Investors Share Their Insights and Experiences with Funding Low-Carbon, Climate-Resilient Solutions
The grave threat of climate change has led many entrepreneurs and investors to find ways to use their resources, capital, and businesses to fight climate change and transition to a system of stakeholder capitalism that heals rather than harms Earth’s natural resources. With intentionality, ushering in a more regenerative system can be done while building wealth and protecting the planet’s most vulnerable workers from job losses.
The increased interest and awareness in regenerative economic solutions is highlighted by the fact that ESG (environmental, social, and corporate governance) investments more than doubled in 2020 compared to 2019. Given pressure from activists, consumers, conscious business owners, impact investors, and more, this growth is likely to continue — and in order to avoid the worst effects of climate change, it must.
“Investment in low-carbon, climate-resilient technologies and solutions is a critical part in winning the fight against climate change and ensuring that we can respond to the impacts that climate change will bring,” said Shilpa Patel in a SOCAP19 session. “The future of our planet, frankly, is riding on this, as I’m sure I don’t need to tell you.”
In this SOCAP19 session, panelists discussed what investors and philanthropists are doing and can do to direct capital toward solutions designed to be more sustainable and, ultimately, regenerative.
Panelists included:
- Shilpa Patel, Director of Mission Investing at ClimateWorks Foundation
- Susan Phinney Silver, Mission Investing Director at the David and Lucile Packard Foundation
- Sarah Kearney, Founder and Executive Director at Prime Coalition
- John Balbach, Director of Impact Investments at the MacArthur Foundation
Watch the session or read the full transcript below.
Watch ‘Fighting Climate Change While Growing Markets‘
Shilpa Patel: Good afternoon everybody and welcome to our panel entitled “Fighting Climate Change While Growing Markets.” We have a stellar panel here to talk about how philanthropy and impact investors do so. We have at my very far right, Susan Phinney Silver from Packard Foundation. Next to her in Kelly green is Sarah Kearney from Prime Coalition. And next to me is John Balbach from the MacArthur Foundation. I think you have their bios on the app. And as for me, my name is Shilpa Patel, and I’m with ClimateWorks Foundation.
We’ve got a lot of things to talk about today. Let me just set the stage very briefly to put things in context. We are almost at 2020. By this time we should have really bent the emissions curve and be very firmly set on a path to decarbonization. Alas, we are not quite there yet. The (United Nations Framework Convention on Climate Change) UNFCCC estimates that $1.5 trillion will need to be mobilized every year between now and 2030 if we are to meet our climate goals. And frankly, some estimates put that figure higher than $1.5 trillion. Investment in low-carbon, climate-resilient technologies and solutions is a critical part in winning the fight against climate change and ensuring that we can respond to the impacts that climate change will bring. The future of our planet, frankly, is riding on this, as I’m sure I don’t need to tell you.
So tackling climate change requires actions on multiple fronts. Now, governments can of course set the stage with the right policy frame and lead the charge. But the rest of us, the private sector, philanthropy, civil society at large must step up to the plate, and multiple levers will need to be activated for climate action. And building markets the theme of today’s panel is one such lever. So the mobilization of private capital is absolutely essential given the magnitude of the numbers that I’ve just cited. And the use of catalytic capitals such as that provided by philanthropy and impact investors is critically important.
In this panel, that’s really what we’re going to talk about, how different types of catalytic support contribute to larger capital mobilization. We’re going to touch upon a few live examples of initiatives and activities that the organizations represented here are undertaking, to give you a sense of different approaches, the whys and the wherefores. We will definitely leave time for questions. So may I please ask that you hold those to the end.
But first, some breaking news. And some of you may have seen this, but if not, I’m happy to tell you that the Packard and the MacArthur Foundation have just announced a $90 million facility focused on sustainable land use in and around tropical forests called Terra Silva. And I would really like us to congratulate the heroic efforts of Susan and John in particular that have seen this initiative come to fruition.
So I’m going to ask Susan to actually kick us off. Tell us about Terra Silva, how it originated, what it’s trying to do?
Susan Phinney Silver: Great. Yeah. No, it is a very exciting day today. And the origin of Terra Silva really has been over a multi-year period. So these large-scale investor collaborations are not easy or quick. But yeah, that really started a few years ago with some more informal conversations. We at the Packard Foundation have been prioritizing climate for all of the reasons that Shilpa so well laid out, the urgency of it. We’ve made about $80 million in climate investments. A big focus of that was within the forestry sector. So at the Packard Foundation, we definitely believe one of the main carbon negative technologies we have at scale is a tree, our forests, and that that really needs to be part of the solution.
So we’ve had a focus on forests and sustainable climate smart forestry for many years. About seven to 10 years we’ve been making these investments, and I think we have a number of individual investments that we’ve been proud of. But it became increasingly clear to us that these individual investments just were not going to move the needle and that many of these fund managers, and you all probably know of a lot of these that have been just heroically trying to raise capital for years, really languishing, not getting to a viable point. So it just was a thought process, “What can we do about that? We obviously need to go bigger than what we are doing on our own.”
And that’s when a fortuitous moment came along which is in a conversation with the MacArthur Foundation in the early days, and I’ll let John in a minute talk about that of what has become their CCC initiative, a discussion started about could we do something on a collaborative basis that could really go a lot bigger.
So we joined forces, and I think it’s been a road. Designing big, large-scale collaboratives has not been easy, but yeah, really happy to say that to be at this point now that we’re launching into the market as of today, that the goal is to have $90 million of blended capital that goes into preserving and restoring tropical forests and to promoting climate smart agriculture and forestry practices in and around those tropical forests, and to engaging communities and sharing the benefits with the communities to create long-term solutions around those tropical forests.
So that’s what Terra Silva will do. And it will do it at a scale that none of us could have done alone. So the target is to invest in eight to 10 fund managers and intermediaries, so enough of a stable that Terra Silva can be an early often significant scale investor to both launch and kickstart and signal to bring in capital and to really get a stable of these fund managers with the pretty ambitious goal then of really trying to get to the point of an asset class, of a stable of these fund managers that investors, commercial investors could then come in, benchmark, have comps, have really an asset class to invest in.
Shilpa Patel: Thank you Susan. So I think one of the themes that comes through very clearly from what you’ve said is this whole idea of collaboration, that together we’re stronger than if we just go about something alone. So John actually that leads me to come to you about McArthur’s Catalytic Capital Consortium, is it?
John Balbach: That’s right. Yes.
Shilpa Patel: Yeah, yeah. CCC. I’m never quite sure what the three Cs stand for. But can you tell us more about CCC and why you’re so excited about Terra Silva? I think it’s one of your first initiatives, first or second initiatives in the CCC pantheon.
John Balbach: Yeah. No, happy to do that. Thank you Shilpa. And thanks Susan for your leadership on this initiative. Two things I wanted to start with. The first is I want to take a moment to thank the good folks at SOCAP for elevating catalytic capital as part of this year’s conference. It’s obviously an issue we care a lot about and really happy that they made this a focus of this year’s conference. And along those lines, I also wanted to thank the team at Mission Investors Exchange who just did herculean work in helping to develop the content and build the panels for this catalytic capital track. So I wanted to make sure I made those two points.
At MacArthur, as Shilpa said, we’ve been thinking a lot about catalytic capital. We’ve been thinking about how catalytic capital was essential to extending the reach of impact investing, how this moment in time is absolutely critical to try to shine a light on this really critical investing tool. And as we were thinking about that, we were inspired by a number of things. We were inspired by the Omidyar Network and the work that they’ve done to really flesh out and frame out the full continuum of capital, and then to take the extra step to really shine a light on the importance of that continuum of capital through their work with Beyond Trade-offs.
We were inspired by the Rockefeller Foundation and the work that they’ve done to really accelerate innovative financial mechanisms that have enormous potential to close the SDG funding gaps to the point where we wanted to think about how we could provide scale and extend the reach of their important work.
And we were inspired by Susan’s leadership and the work at the Packard Foundation. We were inspired by their vision, by their expertise, and by their ambition around climate and specifically around this investing activity that they’ve been pursuing for nearly a decade now around sustainable forestry.
All of that inspiration among other things led us to want to launch an initiative in partnership with Rockefeller and Omidyar called the Catalytic Capital Consortium. That initiative’s goal is to increase knowledge, awareness, and use of catalytic capital, and through that initiative MacArthur has committed to invest up to 150 million in what we are describing as powerful examples of catalytic capital.
And really, I think it’s important to note that the work that we had done prior to launching the initiative and that ultimately led to the announcement of our zero gap investment in March, as well as the work that was under development with Terra Silva at the time of our announcement were very inspirational to us in launching this initiative, and then ultimately creating an invitational proposal process that provided over a hundred proposals that we’re now in the process of reviewing and hope to make announcements around that proposal pool for these powerful demonstrations in the first half of 2020.
We think Terra Silva is a powerful example of catalytic capital. We think that for a number of reasons. The first is it addresses a really critical capital gap. That capital gap is providing a meaningful and demonstrable track record for managers that are sub scale. That lack of a track record for these potentially marketable funds that have the ability to scale, it’s impeding capital from hitting this really critical sector. So that’s an enormous capital gap and a really great use of catalytic capital.
Secondly, as Shilpa noted, this is an incredibly consequential social impact area. And just to put a really fine point on it, there is no rational climate future without sustainable forestry I think, just full stop. So this is an incredibly consequential impact area.
And then lastly, the intervention is systemic in nature. So again, addressing this particular capital gap helps to build a foundation that could create the foundation for an asset class that then can proceed without the need and use of catalytic capital. So that’s what Omidyar describes as market level impact, and we see that enormous potential here with this.
And that idea of capital gaps, that’s what’s critical for us with catalytic capital. This gap that Terra Silva is addressing is a critical one. There are other gaps like addressing the innovation gap which you’ll hear Sarah talk about in a bit. There’s trying to reach underserved people and very challenging places, places that have things like political instability, fragile states. And there’s the ability to pierce very challenging business models, business models that often have high transaction costs.
Catalytic capital is essential to addressing all of these challenges in order to seed, scale, and sustain social impact. That’s why we think it’s so important and we think Terra Silva is a really terrific example of this tool.
Shilpa Patel: Thank you John, and thank you for setting the stage for what’s going to come next which is what I’d like to turn to. I’m sure we could spend a lot more time talking about Terra Silva, but we’ve got other things to talk about. So I’d like to broaden our discussion to the use of different types of philanthropic support or catalytic support across this continuum of capital which goes from grant-making, from grants through BRI, MRI, and then of course market-rate investment.
So I’d like to now turn to this initiative that John alluded to or referred to earlier, the innovation gap for climate solutions, which I think will illustrate this use of different types of capital at different stages. So I’m referring to Prime, and I don’t know, John, if you wanted to say a quick word about the importance of grant-making in building markets or shall we just go to Sarah and have her tell us in her words?
John Balbach: I’m happy to do just a quick intro, but I really want to hear what you have to say. So again, we’re really laser-focused on catalytic capital, but we also recognize that grants are a really critical component of the overall landscape when you’re thinking about building markets. And we see them as helping to either facilitate catalytic capital investing and market building or working alongside that activity. And just a few quick examples of ways that this can work.
So grants can provide really effective operational support for funds where that’s required. They can help to develop tools. Sarah is working on a really important tool in our mind called the CRANE tool which is looking at quantifying the potential emission reduction for early-stage technology for clean energy and resource efficiency. Those types of tools funded by grants working alongside investing activities, really important and effective use of grants.
Technical assistance is another. And this is something that we saw really hit home for us as we were reviewing the proposal pool that came through for the Catalytic Capital Consortium. And this is especially true in emerging markets, and those efforts that are addressing the missing middle gap for small and medium-sized enterprises. But technical assistance combined with investing activity is a really effective use of grant funding.
And then the last one I would emphasize is something called project preparation. And this is an effort that Shilpa and I have worked together on around our work in India where we help catalyze a grant pool of funding called the US-India Clean Energy Finance Facility that’s targeting those efforts that are right on the cusp of very significant pools of capital, helping to use grants to move them over the diligence finish line and catalyze significant pools of capital. That initiative was launched in 2017. It’s already catalyzed over a hundred million for distributed generation, renewable energy efforts in India, and that’s I think a really effective and powerful use of grants.
Then the last thing I would say is grants can be effective in providing early support to help move things, to move efforts to investability. We were incredibly proud to support the Prime Coalition five years ago I think at this time, and made a bet on Sarah’s leadership and her vision and couldn’t be more pleased with what’s developed since then. And I think that’s maybe a good segue to turn it over to you and what you’re doing.
Sarah Kearney: All right. Hi everyone. My name is Sarah Kearney. I am psyched to be on this panel, because as Shilpa said, we have a one trillion dollar gap a year on top of business as usual that we need in order to reach our climate goals. And as I’m sitting here listening about Terra Silva, which diverges from what Prime does, but it’s in climate, it’s a yes and everything. We need carbon negative solutions. We need technology innovation. We need to deploy solutions in places that matter. We need to reduce annual greenhouse gas emissions by 70 gigatons annually by 2050. And all wind power ever deployed is equivalent to one gigaton. So 70 times all wind power ever. So it just feels very exciting to be talking about catalytic capital that can crowd in that one trillion dollar gap. That’s just how I’m feeling sitting here listening to y’all talk about things.
Five years ago I founded a 501(c)3 non-profit public charity called Prime Coalition. We now have offices in Cambridge, Massachusetts, where I work and also down the street here too in Embarcadero in San Francisco. And we have benefited from philanthropic partnership in many of the ways that John mentioned since our founding in 2014. Prime partners with philanthropists to place catalytic capital into market-driven solutions to climate change. So that means we placed catalytic capital into extraordinary for-profit companies that combat climate change, are attractive to follow on market rate investors and have a real chance to achieve commercial scale but would be challenged to raise sufficient financial support without catalytic capital.
So imagine a conservative East Coast Community Foundation like the Boston Foundation supporting an engineer who’s developing better membranes for water desalination, or imagine a corporate foundation like Autodesk supporting innovators that are improving air conditioning solutions, or maybe the Will and Jada Smith Foundation who’s supporting improvements to industrial freezing infrastructure.
Since our founding, we’ve mobilized over $60 million across 13 companies. It really feels like we’re just getting started and we have a three-phase 10-year-plan for unlocking philanthropic capital for climate change mitigation. We’re almost done with the fundraising period of phase two. I founded Prime based on my own experience serving as executive director and trustee of the Chesonis Family Foundation based in Rochester, New York, and my graduate research in systems engineering at MIT.
The first thing that we did in 2014 was a listening tour where we traveled around and we talked to hundreds of different types of philanthropists, large institutional foundations, smaller family offices, individuals using donor advised funds, and we asked them whether they knew that this capital gap existed for early-stage climate innovators and asked them whether they knew that they had tools to step in and help fill that gap and what would make that fun or what would be very difficult about that. And, as you can imagine, we came out of that exercise with a laundry list of reasons that this was going to be prohibitively difficult for any one organization to do on their own. And today I think of those barriers in three buckets. The first is educational, the second is operational, and the third is perceived regulatory barriers.
So to start, on education, what we heard back were people asking questions like, “Isn’t this what venture capital does?” So we knew we had some work to do around really characterizing the capital gap. And the next operational barriers, we met very, very few grant-making organizations that were organizationally structured to behave like a venture capital firm to do the deal sourcing, due diligence, very deep technical due diligence, structured terms to achieve the impact goals later and crowd in market rate investment. And then to serve on boards of directors of early-stage technology companies, there’s just not something that most grant-making organizations are set up to do.
And then lastly, it’s nearly impossible as a single actor to argue this counterfactual, whether you’re trying to establish charitablity for one company or for a fund to say this investment would not be made but for the charitable purpose. Is very difficult argument to make without surveying a majority of the market rate investment community.
So we built Prime as a public charity to try to bring these high barriers down to zero and start to unlock catalytic capital. We came up with this 10-year plan and we celebrated our fifth exemption determination birthday in September. That’s when the IRS gave us permission to do all three of these phases. And as I said before, we’re almost wrapped up with fundraising for period two and we’re on track to start exploration for phase three in the early part of 2020.
So the purpose of phase one for us was to explore the boundaries of what you’re allowed to do with charitable capital. And during that phase, Prime mobilized $23 million from 54 philanthropic organizations to support 10 companies. And each one of these companies holds promise for gigaton scale CO2 equivalent emissions reduction, really big game-changing ideas.
The purpose of phase two where we are now is to prove that catalytic capital will show up at meaningful scale. That’s in the tens of millions of dollars toward high-risk, high-impact reward ideas. And the Prime Impact Fund is now operating as a $40 million seed fund and it’s designed to be unabashedly purposefully impact first.
Our phase three long-term goal is to pioneer a blended finance strategy that combines philanthropic, catalytic, and market rate capital. And our modeling shows that with all three of these different colors of money working together everyone achieves their goals more effectively, and we hope that by doing that we can unlock financing for everything along the innovation to deployment pipeline for climate change mitigation because at Prime we have one goal, it’s to reduce greenhouse gas emissions at gigaton scale.
So ultimately, our success will be measured by the tons of CO2 equivalent emissions avoided by our companies, but we do have some near-term key performance indicators. We don’t just care about the number of catalytic capital investors that have done investment transactions with us, but we also care about how many of them were first-time philanthropic investors or first-time climate investors. So far we’ve done transactions with 121 philanthropic organizations and 42 of them had never used a program related investment or recoverable grant before, and 35 had never — grant or investment — done anything in energy or climate before. So it makes us feel like we’re achieving our goal of expanding the group of asset owners that are active in the space and not just dividing the pie among the usual suspects.
So just for a little bit more detail and then I’ll stop. We have four different types of investors: private foundations, donor advised funds, families/family offices/trusts, and corporate giving programs. And there’s four ways that partners jump in with Prime. They use traditional grants, recoverable grants, program related investments, and concessionary mission investments. So in our $40 million seed fund called Prime Impact Fund, we’ve had 57 distinct contributions, 24 individuals and families using donor advised funds, 20 foundations, and 13 individuals, family offices and trusts. And 18% of that dollar-wise has come in as traditional grants, 31% as recoverable grants, 25% as program related investments, and 26% as concessionary mission investments.
So in terms of how we do our work, we have three simple investment criteria. We’re looking for US-based companies that hold promise for half a gigaton or more of CO2 equivalent emissions reduction potential. We believe they have a chance to achieve commercial scale which means they actually might achieve that climate impact. And we have assessed that they are going to have a difficult time raising sufficient financial support without us.
And the thing I’m most proud of about Prime is the rigor that we’ve put into our system for evaluating each of those very complex investment criteria. So on the commercial attractiveness piece, we’ve been able to attract not only best-in-class investment managers but like the best that we possibly could with a proven track record in venture capital, investment managers that just happen to have the climate mission in their heart.
Secondly, to establish additionality we have an investment advisory committee of 18 of the most active and historically successful market rate venture firms in our space. And they meet quarterly for us to not only say, “Yes, if this company makes it to a certain milestone, we will be thrilled to invest. But also, here are the specific reasons that I would have a hard time convincing my partners to do this today.” So that gives us conviction that not only does it achieve additionality but it’s for good reasons and not bad reasons.
And then lastly, as John mentioned earlier, we’ve developed this in-house methodology for assessing emissions reduction potential or as we say ERP, we do ERPs all the time, for each company that we’re thinking about investing in. And it turns out that’s a really, really hard labor-intensive thing for any investor to do. So we’ve been generously supported by the MacArthur Foundation and the New York State Energy Research and Development Authority, NYSERDA, and the Massachusetts Clean Energy Center to take the methodology we were already using to do our emissions reduction potential calculations and turn it into an online free software tool for any investor that might want to consider climate impacts in their investment decision-making, whether they’re doing that today or not.
It’s called CRANE. Maybe we could talk about that later if you’re interested. But for now, I’ll just wrap up by saying that it’s a real privilege to sit up here with three of Prime’s philanthropic partners and kind of displaying three different ways to partner with us.
So as John said before, he and his team at MacArthur were early absolutely critical general operating supporters when they made a multi-year general operating grant commitment in 2015. And then he and his team also supported the CRANE project for the benefit not only of Prime but the whole field to assess climate impact in your investment decision-making. And that was a project grant in 2018.
And then lastly, it’s been really educational for our investment team to work with Susan’s team at Packer that has been doing PRI making for many years and to sharpen our presentation for catalytic capital commitments to Prime Impact Fund and to look forward together around the exploration of potential blended fund concepts that could combine philanthropic, catalytic, and market rate investment in the years ahead.
Shilpa Patel: Thank you Sarah. So Susan, just to sort of complete the circle in terms of your involvement. I believe Packard has also or is about to make another interesting announcement?
Susan Phinney Silver: Yes.
Shilpa Patel: Or has already made the announcement? Please, fill us in.
Susan Phinney Silver: Yes. No, we are pleased to announce that in September our board approved investment in the Prime Impact Fund. So we are very pleased to be joining the group of investors, and I just want to underscore just again the early grant support from MacArthur and others that really got this to the point where it could become an investment for us. I will say this is a first for us. It’s our first venture equity investment. So that’s again another Terra Silva is a first. In a different way this one is really a first and we’re really excited about that, and we’re trying to really lean in, in our climate change.
And I would say what the early grant support was really able to do in terms of being able to support Prime to get to the point where an investor like ourselves could step in, is really to develop the track record, the capacity of Sarah and her staff to evaluate these technologies and the rigorous, as you’re hearing about, methodology that they’ve created for that, I just think really got it to a point of really being on our radar screen.
Sarah talked about the three obstacles. For us, having 10 years of climate investing, the number one and three, I think it was the educational and the regulatory, weren’t issues for us. But I will say that the second that you said, the operational, even for a very experienced climate investor is a huge barrier. Because we’re a foundation that cares about climate change and really cares about science. Many of you know the Packard Science Fellows, so science is very in our DNA. So we get lots of inbound ideas and really promising ideas, but we are just not technology pickers. It’s just always been clear to us that the answer to climate change could be in one of these inbound but we just don’t have the capacity to evaluate it well.
So it’s just been very gratifying to now be able to partner with Prime that does have that capacity and has really done a great job of building that out. So we’re just really, really excited to join the fold and to look at these really exciting carbon mitigating technologies.
Shilpa Patel: That’s wonderful. And I’m very conscious that time is really flying by, and I do want to leave time for questions from the audience. But, John very, very briefly, you and I have worked together on rooftop solar financing in India. Can you just tell our audience how the foundation consortium that you lead is tackling the financing gaps in that market?
John Balbach: I will be brief. And just to be clear for everyone, this is not the Catalytic Capital Consortium. This is a small group of funders that includes the Packard Foundation and ClimateWorks Foundation, got together a few years ago to see if we could address climate ambition in a specific place, and that place is India. Place matters. And India really matters when you look at what we’re trying to achieve from a global climate ambition perspective.
And when we got together, we tried to think about how we could help in a small way to move and develop the market for distributed generation and renewable energy, distributed generation solar and renewable energy. And to do that, we looked at a very specific or we identified a very specific capital gap. And that capital gap is in down market, so small- and medium-sized enterprise rooftop solar. And it’s a really important element to the broader market building component of what’s happening in India. So capital is flowing at a large scale, at utility scale, at large scale commercial, but it’s blocked as you move into this downmarket phase of the rooftop solar market in India.
So to address this, our collaboration designed a series of interventions that span the spectrum from grant-making all the way to full-on impact investing. From a grant-making perspective, the US-India Clean Energy Finance Facility that I mentioned earlier, that was the sort of core intervention. Shilpa led an effort to design a recoverable grant that supported the launch of a purpose-built financial intermediary that’s addressing this particular gap. And then MacArthur, along with a couple of our other partners, made an anchor and foundational commitment into a fund called Encourage Solar.
That fund will ultimately be a $75 to $100 million fund, and it will invest into the Indian financial system through what are called non-banking finance companies or NBFCs as a way to effectively channel capital towards this capital gap. And for us, this is really exciting but also important because it’s a systemic intervention. We’re working within the system and we’re using these different levers to try to move a solution around this really important gap in India.
Shilpa Patel: So essentially the India work has involved basically various types of interventions, various types of catalytic support to address gaps at different levels in the market, but mostly to nascent companies or entities that are new to the space. Susan, you folks at New Forests have been involved in something a little bit at the other end of the spectrum which is working with a very established entity to deepen impact. Can you very briefly give us a few sentences on that?
Susan Phinney Silver: Sure, sure. Yeah, because it is sort of a different kind of catalytic capital. And it’s also a first, another first. So again, theme of 2019, really trying to stretch on climate change investing. This one is our first MRI. And I think what is really different about it is that almost all of our portfolio today has been in trying to take early-stage risks, try to go and build emerging and nascent fund managers and intermediaries and get them to scale climate solutions. So that’s really what our entire portfolio is. And in Terra Silva, that’s what it’s about with the sustainable forestry fund managers, Prime with the ventures and the technology venture.
So I think what happened in our partnership with New Forests is we asked ourselves a question, could we go the other way? So could we work with an entity that was already at scale? So New Forests with billions of dollars of forestry assets under management, tropical forests under management, approached us, and I think became I think a really good and interesting conversation where we sought to see could we pilot this idea of working with a fund manager at scale but finding a way to drive deeper sustainability and trying to do that in a meaningful way.
So what ensued was a long conversation and design process where we created what we’re calling an impact tranche. And the idea of an impact tranche is that if New Forests can deepen its sustainability on very specific benchmarks. And that’s where I was very grateful to be teamed up, I think Belinda Morris might even be here. So really thanks to Belinda Morris who was our climate and land use program officer deep sector expertise was really to go, because the devil’s in the details. You really want to create something that was driving meaningful, measurable impacts that were accountable and, the important part, that were beyond the business-as-usual.
So with New Forests there were carbon impacts, there were communities working with tribes. But we really were willing to reduce our financial return if New Forests can demonstrate these really, these documented both, whether they’re biodiversity or carbon or with sharing benefits with communities. If they can document those, then we would take the reduced return. And that again, importantly, were beyond their business-as-usual. So really, the idea was to be able to essentially drive a new business-as-usual.
Shilpa Patel: It was basically giving them a really strong performance incentive.
Susan Phinney Silver: A performance incentive to include these deeper and then hopefully the next fund that New Forests would have this as part of their business-as-usual for future funds. So that’s the thesis.
Shilpa Patel: So Sarah, and literally a minute and a half please. You are also thinking about a gap in your portfolio company, something that you call first plant risk. What is first plant risk and how are you planning to address it?
Sarah Kearney: So this is something Prime was purpose-built specifically around one capital gap that we spent years characterizing, and it’s the earliest stages of company formation as something moves from say a non-profit university lab into the commercial marketplace, it forms as a for-profit company for the first time, maybe there’s a one person on the team. It’s a really tenuous time especially for any early-stage venture but especially for hardware that can make a big difference on CO2 equivalent emissions reduction.
What we have heard from our own portfolio from many, many other investors in the field is that a very similar acute capital gap exists when those types of companies, maybe they get through their seed round, series A, Series B, Series C, and then they get to a place where they need to build their first facility. And imagine a manufacturing facility that wants to use a new solution rather than the decades old equipment norms. And it is impossible for them to raise the money to build that first plant because like the disproportionate risk that market rate investors cannot accept at the earliest stages of company formation, there are risks that market rate investors just cannot accept.
So we’re very interested within the vertical of climate change mitigation to spend some time in an exploration period characterizing that capital gap, exploring what is the scope of the projects in the pipeline that are falling into that gap, how would you design an intervention that kind of minimally requires catalytic capital to crowd in lots of market rate capital because as you can imagine, as you get further along and want to build plants and large chemical processing facilities, the dollars get bigger and bigger. But it is something that we know is also a friction point for things that could really advance our climate change mitigation goals.
Shilpa Patel: Great. Well, I did promise some time for questions, and that time has now come. I do hope you have questions. And if you do, please raise your hand and stand. I believe that there are a couple of roving mics, one of which will be brought to you so that we can all hear you. So do I have any questions? Yes. Right there.
Asha Jadeja: Hi my name is Asha Jadeja from the Motwani Foundation, a family foundation based here in Palo Alto, and I’ve been working actually in India quite a lot on a whole bunch of initiatives, and I’m just realizing that a lot of the companies that I am seeing there which could be creating solar power torches or cooking stoves and so on, or roofing material, they’re not yet ripe for venture capital. And I’m seeing so many promising companies there which really already have a lot of traction.
Typically, I end up investing a little bit in seed investing as a foundation and I use a PRI. I’m just learning all these mechanisms now. But I’m wondering if you guys are interested in sort of proactively suggesting what you are looking for because there are just tons. I’m a venture capitalist. I have been venture capital for about 20 years now. So I have lined up a sort of a battery of people in India that I know can solve a few things very quickly if we could just get focused. And I’m using the XPRIZE model, for really just getting a larger footprint of people coming through. How do I get to talk to you guys after this?
Shilpa Patel: Thank you. Could I take the question here? Yes, please.
Speaker 6: Thank you so much for your commitment and just for the enthusiasm that is radiating off the stage because if there is something we need in this great struggle, it is a stack of enthusiasm. So thank you. Look, I just wanted to ask you a question about leverage of a different kind. We often tend to think of impact investment and philanthropic investment in advocacy and activism as if they’re two quite different things. But if there’s something we know about the political economy of the fossil fuel industry, it’s that there’s a leverage that comes from the advocacy that follows from having the economic stake.
So I’m wondering if you’ve got some things to say about the relationship between the kind of impact investment that you’re talking about and how that commitment can also be parlayed into political advocacy?
Shilpa Patel: Thank you. Do I have another question?
Olivier Ceberio: Hi. My name is Olivier Ceberio. I’m working for a company called Resolute Marine and we are developing a wave driven desalination system. And I really resonate with just what you just said Sarah, about the first plant issue. We are at the stage where we are trying to develop our first plant. And we are committing, we are finding this to be a very difficult challenge to cross. So we are looking for creative solutions to manage to cross this gap and within the reach of what we can do. We look at exploratory solutions such as bundling and equity investment in our company and a future investment in project finance or first right of offer for the next five years I would say of development.
But I’m very curious in your exploratory research, do you have thoughts that you would be willing to share how to mobilize other stakeholders that could collaborate with us in crossing this threshold and what would you advise us I would say? What kind of way would you advise us to explore and what kind of partner you would like us to go through?
Shilpa Patel: Thank you. This is a lot to handle in five minutes, but essentially I think there’s a couple of questions related to how do you get early stage companies, how do you get them this capital that they need, that they can do the first plant, cover the first plant risk, but even before the first plant risk, to sort of get them to a stage where they are able to have something that they can go and sell.
So that’s one question. I don’t know which of you, perhaps Sarah, or is best placed to tackle that.
John Balbach: Let’s start with the last one first.
Sarah Kearney: Okay, I’ll start with the last one. Actually, I might tie the first one and the last one together. So just to address the first question about the geographic scope of this type of solution, there’s no regulatory reason that you couldn’t have a Prime India or a Prime Europe or a Prime China. We’ve had a lot of families based in those other geographies that are like, “Please, do a Prime franchise.” So there’s no tax reasons you couldn’t do that.
We’ve made the strategic choice to stay constrained to the US for the reason that will bring us back to this question which is to be good investors. It’s just at this stage we felt that having oceans between us and these very, very nascent teams made us less able to do our job well of helping to build thriving lasting companies. But I would love to see copycats in other places.
To answer your question, that’s exactly what you need. You need experienced industry veterans helping young teams build their businesses hand-in-hand. My colleagues often say you’re not an investor. You’re like a talent scout with a checkbook at this early stage.
And then back to your question around how do you access the type of catalytic capital that we’re talking about at the first plant risk stage, I think that my colleagues on stage would agree with me that the power of intermediation cannot be overstated. This is something that I constantly have to tell entrepreneurs even at the earlier stage. Like one company going to MacArthur or Packard is not kind of what’s going to work for the catalytic capital community. They’re looking for systems change.
So those that can do the knitting together of many catalytic capital asset owners from a system’s perspective, what’s hard for them is that they’re inundated with pitches like that. And as Susan was saying earlier, it’s hard to do the sorting exercise of saying, “Here are the things that are going to be supported by market rate capital, here’s the very large set of things that are not going to be funded, but among them here are the things that won’t be successful, and here’s this Venn diagram middle slice of things that really could work but won’t otherwise be funded.” So you need the entity to help with that macro sorting exercise to sit in the middle.
And just one last thing kind of back to the first question, for us choosing to be US constrained, we have over 4,000 companies in our pipeline from pre-seed to Series B. And I imagine the same would be true of first plant risk type projects. So you kind of have to put yourself in their position of like how do we sort through all of that and pick the things. This capital is so precious. You really want it to go to the highest and best use to advance the most impactful toward the impact goal. And that’s a very hard exercise to do when you’re being expected to sort through everything in the world in every asset class.
Susan Phinney Silver: And that’s not our expertise.
Shilpa Patel: Absolutely. Absolutely. Let me come to the other, the second question that we had which is essentially this notion of leverage which includes investment if you will in advocacy and policy reform that make the actual financial investment that will come later fruitful or even possible. Would you like to address how foundations, how your foundations are looking at this?
John Balbach: Did you want to jump at first?
Susan Phinney Silver: I could. Either way.
John Balbach: Go ahead.
Susan Phinney Silver: Okay, because I may be briefer not because John’s not brief but because John I think spans an interesting gap between their grant-making and their investing is why. I think that for the Packard Foundation I know that is definitely the tying together of the grant-making around policy work and regulatory regimes is definitely seen as seeding the ground for our investments. I would say it also works the other way that I think that when we’re making a lot of our investments, we really see that we are trying to prove out so that to make regulatory regimes more likely and viable by showing that it can be done. So I think it works both ways.
John Balbach: And maybe just to build off that, I wanted to build off of one thing that Sarah said as well around the importance of community with early-stage technology and sort of early-stage venture development. To get early-stage companies off the ground it takes a number of things. It takes technology. It takes capital. It takes talent. And it takes networks. And people always jump to the capital, and they think it’s just the capital issue when really some of the hardest things are the talent and the network. So building those in ways, and that’s a great use of grant funding, I just wanted to echo that, that point that Sarah made.
On the point of connecting advocacy and activism, I would start by saying we, as private foundations, have to be careful about the word advocacy. But what we would say is at least from our perspective within the context of what we’re talking about here, the term ambition I think really matters. So within the Catalytic Capital Consortium, we are clearly stating that we’re trying to do demonstration investments, and those investments by definition are demonstrating the use of this tool so that others will follow. And that’s a core premise for what we’re trying to achieve. So there is an element of trying to influence around that through the demonstrations. And I think that’s really important. And I think similarly, that idea of trying to do things on a larger scale with the climate work so that it shines a light on the importance of that activity.
And then the last thing, I’d just echo what Susan said, that the types of investing that we’re doing, that we’re pursuing can absolutely influence policy reform. And one great example through the Terra Silva investment is payment for ecosystem services. There’s an important policy element of this, but somebody needs to come in and do the early investments to show that these work and that influences policy. Policy reforms then occur that helped to make that activity more amenable to markets and it moves forward from there. So I think that’s a great example, through the work that Susan led, of how investing can help to influence policy.
Shilpa Patel: I need to bring this panel to a close, but before I do, I want each one of you to please just give me one thought, literally one thought, not a long sentence please that you want. What do you want this audience to remember? What is one thought you want to leave them with something that they can think about on all this work?
Susan Phinney Silver: I guess my one thought would be now is the time to be bold and to really push ourselves and to do new and different kinds of investments in our fight against climate change.
Shilpa Patel: That’s great. And Sarah.
Susan Phinney Silver: And I followed the rules too.
Shilpa Patel: You did.
John Balbach: You can do a compound sentence.
Sarah Kearney: A lot of clauses. Okay. So I have three things. I’m breaking the rules. First because I’m on stage with ClimateWorks and MacArthur and Packard, it feels important for me to say that you don’t have to be a large institutional foundation to jump in on catalytic capital for climate. We have plenty of small staff foundations, corporate giving programs, individual DAF sponsors and donors and families that are a part of our tribe. That’s one.
Two, please visit cranetool.org if you want to be a beta user for our beta period from November to February. We want input from also cap minded people to incorporate climate into your investment consideration.
And then third, we’re going to be kick-starting our exploration period for the blended fund in 2020. We’re starting to get a handle on the philanthropic and catalytic pieces. We are very interested to talk to you if you are a market rate asset owner long-term viewpoint with constituents that care about climate and we want to talk to you about what would make you excited or hesitant to be in the same vehicle with philanthropic and catalytic capital.
Shilpa Patel: You did break the rules Sarah, but those were three very good points. John.
John Balbach: I’m going to do a compound sentence as well.
Shilpa Patel: No, no, no, no. Oh, go ahead.
John Balbach: Is that okay?
Shilpa Patel: Yes.
John Balbach: Three really quick points. One is embrace the full continuum of capital, invest across the full continuum of capital. Second is just to pick up on what was said earlier, this is an all-in approach. This isn’t only do technology, only do sustainable forestry. It’s all in and it all has to happen in parallel. And the last thing is to really achieve what we’re trying to achieve, we have to be willing to collaborate. And to collaborate in a way where we are willing to stand behind the leadership of others. And I think that’s essential.
Shilpa Patel: Okay. So that just leaves me a minute to try and summarize the hour, which you will I hope agree is impossible. But let me just give you my takeaways, and I’ll try to just hit them one after the next. So first, grant capital is critical in building early-stage innovations or to get projects to investability. We saw that with the India Clean Energy Facility. We saw that with Prime. Second, the venture capital valley of death is all too real and needs to be addressed as Prime is trying to do. Third, sometimes you need to build a new asset class to crowd in private capital for emerging fund managers as Terra Silva is trying to do. And finally, at the very end of that continuum that I alluded to earlier, you can incentivize deeper impacts for fund managers who are already at scale as we saw with New Forests. With that, I am out of time, but please join me in thanking this wonderful panel, for a great discussion. Thank you.
Susan Phinney Silver: Thank you.
