Climate Investing: General Framework (Part 1)

Part 1 explores my general framework for climate investing.
Part 2 drills into carbon markets.
Part 3 is about carbon and crypto.

Climate change investing is the new crypto. Many expect the first trillionaires to come from these two industries. Climate investing is as versatile as crypto, only earlier by 4–5 years. One major difference is that Governments hate crypto and love climate.

I will spend some time on climate in general and then dig deeper in carbon markets, which I believe are the least known part of climate change investing. Let’s dig in.

PROBLEM

In a nutshell, the climate on Earth is a closed cyclical system living in a delicate balance. Greenhouse gases (GHG) are emitted from a variety of natural sources like forest fires, wetlands, permafrost, volcanoes, and earthquakes. These are countered by carbon sinks: oceans, soil and plants. At some point we, humans, came along, and started with our own emissions (the scientific term for human-caused is “anthropogenic”) from burning fossil fuels, producing stuff (steel, glass), using fertilizers in agriculture, mass farming (methane-emitting livestock) etc.

As of 2020, our emissions are estimated to equal the natural: ca. 50Gt (50 bn tons). The problem is the additional greenhouse effect, which causes the climate system to rebalance on the margin and global average temperatures to increase by 2 degrees C, leading to a disaster. If we don’t reverse this process in the next 10 years, and fully succeed to go net zero by 2050, many of us, our children and grandchildren will very likely die.

SOLUTIONS

Reduce our emissions by >50% by 2030 and completely by 2050 so that we reach the Paris Agreement’s target heating of 1.5 Degree Celsius, avoid the worst calamity and continue business as usual to argue on Twitter, watch TikTok and give Elon time to get us to Mars.

Ok, but how do we not emit any CO2e by 2050?

1. Replace existing dirty technologies and/or processes. For example, burning coal -> natural gas -> renewable energy or diesel -> biofuels -> electric
2. Change our habits (bike vs car), product choices (degradable vs plastic), diet (plant vs meat), transportation (sharing vs ownership)

Some of the above is driven by people’s desire to live in a better, cleaner place. For the rest, we have incentives. Governments subsidize renewable energy and electric vehicles, but also penalize polluters and make them pay a price in the form of carbon allowances or tax their products.

However, the above two points are not enough. In addition, we need to develop completely new technologies, which:

1. Stop / reduce the emissions from natural emitters like swamps and better prevent / fight forest fires
2. Remove the excess CO2 from the air by planting trees and develop carbon capture technologies at scale (see how they work here).

INVESTING

I believe investing in climate is a land grab. I will briefly list some of the obvious themes and then move on to carbon markets, which, I believe, are the least understood and have enormous potential.

Energy

Short history: the transition from coal -> natural gas -> biofuels / renewable energy is not new. It was made possible by governments subsidizing the renewable energy producers via high guaranteed prices, which allowed hardware manufacturers to scale up their capacity and invest in R&D, leading to cheaper equipment, scalable manufacturing and, ultimately, lower renewable power prices.

Thesis: energy (renewable) projects are long-term and capital intensive. When you build a solar park or wind farm, you used to fix the subsidized high prices and run it as long as you can. The first cycle started ca. 15 years ago and their technology is from back then. As these projects approach the end of their useful lives, there will be a replacement cycle with new tech.

Standard solar panel and wind turbine efficiency have gone up (e.g. solar panel efficiency back in 2005 was 14%, now it is 20–22%) and approaching the current tech maximum of 25%. This 40–50% increase in the productivity should allow energy generation at wholesale prices. There is prototype tech, which, if industrialized, could push panels to 45% efficiency, rivaling modern coal-fired power plants. Current wind power has efficiency between 35–50% depending on the location. As both solar and wind are not 24/7 solutions, the last piece of the puzzle are batteries.

Battery tech is having its own renaissance which will hopefully coincide with the new renewable tech, thus creating non-stop renewable power plants (as opposed to the current coal, gas, hydro and nuclear, which need to be close to a specific resource like coal mine, gas pipe or water), which can vary in scale and be distributed. This is a secular trend of the distributed electricity internet (per Jeremy Rifkin).

Ideas: there are plenty of listed renewable energy manufacturers (FirstSolar, NextEra, Vestas), power companies (RWE, EON, Fortum), smart grid (Siemens) oil companies going green (BP, Shell), but also startups in hardware, software, services etc. Tesla is also a play because of its solar and home battery business, but certainly not the only one. The theme can also be played via different parts of the value chain (e.g. silver as proxy for solar panel demand).

Transport

Thesis and ideas: transition from diesel cars -> electric / hydrogen cars. Many ways to invest via:

• automotive sector (automakers going electric and EV newcomers (Tesla, Nio, Xpeng, BYD)
• infrastructure (charging stations or related startups)
• EV and battery materials (MP Materials, copper, cobalt, nickel), battery producers (Tesla, Panasonic, LG Chem)
• aerospace (Dronamics, Elroy, Volocopter, Joby, Archer, Ehang) or EV ground cargo (Arrival and Workhorse)

Alternatively, many startups are developing new services around EVs like electric car sharing, Tesla subscriptions, EV marketplace. Deep-tech solutions in electric airplanes, biofuel-powered rockets or hydrogen power storage.

Consumption

Thesis and ideas: reduce pollution by changing our habits. There are several broad categories:

• What we use: bio degradable vs plastic products
• What we eat: dietary changes (plant-based (Beyond Meat) or startups vs meat)
• How we live: sharing economy, e.g. car ownership (Uber, Lyft), startups
• Our waste: circular economy ETF or startups

Funds

For you, lazy lot: go get a random climate ETF or invest in a dedicated climate rolling fund on AngelList or back one of the more active syndicates which occasionally invest in climate-related deals (DVC, MyAsiaVC, Flight.VC, Rob Ness). Sundeep Ahuja’s Climate Capital rolling fund is a fully dedicated vehicle.

In part 2, I dig deeper into the fascinating world of carbon markets.

Disclaimer: The above represents my personal views and opinions and does not constitute an investment advice. The company names and financial instruments above are for illustrative purposes only.

About me: I work in technology M&A and occasionally angel invest. Sometimes, the mood strikes and I write about crypto, macro and climate investing. 10 years ago, I co-founded a carbon brokerage, operating in the EU ETS where we served industrial and energy companies. We also launched the world’s first crowdfunding platforms for voluntary carbon projects called Green Hero. The timing was wrong and we rightfully failed as nobody cared about being green back then, but learned a lot in the process.