, legal guidance, the development of investment strategies, ESG disclosure and governance structures.”

For more on this topic, you can check out more research aggregated here by US SIF.  


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Why is this market not growing faster?

Because people too often act like ostriches burying their heads buried in the sand to avoid new impending realities?

Nope.

(And, by the way, ostriches don’t really do this. You can trust my source: National Geographic Kids. “Ostriches don't bury their heads in the sand—they wouldn't be able to breathe! But they do dig holes in the dirt to use as nests for their eggs. Several times a day, a bird puts her head in the hole and turns the eggs.” OK, Fun Fact Time is now over.)

Below are a few barriers based on the reports referenced above and my own experiences in the sector:

  • The belief that impact investing requires a sacrifice in financial returns
  • Limited amounts of capital relative to market needs for impact companies to scale
  • Lack of investment options across the risk-return spectrum of asset classes
  • Misunderstanding of how to define and segment the sector
  • Good investment opportunities with sufficient track record
  • Too few professionals with the required skills and sector knowledge
  • Excess passion for the mission versus hard-core focus on business execution


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So what?

Impact investing is not going away. Instead, it will become mainstream.

I think it’s going to be like other niche fields that I’ve entered five years ahead of the masses — green real estate, solar power, energy storage — before the billions of dollars began flowing into sectors thought to be purely about mission, solely the purview of “hippie capitalists.”

If you don’t agree, then consider one more trend: An estimated $30T of wealth is expected to be transferred from Baby Boomers to Millennials over the coming decades. And research shows that this younger generation cares more about using their capital to make an impact, not just a profit.

Luckily, both are increasingly possible.


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    ​Dr. Chris Wedding is an investment professional, entrepreneur, and award-winning professor focused on investment, innovation, and strategy in clean energy, green real estate, and corporate sustainability. He has over 20 years of experience in private equity, startups, renewable energy, green building, cleantech, and education. Full bio here...

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