For the team at Climate-Tech VC Fund it’s the hard-to-abate sectors that show the most promise. They want to have an impact, so they’re looking for opportunities to make big emissions cuts, in sectors hungry for capital.
The New Zealand based fund has a local tilt, but will invest across the Tasman in Australia, and also welcomes fund flows from across the Tasman. They look to early-stage companies, investing into seed and Series A rounds.
OnImpact spoke with Rohan MacMahon, Partner at Climate Venture Capital Fund, about the current state of the market, their fund raising ambitions and the team’s impact measurement approach.
Climate Tech Growth
As rising interest rates and geopolitical tensions drive a broad market downturn, climate tech funds are keeping their heads above water.
Governments around the world are slowing shifting policies to support the sector, companies are pushing hard to achieve net zero, and investors recognise to long-term potential of the companies riding this wave.
While fund flows have slowed, there’s plenty of deals.
“The space is exploding, there’s a huge need for climate tech solutions. And the faster the better. So they’re going to need lots of capital, and lots of scientific and climate specific due diligence.” Rohan says.
The Climate Venture Capital Fund is the second fund for 2040 ventures, it follows the Punakaiki Fund, which was a pure technology fund, focussed on ICT.
“This approach is very different from a typical digital-VC-type of fund. It has quite different dynamics, depending on your assumptions around climate policy, carbon pricing, regulation, sometimes ancillary regulation like product stewardship, and the like. And we’re leaning-in to those different dynamics.” Rohan says.
“We are only interested in things that will provably reduce emissions. They may have other co-benefits in terms of reduced waste or improved biodiversity or better civic amenity or improvements in lifestyle and health. But they all need to come with the emissions reduction first.”
Small But Growing
The Climate Venture Capital Fund had its first close in April this year, and will see final close by christmas 2022.
“At the moment, the flow of our fundraising is pretty modest. Our fundraising is going to close at Christmas for this fund, so it will be a smallish fund in a really big neighborhood. We’re targeting seed and Series A.” Rohan says.
“We are seeing fantastic deal flow though, and the valuations are realistic. Being based in New Zealand we’ve always had probably more realistic valuations than some other geographies. But I would say they’ve become even more realistic recently.”
While the Punakaiki Fund was NZ only, the Climate Fund is open to investors on both sides of the Tasman, as is their search for deals, with one investment landing with a company based in Newcastle.
Climate tech is a broad sector, and while the businesses being built are united by a mission to reduce emissions, and slow climate change, the solutions are as varied as engineering and biotechnology allows.
For Rohan and the team, the opportunities lie in the hard-to-abate sectors, rather than the well trodden paths of transport and renewables.
“We see real opportunity in the so-called hard-to-abate emissions categories. They’re emissions where the solutions aren’t readily available. This is a space where a lot of emitters are currently seeking concessional treatment from governments, because they say it’s all too hard. They argue you need to either turn off the business activity entirely, or give us a free pass of some kind.” Rohan says.
“We think if there are good solutions available for those emissions categories, then they’ll find customers pretty quickly.”
An example is their investment in MGA Thermal, a Newcastle based company working on long duration energy storage.
“Energy storage is an interesting space, but it stretches from very short usage, medium term usage and really long run usage. But we think MGA’s category, which is in that middle space will see strong demand. It’s not the millisecond response, but it’s a few minutes, through to a few weeks of response. It has solid prospects because that can help you to turn off fossil fuel usage, either permanent baseload usage in a power station or gas peaking. There’s just a lack of these sorts of solutions at present.” Rohan says.
Looking Beyond the The Climate Tech Trend
Climate tech may well be the current hot trend for investors, but when you’re investing for ten years you need company fundamentals that go beyond the zeitgeist.
“In some ways we’re all hostage to the vagaries of scope three emissions measurement and international carbon trading rules. As an investor, you don’t want to be set adrift on that ocean, it’s pretty rocky out there with COP 27 results and the like.” Rohan says.
“It’s better to just invest in strong business cases and strong levels of emissions reduction. Just don’t be hitched to the last 10 cents of the carbon price, or the fine print in some regulation, because those things can change.”
Carbon pricing is a manufactured market. Players trade having NOT done something, rather than trading something tangible. Regulations in Australia are likely to change as a result of the Chubb review, and globally there’s similar volatility.
“Carbon pricing models are far from Universal, so you can’t assume that it works evenly because it isn’t even universally distributed. When we first started working on this fund, the New Zealand carbon price was capped at $25. The other day it reached $88! And that’s only in the space of two and a half years.” Rohan says.
“So it’s gone up enormously, probably a lot faster than our expectations, which of course is good. People are finding that the sources of reputable offsets haven’t just magically arrived, possibly because they don’t exist. And therefore, there is more and more interest in actual emissions reduction. And for the remaining pool of offsets that do exist, there’s a high price for them.”
Investing in solutions to climate change has obvious pathways to impact, but not all climate funds are created equal. While emissions reduction lends itself to quantitative impact measurement, it still requires a strategy, building frameworks, and then assessing companies prior to a deal, as well as ongoing through the life of the holding.
“Our theory of change is that by accelerating capital deployment to early stage clean-tech companies, we can help them reduce emissions faster. And by doing so, in a measurable way, we’ll set a good benchmark that investors will be attracted to, and help to catalyse more capital flow towards those companies over time.” Rohan says.
“We’re aiming to cut GHG emissions by 1 million tonnes for every NZ$50 million (A$45 million) that we raise. It needs to be measurable, and cover the lifetime of the fund.”
Rohan and the team use metrics from the GIIN’s IRIS+ framework, and they’re pedantic about identifying the impact that they, as investors, can claim responsibility for. They only count that which falls within the life of the fund, which means a business that plans for a 30 year life, they can only align with the first ten years of that.
“We’re already measuring the early impacts of the work in the portfolio. And we’ve already started to provide those early estimates to our limited partners. It so important for them to see the early stage impacts that their cash is making.” Rohan says.
They also have an external climate impact committee that includes Professor Jodi York, Lucie Greenwood, and Nicolette Boele. This gives them a two-part decision-making process. The committee can veto any deal put forward, and they help to develop the impact measurement processes across measurement, management and reporting.