Climate Investment Opportunities With Impact, Tailor Made For Impact Investors

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All investors, but especially impact investors, should be intrigued by new investment opportunities for addressing climate change. These opportunities feature nascent technologies with great potential for removing greenhouse gases from the atmosphere. Impact investors want their investments to be impactful as well as financially rewarding; and now is the time to achieve the greatest impact, by investing in technologies when they show promise and working to achieve scale.

Climate focused impact investors would do well to view the proceedings Fourth Annual Global Climate Restoration Forum organized by the Foundation for Climate Restoration (F4CR). Of particular note were two issues addressed by speakers and panelists at the Forum. The first is that the most significant technologies for removing carbon dioxide from the atmosphere involve the oceans. The second issue is that the world is experiencing a methane emergency, for which we need new technologies to remove methane from the atmosphere. The term for this class of technologies is greenhouse gas removal (known as GGR).

Let me elaborate on each issue in turn.

Investment Opportunities in Ocean-Based CDR

CDR stands for “carbon dioxide removal” in which carbon dioxide is removed from the atmosphere and sequestered safely and permanently. Because of the behavioral pitfall known as availability bias, there is a general view that the most powerful technologies for CDR are land based, such as reforestation and direct air capture; but not so.

The oceans comprises 71% of Earth’s surface, which means that the water-to-land ratio is effectively two-to-one. Moreover, oceans hold much more potential for sequestering carbon than their land-based counterparts. Already, oceans hold 99% of the planet’s carbon, stored as limestone in coral reefs. Oceans have been, and will continue to be a major carbon sink.

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There are multiple types of ocean CDR technologies under development. A good resource for these technologies is the website of the organization Ocean Visions, which is a nexus for helping impact investors, businesses, and research institutions connect with each other. The Oceans Visions website features a series of “road maps” that lay out key priorities for advancing knowledge about ocean-based CDR.

A good example of a startup working with a nascent ocean-based CDR technology is Seafields. Seafields grows sargassum, a type of seaweed. Sargassum grows quickly, captures carbon dioxide efficiently, serves as input for useful products, and sequesters carbon dioxide which it sinks to the ocean depths.

From an investment perspective, Seafields has intriguing potential along three key dimensions emphasized by F4CR. Those dimensions relate to permanent sequestration of carbon dioxide, scalability of the processes, and profit potential. I have already mentioned permanence, and the fact that sargassum can be used to produce multiple useful products. As for scalability, sargassum can be grown in very large areas of the ocean that at the moment appear to be poor in nutrients. Impact investors, take note!

Investment Opportunities to Address the Methane Emergency

The methane emergency involves a series of interconnected issues. Consider that over a 20-year period, methane is more than 80 times as potent a greenhouse gas as carbon dioxide. And yet, over a period lasting twenty to thirty years, natural processes break down atmospheric methane into carbon dioxide and water. In contrast, the timescale for breaking down atmospheric carbon dioxide is much longer, at least a century.

Anthropogenic global warming has led the average global temperature to increase by about 1.1 degrees Celsius since the dawn of the industrial age. In 2021, the IPCC raised a red flag about methane, pointing out that methane emissions have been responsible for about one third of the 1.1 degree increase. Moreover, methane emission rates continue to increase, and achieved their highest values during the pandemic.

The concerns about methane are compounded by the fact that the natural process for breaking down atmospheric methane is getting saturated by the higher atmospheric methane concentrations. Particularly worrisome is that this saturation will lead to even higher levels of warming.

To make matters worse, pools of methane rose from melting permafrost in Siberia, causing great concern that large amounts of methane might be on the verge of escaping into the atmosphere, which would exacerbate a situation that is already alarming.

While none of this is good news, it is also the case that there is now progress in developing technologies for removing methane from the atmosphere. This is good news for impact investors, and of course the rest of us. These technologies operate by increasing the rate at which methane is naturally broken down through oxidation, which transforms methane into water and carbon dioxide. Of course, more carbon dioxide in and of itself is problematic, but it is better to have carbon dioxide than an equal amount of methane, given the difference in potency. I would add that once methane is oxidized, there is nothing to sequester.

A methane removal technology known as “solar chimney” has attracted considerable attention. There is a prototype in Xian, China, applying an approach developed at the University of Minnesota. The hope is that when scaled, this unit will be capable of processing 11,100 metric tons of methane per year.

Controlling methane is important for future temperature increases. Methane removal technologies, if scaled globally, have the potential to prevent a global temperature rise of at least 0.3 degrees Celsius.

One of the positive developments to emerge from COP26 is the Global Methane Pledge (GMP). The GMP was spearheaded by the U.S. and European Union. Over 120 countries, but not China or Russia, have signed on, pledging that by 2030 they will reduce methane emissions 30% below 2020-levels. Interest in GGR is only going to grow. Impact investors, take note!

What Impact Investors Want

Impact investors want their investments to generate positive social impact as well as financial returns. Recent research documents that many impact investors define impact using the sustainable development goals (SDGs) established by the United Nations. There are 17 such goals. Goal number 7 is “Affordable and Clean Energy,” while goal number 13 is “Climate Action.”

One of the main messages from F4CR about the SDG for climate action is that the much publicized goal of achieving net zero emissions by the year 2050 is insufficient, if we want our planet to be hospitable to human life. Instead we need to have negative greenhouse emissions, fairly quickly, in order for atmospheric greenhouse gas concentrations to fall below the levels they were at before the industrial era, and indeed during the past 800,000 years for which ice core samples are available.

Impact investors are already focused on SDGs 7 and 13. Relative to all 17 SDGs, funds invested in goals 7 and 13 lie in the upper-middle range. Going forward, there is good reason to anticipate that progress on CDR and GGR will lead the size of impact investment dollars allocated to these goals to move to the upper range.

An important research finding is that impact investors associate goal 7, Affordable and Clean Energy, with relatively high financial returns, but not the closely related goal 13, Climate Action. This might be because renewable energy projects are perceived as being more profitable than other climate mitigation efforts.

This finding is important for ocean-based CDR and methane removal GGR. Firms such as Seafields are profit-centered, producing and selling useful products. But not so, methane removal which, at least for now, does not generate revenues from useful products.

An important issue for impact investors who are focused on climate change is that the international agreement from COP26 dealt with Article 6, a leftover from the Paris accords negotiated at COP21. Among other items, Article 6 provides the structure for a global offset market in greenhouse gas credits. If done correctly, offsets provide agents with the option of “make or buy” when it comes to reducing emissions. They “make” when they reduce emissions directly. They “buy” when they purchase credits on the market for offsets from other agents who are “making” emission reductions.

Firms involved in GGR, who do not remove greenhouse gases as side activities from other profitable operations, will need to rely on the market for offsets in order to generate revenue.

There are two parallel markets for offsets, one called the compliance market, where agents operate in regulated environments with emissions caps. The other is the voluntary market, where agents are not required by regulation to reduce emissions, but instead volunteer to purchase credits. Both markets are growing, and impact investors can have a special role to play. I say role, but “mission” might be more apt.

Today, CDR and GGR feel to me the way Amazon.com felt in 1998 and Tesla TSLA felt in 2008: great ideas poised to grow dramatically, change the world, and create great financial returns for investors. Just remember that the net cash flows from these companies were modest for a long time; but that did not stop their stocks from soaring. Impact investors, take note!