We’re moving from theory to practice, with Ben Krasnostein and Dr Jodi York from Kilara Capital.
They’re an impact investing powerhouse and in this episode we dig into the models and frameworks they employ, but more importantly, how their impact approach can help to both drive-down greenhouse gas emissions, while also boosting financial returns.
Ben is founder and managing director. He was born and bred in Melbourne, and after a stint in legal practice he found himself drawn towards business, investing and doing deals. He opened the doors to Kilara in 2017.
Dr Jodi York is Chief Impact Officer, she joined the team in 2020. She’s originally from San Francisco and she found herself in Melbourne via a stint in New Zealand.
On this episode…
These two are the ideal guests for this, the third episode in my podcast series exploring the current inflection point that’s seeing impact measurement and management frameworks harmonise and consolidate.
For investors, that means it’s now easier than ever to use impact principles when allocating capital.
My key takeaway this week…
“We can have information that’s useful for the businesses internally, but also information that’s used, and that’s the strategy piece.
If you’re just measuring it and not doing anything with it, you’re missing 80% of the point.”
Good Future’s Good Books
By Oliver Burkeman
So one of the ones that I just finished recently is called 4000 Weeks. The author was a columnist for one of the newspapers looking at all the productivity systems and started reflecting on the nature of our fixation with productivity. The thesis here is like, look, the average human lifespan is only 4,000 weeks. You can’t do everything, you should actually be relieved, to know that you can’t do everything, it’s okay, if you didn’t get it done. Focus on the things that actually are creating the things that are meaningful that when you think about the life you want to have led to things that make you feel more connected, the things that make you feel more purposeful, more of that and less of the busy work.
By Jonathon Porritt
Yeah, the other one was the about was a book by Jonathon Porritt is a very well credentialed author in the climate space when writing about environmental solutions and how we can look to solve. This latest one is called Hope in Hell, how we can confront the climate crisis and save the earth.
Please note, all book recommendations are directed to Booktopia, a local, Australian online bookseller, and if you choose to buy through that link you also support the podcast as we may receive an affiliate reward. Thanks in advance!
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Ben and Jody, great to have you on the show. Thank you for being with us today.
Lovely to be here, John. Thank you.
Thanks, John. Thanks for all your support.
Love it now. Look, Ben, I’ll start with you. Because talking about beehives, we spoke recently when you’re in Sydney and you told me about how well your bees were doing. And the hives were stacked with honey. And what I want to know is are there any similarities there with with how you run the Calera office? Is there a queen bee?
That’s a tough question. There’s probably a few Queen bees, which is actually not a bad metaphor because we operate quite a flat structure amongst all our senior investment people and impact people and finance people in the business so it’s an interesting analogy. We want to create opportunity we want to create wealth we want to create significant climate outcomes and we’re busy doing it so there’s a good there’s a good analogy for the for the worker bees and we’re all happy to be both so it’s actually quite relevant where you need a queen bee, we’re happy to step into that role and own what we do and lead from the front, and at the same time everybody rolls their sleeves up and get cracking on the mission.
And it’s sort of it is analogous to the mission that we’re on at Kilara, where we want to be providing solutions that assist our natural systems to regenerate and replenish. And albeit our core goal is around GHG emissions, they’re very interrelated concepts. And so if we can assist in any way we can for the planetary systems to be able to regenerate and start functioning at full capacity, again, like we try to do with the beehives, if we can do that at collateral, it’d be pretty happy.
Yeah, and tell me about the genesis of the firm. Why did you choose private equity fund to try and achieve those goals?
Well, the firm is an investment management business that was set up to try and achieve a broad range of outcomes when it comes to decarbonisation. And solving for some of the climate challenges we face.
One product that we can then put behind that is a private equity fund, there are other things we can do to achieve the climate goals we want to seek. The financial product or financial instrument that we use, at a high level, we’re agnostic about, because you can do lots of good things with debt, you can do lots of good things with equity, you can do lots of good things with development and building clean energy projects, which we do on the other side of our business.
And it’s about then, making sure we can scale as much capital into these products that we put into markets. So the vision and the aim of the firm, if you like, was to create investment product that enabled capital to flow, to then achieve these outcomes that we’re seeking both from a commercial point of view and an impact point of view.
And the first thing we did was some private equity syndicates and debt syndicates, which then led to the Kilara Growth Fund, which is our first flagship fund. We have other plans for what the next one might look like. As well as what, as I said earlier, is happening on the renewable energy development side of the business. And there’s probably a three year plan there. But beyond that, we could very well do other things to achieve the outcomes we’re seeking.
And rolling back to that mindset, when you did start the firm, what was your philosophy back then? Or what was your vision of impact investing. And I wonder if it’s changed since then, along with the industry.
I don’t think our vision and mission around impact has changed. It probably has evolved from where we were in terms of broadly speaking about climate outcomes to where we are now quite fully focused on three or four key metrics within the climate world or the Climate Solutions space.
We have chosen to hone-in on greenhouse gas emissions, which are then underpinned by certain other criteria and metrics, which Jody can touch on in a minute.
My view of impact investing, and has it changed and has the industry evolved, to that part of your question Look, no doubt it has, if we go back to sort of 2017 and 2018 when we started nurturing this business into reality. And obviously, prior, we found this, I think, a significant shift where two things have happened, one: People, investors have been more comfortable with labeling things as impact and then channeling funds into those opportunities.
We still, in relation to that concept, very strongly argue that impact is a lens, not an asset class. And we will keep talking about that, because it will take longer for people to I think, understand what that means. I don’t think it’s rocket science to understand what it means it’s just using that analogy or using that reference. Because you can have a green impact deal when it comes to commercial real estate, you can have a green or impact deal when it comes to private equity like we’re doing, you can have an impact deal with private credit, listed equities, even where you put your cash. So it’s important to think about it that way.
So going back to your question, I think it’s evolved from where we were when we started Kilara to now, in that people understand that concept a bit more.
And I think the second thing is, for us, we’ve seen an evolution in the way that decarbonisation and Net Zero commitments are being adhered to or are playing out. What I mean by that is, you can use impact as a proxy for decarbonisation, or vice versa. And therefore, there are easily identifiable concepts that investors can relate to, without necessarily having to label it, as such. I think that’s really important.
Where you talk to investors, and you use the words impact, or green investing, or sustainable investing, or social enterprise; they often get bundled together, put into a bucket where people say, well, that’s got to be a discounted return still, or I’m going to take that off my foundation allocation, rather than my pure commercial allocation from an investment point of view. And so we want to try and break down those barriers. So that’s also changed for the better for us, I think it’s a lot easier to describe to people, what we’re trying to do from a climate point of view, decarbonisation point of view, net zero point of view. We don’t have to say to people, you have to be into impact investing to do it anymore. I think that’s a really important evolution. I think as it relates to planet, there’s certainly been an evolution around what it means to invest for planetary outcomes.
So that’s, that’s a long way of saying, John, that yes, things have definitely evolved and are evolving for the better, life is becoming easier in describing what we do, and getting allocations from more mainstream investors into our product. So that’s probably where the proof lives.
And Jody, I will roll back and I will talk about your background, but but following on from Ben’s comments there. What do you think about wearing this label of impact today and how that’s changed in recent years?
I think impact has become a lot more mainstream, and there’s still quite a bit of confusion around it about whether it’s the same as ESG or what I often tell people is that ESG is retrospective. You look and you say Did we did we do harm, impact is about strategy. It’s about what do you want to do? And then you integrate, you integrate that into strategy so that you are delivering that it is a forward looking approach. But you don’t have to be interested in that component for it to be a good investment. You know, if I serve you a delicious meal, you can engage with it at that level. If you’re vegan, you can get excited about the fact that that meal happens to be vegan. But you don’t have to be a vegan to appreciate that. I think it’s a little bit the same in impact investing, particularly in the space that we’re working in, you know, climate, investing in a lower carbon future is just good sense.
Because if we’re not investing in a lower carbon future, we’ve got a lot of, we’ve got a lot of other problems. So investing in the kind of world you want to live in, if your goals are successful, I think puts a lot of momentum behind the kinds of things that we are currently investing in. So you’re welcome to do it, because you’re highly values aligned, you’re welcome to do it, because you are impact agnostic, but it’s a very solid investment with strong and credible market drivers.
And you’re welcome to do it because you are deep into the impact space and want to engage with the data want to engage with improvement want to be able to look across investment managers, and say, how do these investments stack up from an impact perspective, and from a financial perspective.
A lot of investors are not in the habit of thinking about what their money is doing in the world. But all investments have an impact. It’s just a question of whether you measure it or not, all investments in the world are having an impact. So what impact are your investments having in the world? Is your money acting in alignment with the values in the future that you want to see?
Yeah, I think that’s really important. And, Jody, I really appreciate you know, the depth of your thinking there and want to wind back to how you came to it, your head of impact there at Kilara. But previously, you were you were an academic in California. Tell me about how those two fields complement each other. And then this term, pracademic.
Haha, that’s one that I often use, to kind of explain where I positioned myself.
But it gives me an excuse to still be very nerdy about some things. I’m a sociologist by training, I did a PhD at Berkeley. My first professional things I was doing was actually squatting in the dirt, talking to farmers about natural resource conflicts. But the theme there was the same as it is now which is about making better use of information to tell evidence-lead stories that allow you to engage your stakeholders and have people understand within their own frame of reference, what you’re trying to do.
So to me, those are the same things, but I sort of spiraled into the finance system. I’ve been on all parts of the impact system. I’ve been with community organisations have worked with a lot of social enterprises. I’ve done quite a bit of most of my academic research is actually around things like sustainable business models, which is the term that we use for business models that create value for multiple stakeholders in a variety of financial and non financial forms. So how do we use enterprise as a force for good and how do we use capital as a force for good? I bring that back into what we’re doing? What we’re doing here.
I think a lot about systems change and the beauty is investors don’t need to understand systems change, they can engage with it if they want. But when you’re thinking about changing systems, you look for where the levers are for change, and you look for what is driving the force in the system. And so capital provides an enormous lever for change. Because we get to choose what investments our supporting, which is one of the reasons that, in addition to doing, to looking at things that are directly reducing significant sources of emissions, and protecting and enabling existing natural carbon sinks, we take a step back from that and look at the drivers, one of the things that’s a key driver of emissions is actually the material footprint of stuff, right? Everything, everything we consume, every good every service has a level of embodied energy. And the more embodied energy it has in it, the bigger the climate impact throughout the entire value chain.
So one of the major areas that we’re investing in is things that enable more end users, whether those are businesses, whether they’re consumers, to consume products and services that have lower embodied energy, because the multiplier on that is absolutely massive.
We have a big focus on scope one and two emissions in the measurement space, because those are the most easily measured, the things you have the most immediate control over in a business. But the fact is, most of the carbon impact that a business has, is in its value chain. Which means that somebody else’s measurement is what enables you to understand your own carbon footprint.
So a lot of the businesses that we’re looking at are things which enable their end users to understand that, and to make lower carbon choices. To make the kinds of choices that we will need in the future that we actually want to live in. Because I don’t want to live in a 2.7 C, temperature increase. That’s not a very nice future.
All right. And I think your academic career is similar to the way that we’ve had decades and decades of climate scientists running the numbers we have, we have this big, deep academic approach, but global emissions are still going up. And I think turning that those academic insights into investable opportunities to funding technology, that’s where the rubber hits the road.
And so let’s dig into the impact thesis and some of the details of how you guys are doing that at Kilara. What’s the specific change you’re making there?
So I think about our kind of theory of change involves three elements:
Directly reducing direct emission sources, and, enhancing and protecting natural carbon sinks. So every time we clear, every time we clear land to expand meat production, for instance, you know, this is one of the things that’s happening in the in the Amazon, that’s reducing the amount of natural carbon sink, that is basically how the Earth is a natural system absorbs carbon and puts it into other things.
So we are breaking down our ability, while we’re also putting out a bunch of emissions, we are breaking down our ability to take those emissions back. And that’s a bad feedback loop. So there’s that element.
But through the things we’re investing in, we want to change production norms, so that lower carbon goods and services are more normalised. And there’s a lot of forces doing that. So we’re kind of stepping into a thing that is going to happen anyway. And we want to make sure there’s good products and services in there.
And then the third thing is we want to move markets, right? We want to actually change the behaviour of end users, such that lower carbon goods and services are the normal thing that you reach for. And we’re seeing this from a variety of directions. But one of the challenges is that transition can be difficult for maybe for households or for small and growing businesses. Not everybody has a whole R&D department. So doing the things that makes That transition easy for end users has a huge multiplier because you get more people involved just through, you know, where they’re spending their money and what they’re consuming, more people involved in building that path to a lower carbon future. Just making climate smart choices, enabling climate smart choices.
And Ben digging into the investment approach, at Kilara and how you source deals and find them, obviously led by that impact thesis, but do you find you go out looking for the deals, and then that can shape the thesis? Or is it more, you set yourself some blinkers of these are the issues and we’re going to find companies that fit?
We set out guardrails on our mandate, that include various criteria around investment stage, and founders and levels of runway and cash flows and balance sheets and profitability, and all those all of those things.
And fairly mature, right, fairly mature,
The current fund is looking at fairly mature sort of late VC, or early growth, if you like companies that are not far away from profitability. So yes, if not early stage or seed stage investing by any means it’s filling a gap that we saw in the market here where small to mid cap style or type businesses need funding to grow rather than to prove up technology or, or startup technology or processes or manufacturing, or whatever the business is.
Our thesis around GHG emissions is quite broad in one sense, ie we will invest in businesses that ultimately achieve GHG emissions reduction outcomes. But it has to come from businesses that operate in one of four sectors, their sectors that we’re focused on where we’ve got experience in that we think we can drive significant profitability when we invest and then drive significant outcomes when it comes to the GHG piece. Those four sectors, we can talk about that we believe we making change, and we can get great deal flow in the energy transformation vertical, in carbon, environmental markets, in waste, and circular businesses that really focus on sort of packaging solutions for the most part, or even other products that come from sustainable resources. We’re looking at some interesting kind of seaweed to plastics businesses at the moment. And then food systems.
So we can look at all of these things across those sectors, and that’s where our specialisation comes in. So it’s really a quite traditional approach to VC or PE investing that we undertake, there’s no difference with us or any of the other VC firms out there or PA managers out there.
We do the same thing in terms of deal flow, the opportunity set for us is not limited in any way, shape, or form based on what we’ve said, we’ve got those four sectors and others having to rapidly transform and decarbonize whether we like it or not, or believe it or not, it has to happen.
Very good, and, and Jody, going from the investment approach to the impact measurement and management approach. That’s really the core of what this podcast series is about. And you’re really keen to hear about the Kilara approach to IMM, and how it’s evolved.
We use standard tools that are broadly in use in the market, things like the IRIS+ taxonomy, the norms developed through the great work of the Impact Management Project. The nice thing about a taxonomy like Iris+ is it’s aligning with all of the other things that people are thinking about from a measurement and disclosure point of view. So this is information that a lot of businesses either have already needed, or will need going forward. Because as far as I’m concerned, impact information is just performance information. And so helping businesses understand that make better use of the information that they have, and make sure that that information is integrated into strategy formation in a timely fashion. You wouldn’t look at your balance sheet three years later and wonder whether or not you had money. This is ridiculous.
So we all have the capacity to think about this information. Earlier in the evolution of thinking about impact, sustainability sat in the marketing department. Right. So it was something that was used mainly for external communication to make people feel good. That information wasn’t integrated into strategy. And I think going forward, this is something that businesses across the board are going to need to do.
The demand is there, the regulations are coming into place that are causing that. But there’s pretty limited capacity. And this is one of the ways in which we work with our investees is actually just developing that capacity to make better use of information and be an evidence lead business. So that you can be strategic, evidence lead, impactful, right, so you’re doing things that actually matter, and then look at doing those things effectively. Because it’s really easy to focus on doing things that don’t matter really well. And then what you’re doing, still doesn’t matter.
And, you know, when Ben was talking about the verticals, part of that is limited by or or shaped by the capacities and and experience that our team has. We look at the evidence, and these are actually the six most significant drivers that we could tackle, in terms of where we need to make change. So we look at the evidence, pick things which are big and meaty, decide which of those our particular team has the right shape for that problem, and then go hard on those, rather than, you know, just picking anything that seems slightly impactful. And doing that, because then you can just have lots of little, like that’s nice, but it doesn’t actually make much difference, but people feel good about it. And that’s kind of a distraction. And really, in the face of climate change. We don’t have time for that.
And tell me about how much work you have to do with your portfolio companies to help them build the capacity to pull together high quality data. What stage of that and how much work do you have to do?
And from your perspective, head of impact, looking after this flow of information, pulling it together into a suite of impact framework so that you can then report on to your stakeholders how, tell me about that evolution of those systems.
In the past, we’ve heard a lot about the alphabet soup of frameworks that lots of different groups are using lots of different systems, and it can be quite overwhelming. And as you said at the beginning, there, you’ve found a set that you think of being broadly used. And I think, right now we’re at a moment where there does seem to be some consistency in that, do you think we’ve evolved to that point?
In the last five years, and this is why organisations like the impact management project (IMP) were convened as a field building exercise, there’s been a big convergence, to move away from this tower of Babel that was being built. Your proprietary framework is not a secret sauce, it’s a hindrance. Because when we’re speaking the same language, in the same way that we speak at accounting frameworks, and it’s really great that we got the standard setters and the accountants involved, so that we could actually have information that is, it’s credible, it’s balanced, it’s material, you can deliver it in ways that are comparable, so that people who are using that information, whether we’re using it internally, whether businesses are using it internally, for management, investors are using it to choose between investments.
That information is in a standard in a somewhat standardised form, there’s always going to be a trade off between what’s material for a given company, like, oh, actually, we need this, we’ve got five business lines, and we really need to calculate that across all five. Okay, cool. But let’s roll that up. It’s calculated at that level, roll it up. So the goal at any level is having decision worthy information.
So, can we have information that’s useful for the businesses internally, and not just useful, but is used and that’s the integration strategy piece. If you’re just measuring it and not doing anything with it, you’re missing 80% of the point. But they also can be aggregated in their standard ways of aggregating it, so that people who are using that information further down the impact chain, whether that’s a fund manager, whether that’s a fund of funds, that information maintains integrity, and people know what they’re seeing. And that also sets us up for one of the other things that’s happening in the field, which is a move toward verification, sort of third party auditing the kind of work that people like Blue Mark are driving. And that’s, from the accountants’ point of view, that’s kind of the gold standard.
I think for me I’m seeing in the field a bit of a bit of a catch 22, which is that there’s around verification, which is that there’s a demand for it because we will look at financial information of course it’s been audited. But there’s demand for it at the aggregate level, but nobody seems to care that much just yet, at least in the local private equity space, about having it at the lower level.
So, as with any market, when there is increased demand, when the institutional investors, for instance, start saying, we’re only going to play if this is verified, then you’ll have more managers verifying,
but that’s, we’ve had we’ve been doing double entry bookkeeping, for what 400 years? Nope, 600 years like we’ve had a good head start on the financial side. In the climate side, we have had 30 years of, really trying to take get an understanding, arguably, people measuring that for over 100 years.
But we are able to build on what we’ve learned in other parts of accounting, to understand what good information looks like, and how to use it effectively. So with every iteration, we are getting, I think, better at that, because we don’t have to do it from first principles. We’re able to build on what we already know. And that’s how this part of how this convergence has been really important, is there’s no point having everybody around the world trying to solve the same problem on their own, that’s just inefficient and ineffective.
And Ben taking that further, you’ve set impact performance goals, and you’re standing behind it by linking fund returns to that impact performance. So tell us about the hurdles you’ve set yourself.
Yeah, so we’ve set out a system whereby we were assessing where each of the companies are at from a baseline point of view. And that takes some time, some of the companies in the fund have only been in there a little while. So our first crack at this was just the financial year gone by so it’s actually longer than just going by it’s almost halfway through. And we assessed at a baseline level what these companies were doing, from a number of different points of view: particularly around carbon CO2e, so carbon dioxide equivalent, mitigation.
We looked at megawatt hours of renewable energy, we looked at kilogrammes of plastics avoided for motions and a range of other things that were drawn from the IRIS+ metrics.
And what we said to ourselves are we going to set on an end on a rolling basis targets that are meaningful, and that are somewhat stretch, in order to achieve the performance that we want, from a from an impact point of view.
So we’re setting those targets as we get appropriate baselines for each of the companies and then rolling that up to a fund level performance target. That’s relatively new, to do something like that, it’s also relatively uncommon to then link that to your standard performance fee entitlements, as a manager, which we’ve done. If we don’t achieve a certain threshold of our impact target, we don’t get paid our full financial carry as a manager. And we’ve sort of scaled that down to various thresholds such that if we don’t achieve 40 to 60 or 80% of our impact targets that influences our financial character we get.
One of the key things where we’re now that that’s emerged, and that we’ve now committed to, is to try to achieve double the outcomes that are set by the Paris agreement in terms of GHG emissions mitigation year on year. In order to get to 1.5 degree world, if you back solve that to how many emissions reductions you need, or how much emissions reductions you need. On a year on year rolling basis, it’s about 7.5%. So across the economy, we need to effectively mitigate 7.5 percent year on year from a CO2e point of view. We’ve said, okay, well, we want to set a stretchier target than that we’re going to aim for 15% year on year mitigation outcome for our fund. That’s double Paris, and if we get there, across our economy, we’ll get to hopefully, either a 1.5 degree world in time, or slightly lower than that, that would be fantastic. So we’re trying to set a model and a benchmark for others to follow. And we’re putting our money where our mouth is or our impact where our mouth is by linking that to our return hurdles.
That’s the bigger, more global goal. When I say global, the Kilara Global goal of 15% year on year. There are and maybe some others that we set as we go through the next six months, and therefore can look back at where those companies are at and what they’re able to achieve because you’ve got to set targets so you can achieve financially and then you’ve got to set realistic targets that you can achieve from non-financial metrics. So again, it comes back to that same premise, we’re not reinventing the wheel here on what we do. Talking about just putting other data and assessing other externalities as part of our process, something that can be done because you can quantify some of these externalities, you can quantify how many tonnes of carbon it takes to do A, B, C, D, or E, you can quantify how many kilogrammes of plastic going into the ocean and try and stop it. And you can quantify how many hours of clean energy you’re generating or enabling amongst a whole range of other metrics. So that’s really important for us, we want quantifiable climate related outcomes that we can track. And then we’re just applying the same version of Assessment and Reporting across that that we do for your traditional financial metrics.
I think that’s really important, this idea of quantifiable metrics, and a very capitalist approach, a very, very clear financial incentive to drive that impact. But of course, in finance, it comes down to the dollars and cents and the decimal point moving. has it taken a while to get to a quantifiable metric that you’re willing? You know, that can’t be massaged, or, or did you feel that that? I mean, I assume the fact that you’ve done it now you are comfortable with with that data? Has that evolved? And yeah, where did the data points come from?
Yeah, it’s definitely evolved. And it’s not it’s not necessarily simple. In the first instance. The the framework is relatively straightforward is what I’m getting at, then to pull it all in. And then to start to assess which of those metrics are relevant for what we do in private equity investing, or venture investing is not as straightforward because you’ve got a number of different things that you could talk to when it comes to comparing returns.
So when we’re talking about comparing returns, financial returns, we know what they are with their set parameters and protocols that investors will look at. And they want to assess where they’re going to invest with you. What’s your track record on delivering IRR? What’s your track record of delivering cash yield, what’s your track record and delivering multiples on your money? All very commonly known, and if you’ve got a good enough track record, people might back you and trust that you’re gonna achieve those financial returns.
Where we’re at now in the space around quantifiable climate outcomes, and measuring them and again, getting the same types of ubiquitous metrics that people can look at. So let’s take three IRR, money multiple and cash distributions. And say what are the most relevant three from a climate point of view? We started to hone in on that.
So we’re talking about things like what is your carbon intensity per dollar of equity invested? What is your carbon intensity per dollar of revenue generated from those portfolio companies. And then you start to get a level or a measure or a gauge of carbon intensity of your investment. From an equity point of view or revenue point of view, then you can start to, if you like, normalise what those metrics look like across different businesses. Ie, standardised what is an IRR; IRR is a calculation of the return that you’re getting time value of money is included in that and you can figure out how you calculate that there’s a formula for that over time, and there’s your number.
The same thing applies not from a time based time value of money point of view. But the same thing applies if you’re able to get the data in. Because you know how much CO2 You’ve offset, you know how much your revenues are, that’s pretty simple.
You know how much money you’ve put in there. So the formula is simple. So I’m getting back to the formula is really simple. Because you can measure carbon, you can measure how many dollars you put in, getting the data from the companies is not so simple. Landing on which are the relevant metrics that can be applied across the sector is not so simple. But we’re having a go at it. And we think we’re getting close. And we’re seeing actually others out there starting to talk about that.
What is your CO2e intensity per dollar of revenue, or CO2e intensity per dollar of equity or CO2e density per point of IRR. There’s another interesting one, and then you really start to measure them together. We’re getting there. And I think, next year’s report, which will be the second annual report for the fund and Impact Report will start to bring those together. So okay, we’ve started to get a bit of a trajectory here. And then we’ll reassess, John, whether we think that the right metrics, we might change some of the things we look at. We’ll get feedback from others and hopefully by that sort of three or so, we’re out there with the others. And even as if Jodi said earlier, even out there with the banks and the ratings agencies and the other really important stakeholders, you’re talking to them about this. And maybe we can contribute to some form of taxonomy or global standard that sits there and gets rolled out over the coming generations.
And Jody, Ben mentioned there, the impact report, you’ve released the inaugural report a few months ago. And with this broad suite of metrics, it all comes down to can you make comparisons with peers, and maybe even a global benchmark? You used the COMPASS model from GIIN, can you tell us about that process?
So one of the fantastic things that the Global Impact Investing Network has done is they’ve convened large stakeholder groups of people to work on specific problems. Right. So one of the things that they’ve developed, I think they only released that in early 2021 was, what is the methodology that we would use to compare impact? How would we normalise that because if someone’s looking at investments, they don’t have to know the formula for IRR, they have a general idea of what IIR means, and everybody’s putting it up there. And you can just compare A, B and C.
And so right now the field is still settling on what’s, what’s meaningful, and what’s agreed. And so that’s been a really important move in that space.
However, there’s also an education piece as norms change. And if you roll back five years, people weren’t talking about CO2e. Because we had to educate the market what that meant. Well what do you mean, I can’t compare nitrous oxide with carbon dioxide, and people like me said, well, actually, that is a scientific problem, we can give you a formula for that. And now that’s fairly normalised. And now we’re working on getting that way in, in comparing different forms of impact in the same way. That’s one of the things I was doing in the impact report.
The interesting thing about the impact report, given that I am where we welcome impact agnostic investors and people who just want to make green investment and not deal with the data too much, and people who want to go really deep in the data, is that we recognised you might put out a 40 page report, and most people are going to they might read the commentary at the beginning, look at the first two pages, and then not like flip through it and say, Oh, that looks that looks okay, that looks rigorous. And that’s absolutely fine. But wanted to go deep in that information for the people who are on that journey and show that it’s possible, show that if you want to go down that path, you can go down that path with us. And also to put a bit of a stake in the market on what I think we should be doing from a best practice perspective. It’s a bit risky. And some times there’s a first mover disadvantage. But I’m pro transparency in general, there’s lots of problems in the world to go around. So I don’t have to be greedy and say that I’m the only one, and I’m going to keep to myself exactly how I’m going to try and to address climate change. I want everyone to have better data, and to be able to look transparently at what’s working. And I want them to come to us because they can see that what we’re doing is working.
As you say, You guys are at the vanguard, you’re working with the global evolution of the industry. And there are benchmarks that have a certain metric. And I imagine you then have the data base that you can work with. What do you hope in the next in the short term, I guess, in the next few years, for the next report, report in two years time, what do you really hope to be able to compare your performance to, what would make your job easier in building that model?
So one of the things that we do on the financial side is, of course, there’s benchmarks, there’s benchmarks for everything. And the way you develop benchmarks is you have a lot of data. And so you have enough diversity within the data that you can carve it into tiny boxes with similar characteristics. This is how we compare things.
There is more demand for impact data than there has been willingness to supply because people either don’t know how to do it, or they’re uncomfortable about putting their numbers out there. They don’t know if they’re good enough. So the GIIN has actually convened a process around a few things using the COMPASS method, in particular domain areas to say, let’s get a bunch of investors who are doing this to actually put their data together. And we will build a proto benchmark.
So that’s what they’re working toward is, can we get enough data? Can we understand well enough, what is both material but also possible and widespread? Not everybody is going to have a Rolls Royce solution. So we might need to have the most general kinds of data that we’re actually benchmarking, and then have things that sit underneath that.
So right now, I was grateful that last year, they published the GIIN, published one of the first reports, I think it was probably the fourth report out of that series, which is on other climate change mitigation investments. So we have a little bit of a benchmark, it’s the best thing we have in the market currently, on what other people doing exactly this thing and measuring exactly the same thing, are actually achieving. And we can break it down by whether it’s a private equity instrument or a debt instrument, or it’s in an emerging market or a developed market. And relative to the other private equity investments, we’re doing very well. And we feel really good about that. And we highlighted that in our report.
And people do that all the time when in benchmarks, and it’s just taken for granted in the financial information is taken for granted that you have a benchmark, and you say, this is how we performed. And in fact, you might set your targets relative to a benchmark, any of your super funds will say this is this is what we’re planning to achieve. Without that information in the market, we have to be the ones that create that information and put it into the market.
That’s right. And I think that’s taken for granted that in other industries, this data, and these baselines are all there. And they have long histories, right, as you said, hundreds of years in financial accounting, but we’re very much at the early nascent stages of this. And that’s really, the point here is to dig in to where the space is going and the fact that you’re there working hard to find, the scerics of data you can and work with it, and that that’s the seed that that will then grow going forward.
But look, Ben we’re running out of time here, but let’s talk about your particular approach at the moment companies you’re interested in for the private equity fund, you’ve invested in four companies so far, you have a bit of dry powder there. What are some big opportunities that are on the horizon that you’re looking at that are getting you excited?
Yeah, there’s one in the seaweed-to-plastics space, which is super exciting. There’s quite a few technologies around it processes around which have enabled the creation of certain materials, with the use of seaweed. This one in particular is taking things another step beyond that, which is which is super exciting. There’s some great technology that sits behind that one. And the problem that the solution is aiming to resolve is enormous when it comes to Virgin plastics.
As we know it’s almost indescribable, the plastic waste problem that we have globally, and there are enormous amount of top down pressures to resolve that again goes back to the original positioning, this is not about trying to seek out green or impact deals. This is about trying to scale opportunities for which there are societal issues that need to be resolved. And where there are fundamental top down pressures that have been brought to bear. It’s a market shift. It’s a market change where are the opportunities, this happens every time there’s a shift in markets, this happens every time there’s a shift in approach to investing through tech bubbles, through financial bubbles through tech 2.0. And clean tech, there’s always been these big changes in the way that markets have worked, that will continue, we’re responding to it and trying to solve problems there.
So. So again, it just comes back to that point about trying to solve big problems.
The other one that’s also exciting is in the sequestration space, where we need to enable continual improvements to our carbon sinks around the world. How do we do that planting trees is one way of doing it. We’ve seen some pretty amazing new papers and technology, Australian technology and hardware that might facilitate the rapid deployment of significant numbers of seedlings to then grow into going into bigger trees that are either endemic or native or suited to the environment that they’re going into. So that’s very important for us no point just going in planting mono-crops or mono-cultured trees or any other crops where you need to promote biodiversity.
So these guys have sorted out a version where they do a lot of work around what’s native to the area or what’s going to improve biodiversity and degraded areas in particular. So the application there could be for mine sites could be for corporates wanting to plant trees, it could be for major government initiatives along highways, all sorts of things where we need to promote increased biodiversity, increased sequestration, increased green amenity. There’s a whole range of things that they’re excited about, though. So there’s two that are super exciting. And we’re seeing lots of deals coming into the pipeline, and we’re excited about that to the opportunity sets pretty large.
And Jody, last word, your, what’s your view there on exciting technologies and opportunities, you’re, you’re part of the same beehive? You know, you’re probably all aligned with that hive mind. But, yeah, anything?
Well, just to just to speak about the exact same same things that we were looking at there the, for me from a, from a systems from a systems level, and from a kind of problem focus, the challenge in in the Getting trees in the ground. Problem was when you look at the sheer scale of what needs to happen, particularly, you know, that’s before we even burn down half the rain forest, like we did in 2019 or 2020, I suppose. But the you know, as fire seasons get worse, we need to get a lot more trees in the ground than we can like, we literally can’t do it fast enough with people in shuffles. Right, you got to take people to places that those places may be dangerous, they may be good, because they’ve just had a fire, like you literally can’t solve that problem fast enough. So anything that allows for a replacement of something that we already have a strong drive to do, that allows us to do it faster, more cheaply, more sustainably, is of huge interest. You know, on the on the plastic side, you know, one of the one of the you know, the kind of holy grail for some of these things, or any kind of low carbon technologies is, can we have a drop in solution that allows people to simply, you know, take out something that’s really problematic and drop in something else without having too many other uptake challenges so that the users of those technologies don’t have to have don’t have to do a whole retooling because that’s where a lot of the resistance is, because then it’s adding expense to them. And so they Oh, yeah, sustainability, it’s expensive, doesn’t have to be expensive.
So the exact example there is where you say, instead of having virgin plastic pellets go into a moulding or extrusion machine that exists all over the world at scale. You just drop in a different type of pellet, don’t change the machine. And you’ve got this completely enhanced solution. Without virgin, plastics, completely renewable resource. It’s then biodegradable that comes out the other side. To Jody’s point, you’re not retooling. You’re not changing the manufacturing process. There’s no capital expenditure you just take away that virgin rubbish and put it in is lovely seaweed product.
It’s something that’s got a tight problem solution fit for all for all the stakeholders involved, and that’s like that’s the sweet spot.
Amazing. Then we
apply apply, you know, money and love and help that grow. Just scale that impact as we’re scaling that business.
Not a bad not a bad spot to end on that roundabout was John the honey turning into the sweet spot.
Money and love
money and love and eat love and sweet sweetness.
That’s all you need. That’s all you need? Well, look, yeah, let’s leave it there. But what I do want to give my listeners is a book recommendation from you guys. Something that has informed your work, or maybe even just something that’s on the bedside table.
So one that I’m almost through is atomic habits. Most people, a lot of people would have heard about atomic habits, it’s a great book. There’s another one, which I’m going to quickly look at my phone to ascertain what it is, it’s a book that I’ll tell you about when Jodi tells you hers.
So one of the ones that I just finished recently, is called 4000 Weeks. So the author whose name is currently vanished from my mind, so I’ll just keep going, was a columnist for one of the newspapers looking at all the productivity systems and started thinking about the reflecting on the nature of our fixation with productivity. And, you know, the thesis here is like, look, we’ve only got the average human lifespan is 4000 weeks. You can’t do everything, you should actually be relieved, to know that you can’t do everything, it’s okay, if you didn’t get it done. Focus on the things that actually are creating the things that are meaningful that when you think about the life you want to have led to things that make you feel more connected, the things that make you feel more purposeful, more of that and less of the busy work. And that actually like underpins a lot of my a lot of my career is you know, how do I do things which are more materially meaningful, rather than just turning the crank on things?
Yeah, the other one was the about was a book by Jonathon Porritt is a very well credentialed author in the climate space when writing about environmental solutions and how we can how we can look to solver for while this latest one from him is called Hope in Hell. How we can confront the climate crisis and save the earth. So we want to borrow that I do have a hope in hell, I haven’t started reading it.
are very good, great tips there. And thanks for all the insights today. I think there’s some really practical stuff there going forward and, and puzzling how this impact space is growing. And that’s all pretty exciting. Honey, money and love, love it.
Good luck. Thanks a lot, John.
Always a pleasure.