Investing in the Value Chain of Climate

I’ve been working on something: mapping the value chain of the energy transition, in order to inform my decisions about how to invest in climate.

Investing in climate sometimes feels like throwing spaghetti at the wall. There’s so much to be done, and it’s all incredibly complex, and a lot of it is critically important. I’m not a subject matter expert in climate, climate technology, or investing. I can see what sticks to the wall, but even then?… what if the most important spaghetti isn’t the stuff that sticks?

I decided I wanted a better framework for investment decisions than chucking pasta. And while I don’t have technical subject matter expertise, I’m skilled in strategy and systems thinking. So, rather than trying to pick individual companies, activities, or even industries where I should focus time and money, I decided to look at the whole system.

Principles & Prioritization

I started with a couple of principles. I want to focus on areas with proven climate impact, and where there’s an unmet funding need. To understand impact, I turned to the IPCC. According to the Sixth Assessment Report, five areas stand out for climate impact:

• Solar energy
• Wind energy
• Reduced conversion of forests and other ecosystems
• Carbon sequestration in agriculture
• Ecosystem restoration, afforestation, reforestation

Given my background, I chose to focus on energy transition. Having worked in solar software, I’m broadly familiar with the opportunity space, although with only a few years in the industry I’m hardly an SME. Energy might not seem underfunded, however, while there’s considerable funding in aggregate for renewable energy projects, there are also significant gaps in funding for the energy transition. This is in part because established funding models are not well matched to the needs.

As I sketched out the high-level value chain, I started exploring the next layer down. What are the activities, companies, entire industries, under each link in the chain? What is required for decarbonization at each stage? What are the connections across different parts of the value chain that will accelerate the transition?

Approaching the problem in this way has brought up more questions for me:

• Which parts of this value chain are already in my portfolio, and which are not??
• Are there connections across the value chain that are accelerants??
• Am I biased toward areas that are easier for me to understand? Does that matter?
• Where I have less knowledge, can/should I still invest??

If you’re reading this, there’s a pretty good chance you’re a climate investor. I’m using “investor” in the broadest possible sense. Maybe you invest capital, maybe you donate, or maybe you invest your time (paid or unpaid), your expertise, or your attention. Your investment might be in the way you raise your kids, or your commitment to reducing your energy consumption. Maybe, like me, you’re privileged enough to be able to invest in a few of these ways.

I’m sharing this work in the hope that it will help you — whether you’re managing a fund, looking for a job in climate, or donating to a non-profit. I’d love to hear if you use or build on it!

Selected References

CEFC report: mining in a low-emissions economy

IEMA GHG Management Hierarchy

IPCC AR6 Synthesis Report

IEA Net Zero by 2050

Climate Salad 2023 Australian Climate Tech Industry Report

Principles of Sustainable Finance, Erasmus University Rotterdam (Coursera)

Principles of Sustainable Finance, Dirk Schoenmaker and Willem Shramade, OUP

Understanding Michael Porter, Joan Magretta, Harvard Business Review Press