For as long as business acronyms have been around, companies have been using OKRs and KPIs to track progress and measure results. Historically, the health of a business has been commonly tied to metrics like sales, profitability, and growth over time. However, over the past decade ESG metrics, such as GHG emissions, have emerged as common measures of a business’s health.
The word ‘carbon-intensive’ has become synonymous with ‘high risk’ from an investor’s perspective. Across industries, companies are responding by creating environmental policies and pledges to reduce, or even eliminate emissions from their value chains. But how can businesses really begin to drive down their emissions consumption when they are not equipped with the tools needed to detect and track emissions?
The answer begins with a systematic approach to measuring, tracking, and reporting emissions. For the past year, Energize has been tracking the wave of new companies providing solutions to these problems.
By our definition, a carbon and emissions platform is any technology-based solution that helps entities measure, analyze, manage, and reduce their emissions footprints. A new wave of these platforms has emerged to meet growing demand from investors, corporations, and governments alike as the pressure to reduce carbon footprints and combat climate change mounts.
When contemplating what solutions are best suited to mitigate emissions, it’s important to understand their sources. In the U.S., two-thirds of our emissions come from transportation, electricity generation, and the built environment. At Energize we believe renewable energy generation and the electrification of buildings and transportation will account for the majority of decarbonization in those sectors — a conviction that is core to our investment thesis. In order to address the remaining emissions, we are looking for new solutions that measure and reduce emissions in harder-to-decarbonize sectors.
Emissions reduction targets have become ubiquitous — from climate commitments made by leading tech companies like Microsoft, Amazon, and Google, to asset managers like Blackrock and Vanguard joining the Net Zero Asset Managers Initiative, to the U.S. federal government’s rejoining of the Paris Agreement and promise to reduce emissions by 50 percent below 2005 levels.
Climate-related events happening around the world in real time are increasing pressure to act. The record-setting heat dome in the U.S. Pacific Northwest, raging wildfires in California, and flooding across Europe and Asia that we saw this month are just a few examples of how the direct effects of climate change have been accelerated and magnified.
We believe now is an interesting time for solutions that address carbon and emissions management due to the confluence of several factors:
Corporate Action: 2020 marked an inflection point in which corporates being held accountable for their impacts on the environment and on society — driven in large part by wave of activism and consumer pressure. Roughly 25 percent of all S&P companies have made some kind of pledge to become carbon neutral and/or net-zero. This is up from just 6 percent who had done so in 2016. In addition to societal drivers, investors and capital allocators are urging companies to beef up their ESG commitments. In 2020, lack of planning around environmental impact was viewed as an indicator of long-term risk in the eyes of investors. Companies across all industries have reached the realization that failure to act on climate will not only have negative PR implications, but also put their assets, access to capital, and future revenues at risk.
Capital flows: In recent years, we’ve seen major flows of capital away from fossil fuel-intensive industries — much of that cash has been diverted towards more sustainable investments. Investment in midstream oil and gas infrastructure has fallen from $440 billion in 2013 to $190 billion last year. Meanwhile critical infrastructure and renewable energy generation have received significant cash infusions. ESG ETFs have grown at a +172 percent CAGR in the past three years, and we’ve seen $2 trillion of sustainable debt issued in the past five years, $731 million of that coming in 2020 alone. This shift in capital allocation has fundamentally altered business practices and brought environmental impact to the forefront of both public and private markets.
Major money managers have seen the writing on the wall. Driven by the push to capitalize on ESG-based investing, we’ve seen a slew of acquisitions in the space. In July of 2021 alone, Blackstone snatched up Sphera, JPMorgan bought OpenInvest, and Vanguard acquired JustInvest to enable the construction of more tailored portfolios that can be better aligned to investors’ ESG priorities.
Government: An onslaught of regulation at the local, state, and national level, as well as industry-specific regulation, has been another driver of innovation in this space. While promises and pledges have been more common than binding legislation, government positioning around emissions and climate risk has been motivating corporates to get ahead of potential regulation. The EU recently made headlines with a proposal that would put its 27 countries on a legally binding hook to cut emissions by 55 percent by 2030. The proposed bill would expand their already successful Emissions Trading Scheme to shipping, phase out internal combustion engines, and limit emissions from buildings, among other things.
Some heavy-emitting industries — like transportation and aviation — are already innovating under legislation, or the threat of imminent legislation.
Emissions management is an exciting space that we’ve been monitoring closely and will continue to keep an eye on in the coming years. A slew of promising startups have already emerged to solve governments’ and corporations’ most pressing concerns. Driven by these tailwinds, we believe the market will outpace legislation and will soon become a multibillion-dollar industry. We foresee major potential for businesses that:
We’re excited to see more venture-backable companies come to market in this space. If you are working in these areas, we’d love to hear from you. Shoot us a note — eileen@energize.vc
