Impact investing meets Environmental innovation. The October edition of the Podcast Newsletter features the conversation of Elena Shirokaya with Praveen Sahay from WAVE Equity Partners.
Praveen and the team started Wave Equity Partners about ten years ago, believing in the urgent need to drive environmental innovation. The true innovation means increasing efficiency whether it’s in energy, water or materials, leading to lower costs and more effective solutions.
The importance of Innovation in Environmental Impact
The critical issue in the world of climate investment is whether you are following true innovation as opposed to relying on government subsidies.
The genuine innovation leads to lower costs in purchasing, using and operating products. However, some investors are taking the policy pathway, chasing government subsidies for businesses like carbon capture, green steel, sustainable aviation fuels etc. These subsidies often come with significant political and economic risks, which contributed to the collapse of the first wave of clean tech [early 2000s].
Investors that take a deliberate decision to avoid subsidy-driven business models, focus instead on true innovation. The power of investors is in supporting talented entrepreneurs, who bring fantastic innovation to the market, rather than chasing policies.
Scaling innovations for Climate solutions
Limited partners often wonder about the specific impact of their investments in green companies.
Wile the innovation ecosystem is growing, the adoption by global companies drives the progress. Established companies in electricity and water industries are starting to adopt new, more efficient solutions. But it takes time.
Specialist investors focus on finding compelling innovations that global corporations will adopt in their supply chains. Breakthrough technologies like EV batteries can deliver 80% more energy density, or water heaters can use 50% less energy. These innovations, once adopted, can spread globally, multiplying their impact exponentially.
Thus, the real innovation does not produce a 1-to-1 return. $1 of investment can create $100K of impact overtime. This is the definition of transformative innovation.
Measuring the Impact of Investments over time
Limited partners often look for specific KPIs to track how their investments are making a difference.
Investors who claim their innovations can mitigate a billion tons of CO2 over decades might have difficulties proving this. A billion tons is a large number. Long-term promises often lack concrete backing or fail to anchor in reality. It might be more beneficial for the investors to focus on tangible measurable CO2 reductions within the fund’s lifetime, avoiding the pitfalls of chasing unaccountable long-term goals.
ESG versus Impact
In the investing context, while ESG focuses on running a company sustainably, the impact involves creating technologies that significantly reduce the carbon footprint on a global scale.
ESG efforts are essential, but they alone won’t solve the existential crisis we face. The real impact comes from innovations that can be adopted globally, multiplying their positive effects.
Rather than pushing the small innovative companies to achieve net zero on their own, specialist investors focus on scaling impact innovations. In one example, a technology reduced the cost of industrial carbon capture by over 50%, making it profitable for major industries like steel, power and cement, which account for over 25% of global CO2 emissions. The goal of the specialist environmental fund is to develop and commercialise these technologies globally, driving substantial CO2 reductions.
Some traditional funds use ESG as a way to showcase responsibility without making substantial changes. Real innovation, on the other hand, drives significant and meaningful change.
Case studies of successful innovations
AeroSafe Global
The company developed a ground breaking way to manufacture the world’s best insulation materials, at 99% lower cost than before. Originally used by NASA, these materials are now making a significant impact on a larger scale.
AeroSafe started by focusing on high-value markets, particularly shipping pharmaceutical and biotech products. Their high performance insulation boxes ensure that medicines maintain the required temperature, preserving their effectiveness. This innovation resulted in millions of packages being shipped without any temperature excursions, a massive win for healthcare.
The company also built a circular pathway: boxes are sent out, deliver medicine, return to the company, and are then cleaned and refurbished for re-use. This eliminates almost all plastic insulation waste, 97% reduction in landfill. Some of the world’s largest pharmaceutical companies have achieved their annual carbon footprint reduction goals by switching to Aerosafe’s boxes.
Carbon Clean
Wave Equity saw the potential in their innovative chemistry of carbon capture, and led the Series B round. The company re-imagined the entire carbon capture facility, reducing its physical size by 80%, and the costs from over $100 a ton to just $30-40 a ton.
Carbon Clean’s technology captures CO2 at high concentration and purity, making it both economically viable and profitable for major industries like energy, cement and steel.
By launching their compact model, Carbon Clean has set the foundation for the industrial carbon capture ecosystem worldwide. This approach differs from the direct air capture, which remains prohibitively expensive at $400 – $1,000 a ton. Despite its inefficiencies, direct air capture often gets a lion’s share of government subsidies, a frustrating misalignment for many in the climate space.
Economically affordable innovations preferred over green premium
Many innovations backed today are not economically viable on their own, leading to increased costs, or what is now known as the “green premium” or “greenium”. While some are willing to pay more to go green, this isn’t a sustainable long-term solution. Sectors like EVs, batteries, green steel and green concrete often come with a hefty price tag, which doesn’t bode well for their future.
Another approach could be growing companies’ revenues by offering innovations that are both environmentally superior and economically viable. It is about adopting products and services that support the transition to low carbon economy with minimal costs.
The Danger of Greenwashing
Many established funds, with billions of dollars in assets, produce flashy and extensive impact reports often overshadow the work being done by smaller, newer funds. Some asset managers might engage in minimal genuine environmental actions, yet their glossy reports attract more attention and investments, making it tougher for impactful companies to get noticed.
The ESG- and green- agenda has been hijacked by the traditional private equity buyout funds. Their massive impact reports, often thicker than their annual reports, soak up investor attention, leaving little room for newer funds to make their case. The funds’ focus on true innovation and environmental impact should be a key consideration for investors.
Call for Action: Don’t Lose Hope
Many young people might feel frustrated, believing the previous generations have created insurmountable problems, leaving future generations with a massive debt to the planet.
While progress may seem slow, real progress always takes time. Innovations like solar energy, storage, clean energy generation and carbon capture are paving the way for a sustainable future.
Despite the setbacks and wrong pathways, many of which are being shut down due to economic downturns, there is still a bright future ahead. The downturns often force more responsible action and behaviour, leading to a reset in the climate investment sector. It is up to the investor community to keep pushing forward and support genuine innovations.
This Podcast Newsletter is based on the October Issue of Climate Investing Insights Podcast, “Impact Investing meets Environmental Innovation”, published on October 17, 2024. https://podcasters.spotify.com/pod/show/privateequityforclimate/episodes/Impact-Investing-meets-Environmental-Innovation-e2pq0mu/a-abj7el4
Disclaimer: we have no commercial affiliation with Wave Equity Partners. This conversation on the podcast is purely to share valuable insights and foster discussions on climate innovation.
