The $120 Trillion Repricing: 4 Investors on the Carbon Bubble, Stranded Assets & Real Returns | (#142)

Up next on the SRI 360 podcast. Of all the places in the world to think about being the vegetable capital of the world, Holland would not be one of them. And it is literally a powerhouse. Agriculture in India is not going to be viable.

It's going to be too hot to farm. We have to invest in adaptation and resilience. So it really creates this optimization problem where we can manage forests for sustainable harvesting of timber as well as climate mitigation outcomes as well. It's a new revenue stream.

Far more fossil fuels are owned in public markets than we can possibly use. Unlike the potential of your investors to improve the world and make high performance return. Welcome to Sustainable and Responsible Investing 360. My name is Scott Arnell, and each week I sit down with a world-class investor to uncover their secrets of profitable ESP, impact, and socially responsible investing.

Find out more at SRI360.com. There's a kind of money that doesn't chase stocks or startups. It buys the physical world.

Things like farmland, forests, greenhouses, the actual ground your food grows in. Those are referred to as real assets. And right now that money is moving fast. Today's episode follows it.

Four investors, four different conversations, one question underneath all of them. Where is real asset money going in food and land and why? We start inside the greenhouse. Dave Chen of Equilibrium makes the case that you can unhook farming from geography altogether and points to the strangest proof there is, and that is the Netherlands, a small, dark, rainy country that somehow became one of the biggest agricultural powerhouses on earth.

Then we move to the forest. Radakupali, who was at New Forests when I spoke with her, and she tells us why big institutions have quietly loved timber for decades. And that's because trees grow no matter what the economy does. And they also like how carbon finance turns that same forest into a second income stream.

Then we move to the frontier markets where Mark Khan of Omnivore is investing in India. And he talks about what he calls the unglamorous side of climate investing, which is climate adaptation over mitigation. And it's where the returns actually are, and in a country that may soon be too hot to farm. And then we close on what to walk away from.

Mark Canfinelli and the terrifying math of stranded assets. And he tells us why the world's fossil fuel companies own far more carbon than we can ever safely burn, and what happens when the market finally notices. Three conversations about what to buy, one about what to leave behind. And now let's kick it off with Dave Chen of Equilibrium, who's running greenhouses like data centers and completely unhooking food production from geography and climate altogether.

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It helps this channel more than you know. Thank you and enjoy this episode. Another thing I've seen you say is that your investor operators. Does that mean you're like a data center company where you build these greenhouses and then you operate them and then lease them out to agricultural operators?

Or are you actually operating them on the network? It depends. So in our agricultural capital platform, because of the time frame when we created that strategy, we did not believe that there was enough expertise out there in high-scale implementation of sustainability-driven strategies. We actually took a complete vertically integrated strategy in that fund where we were, in fact, literally the farm team as well as the owner of the farm, as well as the owner of the midstream assets.

In our renewable natural gas, wastewater energy portfolios, because we entered at a time when the industry was relatively nascent. We took on probably at the time more development, project development responsibility than we would have actually wanted to, but it was necessary at that stage of the industry. And then to date, we have continued to employ or to outsource, but to manage the outsourcing of the OM, the management of those facilities that produce renewable natural gas.

So these are $50 million, $80 million assets that we're talking about here. And so when we talk about being an investor operator, it means that we always have enough expertise on our team and enough focus on these asset types that if we need to, we're capable of going in and actually operating those assets. In the greenhouse space, we are now, I think, at this stage of the game and at that sector in North America, among the largest owners of greenhouses in North America. And I would say that on our team is the depth of expertise driven by the fact that we've hired with that in mind a set of expertises that are necessary to step in if necessary.

But in all cases, even if we're not stepping in, uh we have the expertise to understand the economics of the industry, the economics of the operation, to be a partner to the best greenhouse companies and operators in North America. So your returns then are a combination of operating income and then your exits. Correct. Correct.

That's quite different, I think. If I use a real estate analogy, and you're well aware of real estate, you have value add funds, but the vast majority of the real estate capital is in core and core plus funds. If you look at the entirety of the Timo industry, timber, almost all of it is targeted at income producing. If you look at the entirety of historic agriculture and how different we are from historic agriculture, almost all historic agriculture investing, other than pure private equity, but land investing has amounted to three phrases.

Land, God ain't making any more of it. We have aging farmers, so we have a buying opportunity. And three, the Chinese middle class is consuming better food. And so it's always been an income-producing, land-based, land rental, land lease income-producing strategy.

It's all these smart high-tech greenhouse buildings. Correct. Primarily that, yeah. It's like two billion, I think you said.

It is exclusively in high-tech controlled environment. Environment greenhouses. The crops that are grown in those greenhouses, what does it span in terms of the crops that you're targeting for that? There are three broad categories of crops that are currently contemplated or exist in greenhouses.

One is what are known as vine crops, and those are generally tomatoes, cucumbers, and the peppers. But they include also other vegetables like green and eggplants. And that is the most mature category of greenhouse-grown crops that traces its history back to the Dutch and the Dutch powerhouses of greenhouses. The second category, and it's much more nascent, is what is broadly called leafy greens, which would include lettuces, spinaches, and then the incredibly nascent field of Asian vegetables.

Asian vegetables are very important, but because we're Western centric, we forget that there's four billion people on the other side of the planet that actually have a very high vegetable-oriented diet. So you're primarily focused on North America. For now, because this is where we live and this is where our expertise is. But I would not be surprised if you saw us enter into Southeast Asia over the course of the next 12 months.

And I would not be surprised if you saw us enter into Northern Europe in the course of the next 12 months. We live part of the time in Amsterdam, and I've seen greenhouses there. Is there anybody doing the same thing you're doing there with the same technology, or are you unique in that? The wellspring of knowledge in this area is Holland.

I somehow had the idea that you were unique in this approach. Are we unique as an investment manager in targeting this sector? Yes, we were the first. Are we the fountain of technology for this area?

No. That would be Hubris. The fountain of knowledge for this area centers in Holland, and to some secondary extent Israel. And that is where the systems, the technology, the expertise, the computing systems, climate management, water management, even the bio systems that occupy that, and including the genetics.

Much of that centers in those two locales. I presume you're not taking technology risks. And then what about technology obsolescence? I've seen a presentation you've made.

I might not have the numbers right, but I think you were talking about historically, you look at an acre of land, our agricultural land valued at 40,000, and now with all the technology, it's two and a half million or something in the US, I think. Most of that is technology, then there's technology obsolescence, is that correct. That is correct. In the same way that that a data center owner, the landlord, has to maintain a constant evolution of the underlying infrastructure of the data center, or else they have an old data center, honestly, might suffer from the fact that they have an inefficient data center or a non-cost competitive data center for the same reason that those assets need to be kept up to speed, up to technology, on life cycles.

The same way that if you look at the way you underwrite uh solar and large-scale wind fleets, you build into it that every 10 years or every seven years you're upgrading this system or that system. The windmill blade may have a useful life of 20 years, 25 years, but the gearbox is changing. Software management system is changing. And in way that any of these technologically dependent, long-lived assets have to be maintained and upgraded.

We do the same thing in our underwriting and the management of our assets. You've talked a lot about inflection points. You mentioned Asia now, but do you see other inflection points, or how do you incorporate your inflection points in your strategy? I think in two ways.

One is it allows us to ask the question if we don't want to take technology risk, and we're in these food systems, which are no matter how you dress it up, it's still a commodity. So I don't care how much technology you put into a salmon, uh, it's still a salmon. We forget that Elon Musk only sold, I don't know what it was, a thousand roadsters. And it wasn't until the Model Three and the Model X where you see mass consumption.

We're in the commodity business. And so you have to hit price point and you have to hit cost points. And so the S-curve analysis is critically important for us because it's about when is a sector or a technology S at the flat part of its development curve, in other words, it's not competitive, but you have to watch it because it will become competitive. When does it hit competitiveness?

And so we apply that very simple logic to, for example, aquaculture RAS systems. We apply that very simple concept to things like vertical farms. We're agnostic. We're just trying to figure out when these things hit the curve because we're real assets investors, not venture capitalists.

You've referred to distributed abundance. In the long term, you're unlinking or unhooking geography and climate from where things can be grown. What's the long-term impact that you think that's going to change? So when I talk about distributed abundance, the same reason that Saudi Arabia is a country with a border that happens to sit over a massive pool of dead dinosaurs, they won the country lottery.

The reason the United States became a superpower in the 1800s and 1900s is because we had the Mississippi Valley that had a river across one of the most fertile places in the world that was huge and had access to a transportation network. We won the climate and geography lottery. Wasn't anything we did. Now, when climate change starts taking place and weather is the number one predictor of quality and quantity, and if you actually believe your own, as I said, bullshit about climate change, then the lottery ticket changed.

The second thing is resiliency, and COVID gave resiliency a face. Resiliency was a fun word to say on panels because it made you look smart. COVID actually made it visceral. And so now we have, geez, if I can DIY climate, uh controlled environment agriculture, if I can distribute that away from the land and away from the climate to anywhere, right?

One of the biggest build-outs of greenhouses in the last decade was Russia. It's really hard to grow a tomato, okay, when most of your year is cold and dark. So one of the largest build-outs of glasshouse infrastructure in the last decade was Russia. So that's the ultimate in DIY and BYO.

Bring your own, do it yourself. How does that change the economics of the places that were heretofore the centers for that production? You sort of have to appreciate the absurdity of that situation, right? You know, there's a little bit of exaggeration, but the National Geographic article wasn't that far off.

I mean, the Dutch, of all the places in the world to think about being the vegetable capital of the world, Holland would not be one of them. It's dark a lot, it rains a lot. Okay, it's not a big country, and it is literally a powerhouse. One of the things that we do in our shop is we always look at something that we used to use as an expression at McKinsey: the existence proof.

Does it exist? You can argue all you want about absurdity, but does it exist? And the existence proof of grow the abundance in a distributed way in places where it frankly would be absurd is Holland. And then the Israelis.

It's not an exaggeration. You're living in a desert. There isn't that much water. It's absurd that this would be the place that you would actually grow vegetables and fruits.

It wouldn't be the ideal place if you had to select the world. That's the built version of the real asset story. Glass, steel, and technology you keep replacing. Next up is the opposite kind of real assets, one that grows in value all on its own, just sitting there.

Radha Kapali was for years an executive at New Forest, and we will hear why timber has lived quietly in institutional portfolios for decades and what carbon finance is adding to it now. So maybe some basics first, stepping back. Could you explain to me what's the traditional role of forestry in investor portfolios and the traditional attraction of the asset class? And then maybe you could go on to say what are the non-financial attractions, perhaps on the social and environmental side.

Yeah, so the traditional attractions are some of the things I was talking about before. Forestry has tended to have a low volatility of returns attributable to the underlying biological growth. Forestry is a depreciating asset. So as it gets bigger through biological growth, then actually grows in value.

So that's one reason there's historically been low volatility of returns. It tends to be positively correlated with inflation. And again, I think that's tied to the fact that timber demand is correlated with GDP growth. Those have been kind of the underlying characteristics.

It's a good diversifier. Also, this is not one timber market. You can get exposure to pulp and paper markets, construction markets or housing, increasingly the visibility for it's a truly now international asset class as well. It started in the US, but it's globalized.

So it's a good diversifier. So those are kind of the core reasons. And so for most of our institutional investors, timber is sitting in their real assets or natural resources portfolio. Sustainability, if you had asked our clients like 10 years ago, why are you investing in timber?

Those reasons I just mentioned, those were always the top one and top two. So the multitude of returns, correlation with inflation, that was the top two reasons. But the third reason, even 10 years ago, was sustainability. Investors just saw here that you could manage assets with good stewardship.

You could be investing in assets that had third-party certification. There's just this view that managed forestry assets were a nice thing from a sustainability perspective. And for our European clients, that was particularly important given the interest of their stakeholders and their pensioners and their members. The thing that has really accelerated in the past 24 months has actually been the sustainability piece of it.

Forestry is increasingly viewed by institutional investors, particularly those who are members of the Net Zero S owners Alliance or those who are taking on decarbonization targets. They're now looking for investments in climate solutions. And forestry is one sleeve of that. So they are looking at how do I invest in forests as a way to decarbonize my portfolio?

And what would that mean? How do you have to manage a forest in order to be climate positive? And so that could be everything from the kinds of strategies and the way you're managing assets to the inclusion of carbon finance and carbon credits in the underlying product and the strategy for that forest. Also, like the bioeconomy piece.

How can forests contribute to new industries around mass timber and then replacing fossil fuel-based products? So I think that's been a really significant shift. And increasingly, some investors are interested in emerging markets. We've had interest in Southeast Asia from institutional clients in a way that we haven't had before because they also view that not only climate, but also the sustainable development goals, there's a real theory of change there in terms of investing in emerging markets forestry.

And they have to get their heads around the risk return profile. I think that's the challenge. But one of the unique things that we have is a track record. Is there substantially increased demand in the last 24 months?

There's always demand for those heavy, mature cash-yielding assets. There was an asset that just went for sale. One timber manager was selling it. It was end of fund life.

This was an asset in South Australia. And we were bidding as well as some other investors. And it was very hotly contested. And in fact, AXA, investment management AXA IM, bought that asset for over $700 million obviously of what we were bidding for it.

And because I think that what they said was that they were viewing that it's a part of a sustainable forestry climate solutions kind of portfolio. And this is their first investment in forestry. There's always demand for these heavy assets, but the new thing is new demand in the markets that were already attractive. You're seeing new entrants, like the X's of the world.

And then in the more niche strategies like our Asia strategy or in the US for managing forests for timber and carbon, we're seeing investors raise their hands and say that they're interested in a way that they haven't before. And then there's a whole new set of investors coming to the table as well. So we have corporate investors who've taken on net zero targets, who are now looking at investing in the underlying real asset because they want to essentially get exposure to the climate benefits.

So yes, I would say that there's increasing demand in a variety of ways. I guess I'm trying to get my arms around is it increased investor demand because of increased global focus or interest on growing trees, or is it increased demand for emerging income streams resulting from what's happening in the marketplace? I think it's both. Selling wood products, you got Amazon Prime shipping boxes everywhere, you've got cross-laminated timber.

Displacing steel and construction of high-rise buildings. I think it's both, Scott. Timber has had some poor performance in the U.S.

If you look at the what's called the Nikrieef index, there has been some poor performing US assets. But I think that's on account of the fact that you've had some managers who have bought high and sold low at the end of 10 years. Because the underlying fundamentals of timber and the underlying fundamentals of the forestry asset class are very sound. So a lot of this just comes down to like, did you buy it for the right price at the right time?

And so I think there have been some, particularly US institutional investors who got turned off of the asset class because of some of the poor returns. But I think for those investors who like forestry, those market fundamentals are always there. And that's a core source of comfort. And I think now there's this view that oh, there's a new value here.

There's carbon. How do we monetize that? How do we think about that? What does it mean for my own climate balance sheet as well as a new source of income?

Yeah, so I guess at one level it's not correlated because trees grow every year, no matter what the economy is doing. But on the other hand, with some of these new uses of timber or new demand, it somehow is correlated to what's going on. Yeah, of course it is. The unique thing is that so let's say you've got a downturn in the timber market.

So like we just weathered that through COVID, right? Chinese demand really fell off and prices go down. It's not like a watermelon where you like have to harvest the watermelon. You can leave the tree on the stump and it grows.

It gets more valuable, in fact. So it's this trade-off between capital appreciation and income. When you're thinking about the total returns, it's capital appreciated income. That's what you're managing for.

And so it's really important what you buy the asset at, what price do you buy the asset at, and your forecast for your log price and whether you get it right or not. Yeah. That determines a lot of what your return is. Can you somehow explain to me in a way that kind of makes it real?

What kind of approach or your process or methodology in terms of investment selection, you know, your due diligence, your financial and non-financial screens, how do you construct your portfolios? So if we take Australia and New Zealand, which is where the bulk of our assets under management are, so we will raise a fund that has a hurdle rate. Historically, that's been between six to seven percent real rate of return or eight to nine percent nominal. That's essentially where forestry in Australia has been.

That's something that we set with the investors at the time of raising the fund. And so we're essentially trying to get a series of market exposures. So, for example, in Australia and New Zealand, you've got three key markets. You've got an Australian softwood market.

So we're growing pine trees, which pretty much are all consumed for the Australian domestic construction industry. We're growing eucalyptus trees, and that's being sold as hardwood chip into the pulp and paper industry in China and Japan. And in New Zealand, you've got again sort of softwood logs, the bulk of which are exported up into China, India, Korea for their industries. And so essentially, we are trying to get a balanced portfolio of market exposures across those three markets.

And of course, it's different if you're in Asia or the US, the markets that you're trying to get exposure to. But fundamentally, it's the same thing. We're trying to get a balanced set of market exposures and trying to achieve this hurdle. So our due diligence process is assessing the quality of the forests.

We're conducting inventory, trying to understand what there is in the forest. We're forecasting log prices, what's going to happen in the future in the different markets in which we're going to get exposure to. And essentially, you're doing a discounted cash flow analysis. And these are complex biological assets where you are looking at biological growth as well as having the underlying financials associated with it.

And the environmental screen really comes into play in different ways in our different regions. So we have a social and environmental management system that governs our whole global portfolio. So really sets criteria around third-party certification. We get third-party certification across every single asset that we own.

And so that's like the baseline for performance. In the US, for example, we have what we call a carbon forestry strategy where we're underwriting assets looking at the timber value as well as the ability to manage assets for carbon and sell it into the California carbon market. And again, like that's a very unique proposition where we're having to do very complex geospatial analytics, carbon modeling, biological modeling to look at the full value of that asset from a timber perspective as well as a climate perspective.

You've mentioned that you have three major regions, the US and Southeast Asia, and then Australia and New Zealand. Is your approach different in each one of those regions? The underlying investment process is similar, right? So you've got a fund, we have investment hurdle, we've got an origination process, you're doing just cash flow analysis on assets.

But yes, the approach is slightly different in that you're facing different sets of issues in each region. In the US, we have this strong focus on selling carbon into the California carbon market. We're resting across the United States. We do have some assets in California.

So you've got wildfire risks. So that becomes a really important part of due diligence and thinking about management of assets. We've got these environmental and social issues in Southeast Asia. So that becomes hugely important to due diligence and the shaping of the product.

What's our environmental and social policy? What will we do? What won't we do? And A and Z, it's quite mature forestry assets.

Here in Australia, you've got a lot of land use competition. Forestry competes with agriculture. You've also got a rising carbon price. So you're really thinking about what do you do with this piece of land?

Is it forestry? Is it agriculture? Is it carbon plantings? So they're really unique sets of issues of dealing with land and people, kind of various commodity markets.

For example, in the US, you referred to carbon finance. Can you introduce or explain what the carbon finance mechanism is? Yeah, because I believe this is mostly in the US, is it saying, right? Yeah.

So there's different carbon markets in different parts of the world. We've got exposure to climate finance or carbon markets in all of our regions. It's played a particularly significant role in the US. So California, approximately 10 years ago, introduced a cap and trade scheme or emissions trading system as a way to enable California to meet its 2050 emission reduction targets.

And so there are emitters in California. Their emissions are capped and they reduce over time. So forests across the United States are able to enroll particular forests, but it's not just limited to California forests, forests across the United States have the opportunity to be enrolled in the California carbon market and to sell credits to emitters who may meet their emission reduction obligations either by owning emissions allowances for the state of California or buying carbon credits.

And effectively, this California forest carbon protocol has created value for certain types of forests in the United States, particularly those forests in Northern California, the Pacific Northwest, Appalachia, the lake states, where you have these semi-natural forests that can be managed on a sustainable basis. And without getting too technical, forests that have historically been managed with a light touch that haven't been harvested very aggressively and that have carbon stocks that are higher on average than those in the region in which they're located can monetize that kind of high carbon stocking.

And then if they grow their forest even further and further enhance the carbon stocks on their forest, that growth in carbon sequestration can also be monetized. It really creates this incentive to maintain existing high carbon stocks and make sure that those forests are not harvested. That carbon stock, it makes sure that it's protected for 100 years, these 100-year liabilities. So it makes sure it ensures that carbon is protected and also creates an economic incentive to further expand the carbon stock of these forests.

And so you're actually able to continue harvesting the forests as long as you maintain a certain level of carbon stocking. So it really creates this optimization problem where we can manage forests for sustainable harvesting of timber as well as climate mitigation outcomes as well. It's a new revenue stream. Forestry is the established case, mature markets, and a real track record.

Now onto the frontier markets where the thesis flips. Mark Kahn runs Omnivor, a venture fund investing in India, and he'll tell you the money in agriculture isn't in slowing climate change, it's in surviving it. Fund three is pretty focused on climate adaptation. I think you've said somewhere in my research that climate adaptation is gritty while mitigation is sexy.

Why is climate adaptation the more urgent investment thesis for India's smallholder economy? And what makes it fundamentally different from mitigation? Mitigation, right, is doing things that would reduce India's GHG footprint. And adaptation and resilience are doing things that will allow us to survive the climate crisis.

So I have two perspectives on that. One, mitigation is sexy because at least until recently, people thought that we were going to make great progress in it. And now America's left the chat. It is still urgent, but it's hard to ask people to do a lot of stuff on mitigation when you have large actors that have decided they just don't care about this.

But I think the challenge of adaptation and resilience in India is just really this challenge of survival. Given that it doesn't seem like the planet's cooling anytime soon, and given that it looks like we're going to blow through every prediction of temperature increases. And given that we're sort of hurtling off the cliff, I think like we need to start building some parachutes rather than assuming that we're not going to hurtle off the cliff. In some ways, mitigation is very important.

A number of our companies do good stuff on mitigation, but I'm a pessimistic person. For a VC for sure, I'm not sure I have the temperament of the optimistic, futuristic VC. I'm the VC that sort of looks at the world and says, God, this has been getting continuously worse the many decades I have been alive. And so when you look from that perspective, and frankly, when I think when you look at fucking reality in 2025, like we have to invest in adaptation and resilience because otherwise a lot of people are going to die.

And agriculture in India is not going to be viable. It's going to be too hot to farm. And so these things are all very important. I've got the high-level strategy overview, but walk me now through your investment strategy.

If you look on our website, you'll see that there's sort of four business models that we where most of our deals fall into. And that's the reason we went from six to four. We had six themes that were agri-food life sciences, precision agriculture, post-harvest technologies, farmer platforms and rural fintech, agri-B2B marketplaces, and farm to consumer brands. And it was said, look, there's a lot of blurriness between the platforms and the marketplaces.

And also, if we were to recast this in a way that we think, and by the way, fintech's very different. And so we actually recast those six themes over the last two years into four business models that are all very distinct that we think better captures where we invest. And so those four business models are number one digital value chains, which is where we put the platforms and the marketplaces, these efforts to organize the agricultural and rural economy and the whole aspect of digitization, which India has been very successful with.

That's one set of business models. And that's where you find companies like DeHot or Tractor Junction or Simplify or Agrizia or what have you. Then we've said, look, FinTech is its own thing. It's not worth clubbing that with the platforms.

And so we've said we have a space of inclusive and rural fintech where we invest. And that's where you find companies like ARIA or Optimo or FinHot. And these are FinTech models. Then we have what we call emerging technologies, which is our catch-all category where we put precision ag, post-harvest technologies, and agri-food life sciences.

These are essentially science-based businesses. These are businesses that have technological risk as opposed to just operational risk. And that's where you find companies like Pixel making hyperspectral satellites, or Nico making, you know, smallholder robots, or EcoZen making climate smart hardware for pumping, for irrigation and cold chain, companies doing stuff in alternative materials like Alt M and Fib mold, life science companies like Loopworm. We think that those business models are actually more similar than they are different.

The way you iterate, the way you grow, your ability to exit. So that's a third theme. And then the fourth theme are sustainable brands. These are farm-to-consumer brands where we see someone building something that has to make consumers happy, but is creating a lot of value for the farmers that it's built value chains connecting.

And that's where you see companies like Farmly or companies like more recently SIDS Farm. I think we'll probably do another one or two more sustainable agri brands over the course of the next year. But uh big part of your raising on that is to generate impact outcomes. So how do you balance in this overall strategy financial returns with impact outcomes?

Fundamentally, I'm investing first of all in the Indian economy in a space dominated by people that are very poor. So if you ask me, do I have to make this trade-off? I don't recall a time where I've had to make this trade-off. We are a financial first fund, which means that if you gave me two deals, one deal which could impact, let's say, a million people and one deal that does 10 million, and the million is going to make us a lot more money than the 10 million, we'll do the million every time.

We have to, because not all of my LPs are impact LPs. But everything we do has to fit within the theory of change. And if it doesn't fit within the theory of change, we don't do the deal. Trevor Burrus, Jr.

What would be an impact outcome that fits with all this? But that you would say no. For example, leapfrog, it has to affect X amount of people. Aaron Powell, we have targets to reach a certain which we're blowing through.

But I would say that almost every deal we do is something that is going to have a large social or environmental impact, or we don't do it because of our sectoral focus. By definition, what can filter through that? Almost everything has a large impact. But if you're asking me if it's a choice between one deal that is, you know, a 70% IRR deal and another deal that's a 40% IRR deal, irrespective of the difference in impact, I will always do the 70% deal because I have a fiduciary responsibility to my non-impact LPs to do it.

Now take me inside your actual investment process. How are you sourcing companies and what kind of screening process do you run them through? And at what point do you have the conviction that this is something that you want to back? It's venture.

I always like to say venture is a river. It's very funny to me whenever people like when we do, when we launch new funds, people are like, give us your pipeline. So we write the pipeline. And then six months later, they're like, Why did the pipeline update so much?

It's like, because I'm not a buyout fund. Because the thing that is raising at that stage has either raised or died, and it's a constant flow. Like venture is about flow. So if you ask me how do we generally source, I'd say a couple things.

One is do the same thing for 15 years and become ubiquitous with the space. So we've been doing the same thing for 15 years. We're pretty ubiquitous with the space. Our inbound is insane at this point.

And I would say our inbound tends to be a large part of what we ultimately do. Our referrals are actually a big thing now where we've backed enough companies who have backed enough founders who've been successful that they refer their friends who are starting up. I got a deal put on my lap about a week ago where the founder came and said, You backed this friend of mine and that friend of mine. And they basically say you walk on water, so let's have a conversation.

I think a third thing is we have a lot of partnerships with accelerators and universities and research institutes in India that give us a good sense of what is really the pre-seed stage more than the seed stage. So we can start seeing what's coming. And finally, occasionally we just deep dive spaces. Like we just say, look, I have a lot of conviction about something.

We go meet all the people. So right now, we have a conviction about electrification of rural vehicles. And we're not sure if the right answer is to back OEMs that are making, say, electric tractors, or maybe what's more interesting perhaps, is to just back the companies making the electric motors because it's hard to decide between backing an upstar tractor company or the fact that maybe the big OEMs are just going to dominate that space. And so if you can do the motors, you can do anything.

But we sometimes develop theses, and right now we're running around trying to meet every electric motor company in India. What about the way you you screen these? The filter is it has to fit into the theory of change or we don't touch the deal. Like if it doesn't fit into the theory of change, we don't touch the deal.

And then it's a very classic venture capital four tease. Team, TAM, tech, traction. Team, do you have founder market fit? Are these the right people to build for this space?

Do they have the right work experience, the right education, the right networks, the right temperament for what they are built? In reality, it's the first, second, and third thing we care about. The next thing is TAM. Is this space big enough to be interesting?

And people, a lot of people get TAM wrong. TAM is an acronym of Total Addressable Market. The point in TAM is just to say, are you building in a potentially large enough space to generate a venture outcome that matters? So if someone comes to me and says, I have this super cool startup in an industry that in India that is $10 million in size, I cannot do.

I mean, unless I think that $10 million is going to become a multi-billion dollar industry, I don't think I can do much there. That happens occasionally, to give a non-impact sense of it. Like 10 years ago, did you know what a stable coin was? Because I sure as hell didn't.

Okay. But that's a space. And it's very funny. Harry Stibbings has this great podcast, the 20-minute VC, and he was talking about the problem with TAM is if something is actually brand new, there is no TAM.

But there were proxy TAMs for what stable coins could be. Money is a big TAM. And so I think it's important to not overthink the TAM. It's essentially a good yardstick for are you building in a big enough space to be interesting?

And then the third thing is tech. And that's really about either actual intellectual property or the uniqueness and defensibility of a business model. And then finally, traction. And traction is always very relative.

It's traction relative to the money you've raised, it's traction relative to the time you've been around. You can see a company that's three months old and it has crazy traction because it's signed five clients. That might only be, I don't know, $10,000 worth of revenue per month, but that's a lot of traction for a company that's three months old. Whereas, you know, you could see a company that's doing $10 million, and if you see it's 20 years old, it's not very interesting.

Let's talk about how you measure impact. You have something that you refer to as the impact measurement and management framework, IMM, which I guess is different than BridgeSpan's IMM. Explain this framework, you know, what it is and how it works, and how do you determine the link between the solution and the impact? Aaron Powell So the first thing is that when we're investing in a company, we try the same way as we're projecting financials, we're projecting the impact that something will have.

So we're thinking from the very beginning, does this fit into our theory of change? What are the metrics we think it's going to drive, and can we have a projection of what those will be? And that's part of the investment, or the first cent investment memorandum that we write on the company. And then going forward, we measure the impact the company has created.

We have an impact policy, it's listed on our website. Originally it was 13. I think now it's closer to 20 metrics that we care about, that we track. And you can be like, you know, but what about this other thing you haven't thought about?

And it's like, that's cool, but here are the 20 we track. This is where we see significant over. We don't want a different framework. We want things that add together nicely across the portfolio to tell a story.

So we have these things that we have decided are the things we will track. We do not do bespoke one-off measurements. We have these things for our fund. And then we essentially, for the purposes of determining impact, we do three things.

One is we heavily rely on very strong MIS systems that we help our company build. Two, we do farmer or MSME surveys in the style of lean data without paying 60 decibels too much money for it, that effectively do statistically significant surveys to determine impact averages that we can then apply to those, to that MIS data and extrapolate them. And finally, sometimes there's a good amount of research on the actual way of calculating the scientific formulas of GHG, fertilizer reduction, these kinds of assumptions that are rooted in the physical world that we then aren't about surveys, but rooted in the actual physics of certain things or the chemistries of things that we then apply to that MIS data.

And then we generate and publish a very transparent impact report. You can read the most recent ones on our website. And thankfully, it was a nice kudos to get. We've been at this for a long time.

We have a lot of development finance funds, development finance institutions that back us. So we've been building our impact and ESG systems for really the better part of a decade. And we were the first fund in Asia to get a Blue Mark platinum, which happened a few weeks back. We're on the leaderboard there and pretty happy to be.

Congratulations on that. Could you give me an example or two from your portfolio that kind of demonstrate your convergence theory and climate adaptation thesis that kind of make it real? Everything you've just described about your investment approach. If I were to give you a good example, DeHat is a great example.

It's the largest farmer platform in India. Dehat runs a network. Of tens of thousands of retail points where they sell sustainable inputs to farmers and then they buy back outputs from farmers and help them sell and they provide farmer advisory. And so if you ask how does this all come together from an impact perspective, one of our impact metrics is around economic value creation for farmers.

And we can survey farmers in De Hat and calculate how much money De Hat has saved those farmers in the cost of farm inputs and their cost of cultivation. We can also calculate the economic impact of the higher prices that De Hat has helped those farmers realize for their produce. We can also calculate the climate impact in terms of adaptation of what De Hat advises those farmers to do in terms of their farming practices and how that has both impacts from a climate adaptation perspective and potentially a mitigation perspective.

That's how we think about it. Do you have one more? We have product companies like EcoZen, which you know make solar-powered irrigation solutions, which reduce the usage of grid energy. And you know how much they've been used and you know how many are sold.

And so it's very easy to calculate the energy savings of a lot of these things or the reduced spoilage. What the other products they make are decentralized solar-powered cold storage. And so you can say, this is the amount of units, here's roughly the amount of produce that flows through them, here's the amount of spoilage that was avoided because these products are in the market. That was Mark Kahn on what to buy at the frontier.

Now we turn to bring you Mark Campanelli, who founded Carbon Tracker. And where our first three guests were buying into the physical economy, he's asking which assets you should get out of before they become stranded assets. Why don't you explain your thesis in the unburnable carbon report? So, what is the thesis?

A very, very simple one, which is that the science tells us that we have a carbon budget, how much CO2 we can emit to the atmosphere before we go through different levels of warming, 1.5, 1.7, 2 degrees, 3 degrees of warming. And that the carbon budget was running down fast.

In fact, the carbon budget is out for one and a half degrees. We're through that. And for two degrees, it's about maybe six, seven hundred gigatons of carbon dioxide. The problem we identified was that when you look at the CO2 and the reserves of Chevron, Exxon, and BP, it's a thousand gigatons.

So they own more reserves than we can possibly burn to stay below, well below two degrees. Now, why is that why is that the case? It's because governments own another 3,000. You know, the Saudis, the Americans, the Canadians, and so on.

So that's 4,000 gigatons of carbon dioxide chasing, if we keep to 1.7 degrees, chasing 400 gigatons, 500 gigatons. So it's a game of musical chairs. We've only got one share left, and there's seven people running it around us saying that share is mine.

The Saudis are claiming it, the Americans are claiming it, the Brazilians are claiming it, the Norwegians are, and of course they can't unless we burst through. So that's what the carbon bubble is. It's a carbon bubble. Far more fossil fuels are owned in public markets than we can possibly use.

And so that became the financial risk that the system would be destabilized by the trillions still invested in colon and gas, and by ultimately by climate catastrophe, would destabilize the financial system. So those were the two big ideas behind the carbon bottle and carbon track. Well, there's another one, it's stranded assets. Our second report on stranded assets and wasted capital said if we can't burn what has already been financed, why are we building even more?

These will never be used, they'll become stranded. But we meant by it's also financially stranded. So you put up the billions and now the trillions in this infrastructure, it will never generate the return on capital that you thought it would do when you first invested. So you can have physical stranding, you won't use the assets, or you can have financial stranding.

They'll never generate the return. And you could have it both at the same time. This report on burnable carbon came out in 2011. First of all, you have something called Carbon Tracker, and then there's something Carbon Tracker Initiative.

What's the structure here? And all that started before that. It was always Carbon Tracker Initiative, and the website's just carbon tracker.org.

Okay, so that's all the same company. It's the same thing. But I created this new thing a few years ago called Planet Tracker that's looking at nature and ecosystems and forests and water and so on. So but carbon tracker, think of it as really as the mothership.

So to put bookends around so people can understand what Carbon Tracker's initiative is about. Overall, do you want the end goal to be from your work to stop investment in fossil fuel projects entirely? Or do you want divestment from companies? Or what's the theory of change for you, even though you're not investing?

The goal is to align global financial markets with the science of climate change, the goals of the Paris Agreement. So you don't produce more fossil fuels than we need to stay to within a well below two degrees outcome, ideally 1.5 degrees. Now, the International Energy Agency has said that to achieve 1.

5, the world does not need any new conventional oil and gas or coal anywhere. We don't need any new stuff. So we're constantly challenging why are you building more? Of course, I would want people to not invest in fossil fuels or divest in fossil fuels, but we need to change the admissions rules of, particularly of bond issuers to the fossil fuel industry, issuing bonds and issuing equity.

So we need the financial regulation to change. But what are our metrics of success? So Goldman Sachs and Forbes wrote about 18 months ago that since the stranded assets argument hit Wall Street and the City of London, global oil and gas reserves have dropped from 50 years to below 23 years. So we've halved the reserves life of the global oil and gas sector.

Now, when the foundations originally funded us, they said, what are your metrics of success? I said, Yeah, stopping investment in new oil and gas. So I wrote back to them saying, Yeah, Goldman's has just written that we've halved the life of oil and gas reserves from 50 years to 23 years. Some of them replied, I think one wrote back and said, Yeah, that's very nice, Mark.

But sometimes foundations move on. I think there's a big success. I wish they come back and said, okay, great, now what's the next thing we need to do? But of course they never do that.

They never go, well done on achieving your mission. Now tell us what the next step is. They're forever looking off, do we want to do something different? Not the Rockefellers, by the way.

They've on the Saintsby family kids, they've stuck with it. They really understand what this is about. Others have moved on, which is a bit sad for me, is still to align financial markets, financial regulation, pension funds with well below two degrees to ensure that the supply is in line with the remaining scientific carbon budget. We don't produce more fossil fuels than we need to stay to well below two degrees.

That's ultimately what CarmTrack is really about. Then this report you published in 2011, Unburnable Carbon, which ended up being the basis for this Rolling Stone article, which put it out in the public zeitgeist. Your concept is that there's only so much carbon can be burned in the future, as far as we can see. But all these oil and gas companies are capitalized with amounts far beyond what could ever be burned.

And so you're saying we have this huge imbalance. Is that the carbon bubble that you're referring to? So what we've never said is the carbon bubble is a financial bubble. And I'm going to tell you the reason why.

If you take the market cap of the world's coal, oil and gas companies today, it's about $7 to $8 trillion of market cap. But if you took the value of their reserves and took it today's price of a barrel of oil, ton of coal, and multiplied it by how many tons they own and how many barrels they're owned, it's around $120 trillion. So that's of the future revenues. That's the value today in today's prices of the reserves controlled by the world's coal oil and gas companies.

Now, obviously, there's a big delta between 120 trillion and 7, 8 trillion. And the reason for that is the market already discounts the probability that these reserves will ever be developed. So you can't draw a direct line between the size of the reserves and the valuation of the company. But what we do know is that when the companies downgrade their proven reserves, their share prices tumble.

And that happened with Shell a few years ago when they had to sort of restate their reserves. So there is a link between the reserves and the valuation. So what we've seen happen is that the oil companies, particularly in Europe, are on low single price earnings multiples. So the market is not giving a premium to the future value of those reserves.

They're not believing these reserves will ever be developed. My view is that the companies should be debooking the reserves that break are outside of the carbon budget. And that the market should be, regulators should be picking this up strongly. And I'll say this, the reason for this is I don't know if you saw this.

In the last year, Sally Aranko issued about six billion in bonds, some of which were dated 2060. So 2060 is way beyond when we should be using fossil fuels. My answer on the question, should we stop investing in fossil fuels? My answer is we should stop burning fossil fuels.

I'm not against oil and gas per se. I'm just against setting it on fire. Now, you know, if you look at this thing that nature's given us, we could be using it for complex plastics, pharmaceuticals, other industrial elements, but instead what we do is we set fire to it, which is just so crazy. And it could be that these companies are worth far more, much smaller, and by having higher margin products, where you take this critical resource and convert it into something really useful for society.

And I don't mean plastics, not mass consumer plastics, specialist plastics, like used in the pharmaceutical industry, the car industry and aeronautics and so on. What I'm absolutely against is this idea that you take this resource which has taken hundreds of thousands of years to be created, and then you just put a mesh to it and you and it's gone. You know, people will look at the last 50 years and go, well, we've just destroyed this extraordinarily valuable resource by burning it and also potentially destroying the planet along the same way.

There are some parts of the world you would never want to develop ornate gas, like the Arctic and the rainforests and areas where you've got indigenous peoples and so on. So I want to hear the origin story. Tell me about the initial back of the envelope calculation that brought these ideas to light. Nick and I, and a few others, Professor Michael Manelli, who became the mayor of London just relatively recently, we were trying to figure out whether the Chevron and Exxon were a small part of the problem or all of the problem.

And we also wanted to know the links between the levels of heating that we've been seeing in the planet, which had got the highest levels of carbon dioxide for you know hundreds of thousands of years and warming we've not seen for in human history before. So we know we've got a major problem, is how much of that is due to the to Chevron on an X on a shell. And what we concluded with the publishing of obviously of combinable carbon is that they are 100% of the problem because all of the reserves take up the remaining carbon market.

And some countries like the United Kingdom, you know, we're much proportionately more responsible for this than other financial markets. So that was the back of the envelope calculation. Of the first that 5,000 pounds, it was to go to a young American called Connor Riffle and a friend of his, he'd joined from the Clinton Global Initiative. And it was Connor that did the back of the envelope calculation, this short paper.

And he said, Mark, yeah, you've got a you've got something here. We should really do something about it. And by the way, I've got myself a proper job. I'm leaving now.

I think of him as the fifth Beatle, the guy that, if it stayed, he knew he would have made his name. But it allowed me to meet a few weeks later. I heard this young guy at the Chatham House roundtable speaking, and I didn't know who the next head of research was going to be. And I heard him speaking, I thought, well, I wonder if he, you know, these random things.

I wonder if he's the next head of research. I didn't know his name. And I had a friend who worked at Chatham House, and she emailed me, said, Oh, yeah, that's James. This is his email.

And I emailed James and I explained to him what this thesis. And he said, Oh yeah, maybe you may have something in there in there. And it was him who found the scientist, Meinhauser, who did the calculation of the carbon budget, which is central to the whole thesis of the remaining carbon budget, the fossil fuels reserves is an indicator of what emissions will be, because what gets financed and developed will ultimately get burned. It's a forward-looking indicator of what the warming levels will be.

And you can link the reserves owned by Shell and Exxon and the others to future warming. You can make that direct link. And in fact, the agreements just coming out in the courts now, the international court, I think, of human rights just come out and saying, you know, we we can now make these links between the fossil fuel companies and the levels of warming. So yeah, interesting to start.

So you publish this report, you view it or have described as somewhat of a cathartic act just to exercise these devils out of you, and you didn't even go to the launch because you were at a music festival. And six months after you published this report, Norway's giant oil fund began divesting. There's a bit of history there. So they got in touch and they commissioned their own report from Reichstadt of our analysis, and Ricstad came back with the same conclusion.

And then there was political voices in a Norwegian government, Sovereign Wealth Fund, and they started to do their own work on and leading to a divestment case. So that I remember I've got all the history of those exchanges with them. I wasn't expecting that either. And then Bill McKibben launched the global divestment movement.

How do you view that partnership between your financial analysis and his grassroots organizing? Well, we're not campaigners in that sense. We try and produce objective research that's used to either engage with oil and gas companies if you don't think they're Paris aligned and we don't think they are, and they would the investors want the analytics, or like PGGM and other big pension funds that want to get out of fossil fuels, so we that we provide that case and other local authority pension funds that want to divest in fossil fuels, we provide we present the logic.

The logic is now much more driven by the fact that renewables are now the cheapest form of energy in the world. The fossil fuel companies are coming to an end. The question really is a matter of timing. And look at all the sales rates of electric vehicles, which are over 50% in China now.

And I was reading yesterday, even in Ethiopia, electric car sales are 60, 70%, the new car sales. This is a phenomenon taking place all over the world. So this is the death now of the fossil fuel industry. It's just a matter of timing now.

And the investors today want to know when do we see oil demand falling? What are the oil companies doing? What's happening with coal? I had a great discussion yesterday with colleagues yesterday about our work on coal decommissioning in Southeast Asia and the whole of the economics of this is what the investors want to know.

So I was pleased to be see this happening, pleased to play my role and speaker at numbers of these events, and is curious how these things have a way of meshing together. I don't think without Bill McKibben, to be fair, Carbon Tracker would have taken off in the way that it did. You've been listening to SRI 360. If you enjoyed it, please hit the like button and subscribe to get future episodes.

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