COP26 and the Role of Private Capital to Scale Innovation in the Net‑Zero Agenda: Moving From Ambition to Action

COP26 ended with the Glasgow Climate Pact aimed at operationalizing the Paris Agreement which should mean an acceleration to a net-zero scenario. In this context, we now need to define the role of private capital — including venture capital and private equity — in the net-zero transition. 

Economists refer to climate change as the greatest market failure in human history because it will affect the well-being, economic development, and financial stability of current and future generations. But these ecological challenges also represent a never-before-seen opportunity and attempt to reshape the global economy. And the scale of this major disruption will affect every country and market sector. 

As a matter of fact, there’s never been a better time to invest in clean technologies and green energies & infrastructures! Governments have made bold commitments over the past few years, and during the recent COP26, set ambitious targets and policies to shape a nurturing ecosystem for enabling climate investments. Investors are actively discussing and exploring opportunities that this industrial and environmental transition will create. Boston Consulting Group estimates that the transition to a net-zero economy presents a historic investment opportunity requiring an estimated $100 – 150 trillion USD over the next 30 years – roughly $3 – 5 trillion annually. As this capital will not come strictly from public institutions, and private investors have a key role to play.

Challenging opportunities abound

As incumbent technologies are insufficient to reach the emissions reduction targets that need to occur post-2030, we absolutely need to validate and scale emerging innovative technologies in this decade to deploy them at scale between 2025 – 2030. This bodes a bright future for our industry, given venture capital and private equity firms’ ability to discover, back, and scale innovative solutions, but also to support founders, de-risk, and close the technology gap, in the global decarbonization of the energy, mobility and industry sectors. It is up to us to seize the opportunity and move from vision and ambition to action and execution.

At Cycle Capital, we strongly believe that public and private investors need to work side by side to effectively finance the transition to a decarbonized economy. Sustainable finance needs to become the new norm, and in doing that, a common language and recognized standards must emerge in order to measure, track, and reduce greenhouse gas (GHG) emissions in private investments. We are seeing regulations on climate disclosures slowly evolving in North America, but unfortunately not at a fast enough pace, putting our industry at risk of missing out on opportunities. While Europe is actively deploying sustainable finance disclosure regulations that are contingent on access to capital, North America and Canada need to adopt global standards, deploy tools, and adopt methodologies that will support this transformation, including in our asset class. Right now, even though there’s a lot of ambition, not a lot of private VCs and PE funds are able to quantify the carbon footprint and impact of their portfolio.

Moving from ambition to action

Given the current global GHG emissions reductions goals in the next 10 to 30 years, we believe that it is crucial for private capital investors to be able to precisely assess and quantify the impact – positive or negative – that they and their investees can have on climate change. The industry needs guidelines and best practices to integrate climate assessment for each of the investment decisions that investors make to funnel capital into solutions with impactful carbon reduction potential.

At Cycle Capital, we are committed to carefully selecting and analyzing investment opportunities on several criteria, including the quality of their climate impact value proposition and overall impact thesis. Accordingly, we integrate at the pre-investment stage this assessment in our investment workflow to measure the environmental potential and monitor the performance throughout the investment horizon. 

Even though the entrepreneurial teams we back know their solutions are solving ecological challenges, they do not always know how to precisely measure and quantify their impact. While a lot of VCs and their portfolio companies face a lack of resources to lead this assessment, it remains the key to avoiding greenwashing and ensuring meaningful reporting to our stakeholders. It can also be challenging for investees to provide precise data on GHG emissions equivalents. We, therefore, believe that if we want to have access to this information, we have to support them in acquiring it.

Walking the talk: the first step

This is why we decided to put the requirement of undergoing a carbon footprint assessment covering scope 1, 2, and 3 emissions, as well as a GHG avoided emissions assessment, as conditions for our investment. Making this quantification mandatory demonstrates that impact measurement really matters to us and to our investors. It also underlines that we consider impact as an important part of the value creation of the company. We chose to partner with a third-party assessment firm to support investees in collecting the right data and make the assumptions using commonly used methodologies, such as ISO 14064 and GHG Protocol.

Apart from the GHG emissions metrics, every company goes through a thorough impact assessment covering the 5 impact dimensions developed by the Impact Management Project (what, who, how much, contribution and risk). We analyze the contribution of every company using the UN sustainable development goals (SDGs), and we use the Global Impact Investing Network’s IRIS+ framework to select metrics that enable us to monitor the impact of each company.

This process helps us to have a more precise and detailed overview of the direct and indirect climate impact of our portfolio. We believe this is the first step to embarking on a thorough, portfolio-wide GHG emissions reduction effort in line with the Paris Agreement.

To learn more about Cycle Capital and our thesis, visit our website.