A Material Impact on Returns

A Material Impact on Returns

What has been the fastest growing category within the asset management market over the last few years? Quantitative or AI-driven strategies would be a good guess but you can feel warm and cozy that, in fact, impact investing has actually led the way. Impact investments are made with the intention of generating social and environmental returns alongside financial returns. Compared to global debt and equity markets in the range of $200 trillion (BNY Mellon, 2016), the size of impact -related assets is probably three orders of magnitude smaller, depending on how and who is counting. Nevertheless, in the 2017 Annual Impact Investor Survey prepared by the Global Impact Investing Network (GIIN), surveyed managers expected to increase dollars invested by 17% in 2017 versus 2016.

If we follow the evolution of impact investing over the years, originally it was synonymous with philanthropic-type activities by foundations or wealthy families. It was not necessarily seen as a financial return generating activity. In the early 2000’s we saw Corporate Social Responsibility (CSR) reports increasingly finding their way on to the websites of large public companies. Accounting and consulting firms were often the beneficiaries here as precision of measurement and the thickness of the annual report were often valued over achieving meaningful impact or change. Thankfully, over the last decade impact investing has evolved to the point where investors are now voting with their dollars to actually impact change. In the words of Apax Partners Founder Sir Ronald Cohen, “Risk, Reward and Impact” will be the standard lens for institutional investors. And there should be no tradeoff. In the GIIN survey mentioned above, two thirds of managers expect to make market rates of returns and as reported by Morgan Stanley in 2015, “Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments.”

There will always be opportunities to improve the world where below market rates of returns can be expected and we should all be thankful that the groups like the Chan Zuckerberg Foundation or Bill and Melinda Gates foundation exist. But at Pangaea Ventures we like to turn the market returns issue on its head. When considering a potential investment opportunity, a critical question we always ask is, “Will this company and technology make our world better?” If the answer is anything other than a clear "Yes," then a consensus quickly forms that we should pass. But if we take this further, by asking this question and in fact more deeply understanding the magnitude of the impact particular companies may have, we strongly believe that we are making investment selection decisions that inherently lead us to opportunities with a great potential financial return. A few examples illustrate the point.

Calysta is a company that utilizes industrial scale bacterial fermentation to convert methane into products such as protein. Since the Series A investment led by Pangaea in 2013, Calysta has gone on to raise several rounds of funding from large strategic and institutional investors such as Cargill, Mitsui, and Temasek and has since partnered with Cargill and other investors to build a world-scale plant producing up to 200,000 metric tons of Feedkind™ protein per year. At first glance, one might frown on the sustainability argument around utilizing a fossil fuel for food production; however, a 2016 report prepared by The Carbon Trust showed that Calysta’s Feedkind™ protein resulted in lower CO2 emissions than fish meal protein and 14x less water, combined with multiple orders of magnitude less land use than soy protein. The sustainability argument for Feedkind™ couldn’t be more clear. Ultimately, these positive impacts also are the drivers behind a lower cost, higher quality feed product and this has been the key ingredient behind a rapidly growing company that is ready to help feed the world… And sophisticated financial investors can’t seem to get enough!

Another example is our energy storage company ESS Inc. ESS has commercialized an iron-based flow battery for renewable energy integration and other storage applications. At a high level, we were always intrigued by the cost potential of using iron as the active metal in the battery (<$100/ton vs. lithium carbonate prices consistently above $12,000/ton). But it wasn’t until we deeply looked at the full supply chain of the ESS approach that we truly understood the potential to create the lowest cost and near infinitely scalable energy storage solution. Think low cost commodity construction materials versus metals such as cobalt, which are in short supply and rely on mines from places like the Congo with little regard for human health and safety. Perhaps unsurprisingly, when you do the full system cost calculations, inexpensive low-impact materials of construction are a major differentiator for ESS in a market where lowest cost of storage wins the day. Expect some exciting news from ESS before the end of the year.

These are just two examples from the Pangaea portfolio of materials, chemistry, and biochemistry-based solutions leveraging technology to drive impact. From Vestaron’s biopesticides that can beat the performance of the toxic chemical-based incumbents to Redlen’s precise solid-state radiation detectors that can enable CT scanners to detect arterial plaque with very low radiation doses, the impact potential of our portfolio is far-reaching. We are especially excited that an impact report is not needed to tell the story; a review of our financial investor reports seem to be doing the trick, thank you very much.

Partner, Pangaea Ventures Ltd. Andrew has over 12 years of energy and industrial experience, recently leading several of Pangaea’s investments in the energy generation, energy storage and energy efficiency domains. Andrew holds a Bachelor of Applied Science (Mechanical Engineering) and a Masters in Business Administration degree.View Andrew Haughian's profile on LinkedIn


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Guest Wednesday, 22 January 2020