Decarbonization, Resource Preservation, and Access: Investing for Impact in Energy & Environment

Stanford GSB Impact Fund: Our 2022 Energy & Environment Thesis

The Paris Agreement aims to limit global warming to 1.5 degrees Celsius above pre-industrial levels. We are already at 1.1 degrees of warming and need to decarbonize at a rate of nearly 13% per year in order to meet the 1.5 degrees target by 2050.¹ How can we reach our Paris Agreement target while preserving our natural landscape, upcycling our natural resources, and protecting those most vulnerable? In addition to changing our lifestyle and consumption behaviors, we need to support companies today that can help us meet our climate goals.

Fortunately, the only thing hotter than our planet may be investor interest in solving climate change. Last year, the venture community responded to the challenge at hand by investing $40B into Climate Tech startups. However, our team is all too familiar with the cleantech investment bubbles and understand the fundamental need to pair measurable climate impact with sustainable economics.

With this reality in mind, we believe that there are four key areas where private and public investors should allocate investments. The first three verticals focus on delivering the greatest climate impact, and include 1) Direct Emissions Reduction, 2) Electrification, and 3) Resource Preservation. The fourth pillar, Adaptation and Access, is aimed not at energy and environmental action, but at helping those most susceptible to disruptive changes in daily life due to climate change.

Direct Emissions Reduction

  • Carbon Accounting: In order for the global economy to actively begin drawing down its carbon emissions, businesses and governments require the ability to measure their emissions. A burgeoning carbon accounting, life cycle assessment, and emissions tracking ecosystem has emerged in order to serve this need, with early leaders like Watershed and Normative. As a primarily software-enabled industry with low CapEx requirements and minimal marginal costs per unit of growth, this is well suited to traditional venture capital funding and can be viewed as an early indicator of the coming carbon management economy.
  • Heavy Industry Decarbonization: Measurement is only part of the battle. Many of the world’s most important, long-standing industries are not easily decarbonized. Heavy industry is the source of 40% of carbon dioxide emissions.² In many of these industries, like steel and cement production, emissions are not just unfortunate side effects, they’re baked into the core process underlying production. This means that these industries require a different approach, closer to a fundamental rethinking of how they operate. Some deep tech startups are already tackling these challenges with already-promising results but they have a long road ahead. And for some industries, it may simply prove impossible to reach full decarbonization as quickly as we must, which is one reason carbon removal is a critical area of investment.
  • Carbon Removal: The latest estimates indicate that for a 1.5 degrees-of-warming pathway, 10 gigatons per year of carbon removal will be required by 2050, that is an industry rivaling the current oil and gas industry in size.³ As indicated in the chart below, massively scaled carbon removal will be required to reach “net zero”. This nascent Carbon Dioxide Removal (CDR) industry bifurcates in two halves: 1) Nature-Based CDR, and 2) Engineered CDR. Nature-based solutions such as agroforestry, conservation, wetlands and mangrove restoration tend to be both cheaper and more easily implemented than engineered solutions, but at the expense of permanence and scale because the CO2 captured is eventually released back into the carbon cycle. On the other hand, Engineered CDR solutions such as Direct Air Capture and CO2 mineralization have the ability to permanently sequester CO2, though at much greater cost per tonne CO2 and much greater capital cost to finance and implement.⁴ Both categories are needed, and of the two, the engineered CDR space is drastically less developed. Therefore, it has potentially more “bang for your buck” from an impact additionality standpoint.

Source: Vox⁵

Electrification

  • Clean generation: Venture capital investments in clean energy generation have long moved past direct investment in conventional renewable technologies like solar and wind, which have since entered the world of institutional project finance. Instead, investment dollars are starting to flow into the “picks and shovels” for bolstering conventional renewables growth. Examples of companies that are riding the current wave of conventional renewable investment include software businesses like Aurora Solar, which uses location data to produce significant savings around installation costs for residential solar, or ancillary devices like ConnectDER that retrofit onto existing meter sockets to provide information transparency into energy consumption. “Alternative renewables,” such as geothermal, modular nuclear, and biomass gasification, are traditionally difficult for venture capitalists to fund, but the rise of more patient and potentially risk-tolerant funds like Breakthrough Energy Ventures, Generate Capital, and our own GSB Impact Fund can provide support for these technologies.⁶
  • Grid modernization: As clean electricity becomes the backbone of our sustainable energy future, grid modernization should be one of the top areas of investment to ensure adequate capacity, reliability, and resiliency. The latest $1.2 trillion infrastructure bill that Biden signed in November 2021 includes $65 billion for grid infrastructure, including funding for transmission and vehicle electrification.⁷ However, grid modernization requires not only project infrastructure dollars, but also venture capital to support cutting-edge technologies. Such investment areas include cybersecurity for critical control systems, real-time sensors and information management capabilities, demand-response systems, microgrid technologies, and other “next generation” devices and software that can make the grid “smart.”⁸
  • Long-duration energy storage: Long-duration energy storage is one example of a critical technology linchpin in grid modernization. Energy storage that can provide time arbitrage of electricity on the scale of days to seasons will be critical in matching generation and consumption fluctuations to the inherent intermittency of renewable energy. Currently, conventional lithium-ion battery technologies are limited from providing storage beyond a few hours, but advances in novel technologies such as flow batteries, thermal storage, gravity-based storage, and green hydrogen hold promise for enabling longer storage durations. Presently, no single solution is the clear winner, and venture capital can win by placing bets on the host of solutions likely needed to meet the expected ~2,000 GW of future power demand.⁹

Resource Preservation

  • Water Access and Treatment: One in four people globally lack access to safe drinking water, and a changing climate is leading to an increased scarcity in freshwater worldwide.¹⁰ Freshwater is one of the most valuable resources on the planet, influencing migration patterns, food production, the economy, and people’s lives. Increasing water access and developing low-cost, long-lasting treatment methods drives progress towards the Sustainable Development Goals, and helps achieve greater gender equity since it is women and girls that collect water for their families, often sacrificing education and career opportunities. Software monitoring water quality and delivery, new cost-effective technologies in desalination, and sophisticated yet easy to use measurement tools developed by entrepreneurs offer promising prospects to reach water equality. This work is especially important given the lack of political will and geopolitical forces that continue to make water security difficult in many parts of the world.
  • Waste Management: How we treat, repurpose and dispose of our municipal and industrial waste is vital to the preservation of our environment. Reducing linear consumption and increasing circular economies across every sector will lessen the environmental burden that high resource consumption entails while mitigating the negative effects that unrecyclable and toxic materials have by being thrown out in landfills, with no plans of further use, contaminating land, air and water. New companies are tackling these problems by providing solutions that focus in areas ranging from creating more efficient food production lines, reducing thousands of tons of food waste, to capturing electronic waste at the end of its lifecycle.
  • Land Use and Recovery: Land use, from which we gain natural capital stocks and ecosystem services, drives how we produce food, fuel and fibers, all which have increasing demand.¹¹ At the same time, the very land used to produce these essentials were once forests and natural carbon sinks that helped mitigate emissions. Companies that can either develop strategies of using land sustainably or expand the marketplace for natural carbon sequestration and forestry conservation are needed to decrease the 15 million ha of land degraded each year.¹²

Adaptation and Access

  • Energy Access: As we enter 2022, nearly 1.5 billion people around the world still don’t have reliable access to electricity.¹³ Think about this for a second — 1 in 4 people either don’t have access to electricity altogether or their access is so unreliable that they never know when that week-long power outage is around the corner. Energy access impacts people’s lives in the most fundamental ways. Children learn all day in hot and humid classrooms without air conditioning, and then have to do their homework out under the streetlights because they have no light at home. Doctors have to perform complicated surgical procedures on overnight patients by candlelight. And public health officials have to throw out life-saving vaccines because there’s no way of knowing if they spoiled in the refrigerators while the power was out.¹⁴ These examples highlight how energy access and poverty are inextricably linked. Electricity is essential when you’re trying to get an education or when you’re trying to access basic healthcare services. And that’s why improving reliable access to electricity is critical to lifting the world’s least privileged out of poverty.
  • Adaptation: In the most optimistic 2050 scenario, the world comes together to dramatically reduce emissions and remove carbon from the atmosphere at scale. (A more likely scenario is that we blow past the 1.5 degree C warming target well before 2050.)¹⁵ Even in the most rose-colored glasses view of the future, the world will continue to warm, the impacts of which will be most felt by the poorest in society, particularly in the Global South. We need entrepreneurs helping us adapt to a world with higher temperatures, rising sea levels, fiercer storms, unpredictable rainfall, more acidic oceans, and less biodiversity. Additionally, entrepreneurs providing high-quality climate data, monitoring, and early warning systems will be crucial to enabling adaptation efforts. The UN estimates that universal access to early warning systems alone can deliver benefits up to 10 times the initial cost.¹⁶

Our team has a depth of experience across these four pillars. We are operators who have helped scale Climate Tech startups from inception to global pioneers. We have deployed and financed innovative climate solutions across the globe, from the US to Zambia to Mexico. We bring deep experience in finance, politics, consulting, media, technology, and utilities, and are ready to help you grow your business.

The objective is clear: decarbonize our economy as quickly and efficiently as possible, preserve and grow the stock of natural capital, and lessen the impact of climate change on those most vulnerable. We seek to partner with entrepreneurs whose missions are aligned with our vision of a socially and environmentally sustainable economy. If you are tackling the greatest challenges of our generation, please get in touch with us at gsb_impact_fund-leadership@stanford.edu. We can’t wait to meet you.

Learn more about the GSB Impact Fund here.

Energy & Environment Team:

Mansoor Abbas, Caleb Cunningham, Patrick Dowling, Oren Fliegelman, Diego Ramirez Aguilar, Kathleen Schwind, Natalie Urban, Claire Yun, Amy Zhao

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