CFI Newsletter #7: The Billionaires' Guide to Climate Action

+ India's first SPAC is renewable, Reliance's net-zero shift, building 30 billion square metres, and low-carbon policies' impact on petrostates

The Climate Finance Initiative Newsletter offers quick digests and insights around what is happening in climate finance. While the Climate Finance Initiative’s current focus of work is India-centric, we will capture a global perspective of climate finance in this newsletter on a fortnightly basis.

This Edition was slightly delayed, a bit more than a fortnight, owing to both Simmi and Shravan having to handle personal emergencies that cropped up in the past week. It’s all good now :)


Today’s intro is a bit longer than normal as the first Indian climate SPAC has just taken place.

We are pretty certain that Renew Power did not get a lightbulb moment after reading Edition #5 of the CFI newsletter, our (mainly Simmi’s) projection that SPACs offered a route to Indian climate-focused companies to effectively tap public markets seems to have been a bit of timely crystal ball gazing. We just did not think one would take place so soon.

Renew Power’s SPAC, which values the entity at US$ 8 billion, is the first one globally for a renewable power producer. It is the first Indian one since 2016 when Yatra listed on the NASDAQ before SPACs entered our vocabulary.

So what does this mean?

We are not going to see a flood of Indian climate startups doing SPACs in the near-term, mainly because most are not at the scale of a Renew Power to do so. What we are likely to see is an answer to the public listing question of a climate startup’s exit story that often plagues startup-investor engagement.

The scepticism of such exits, especially in India, has been a deterrent in fundraising. Renew Power has shown how it can be done, and especially important for an Indian company, navigating an overseas merger, which as we had mentioned earlier is tricky and requires significant regulatory approvals. Pitch decks and investment memos of climate startups from all stages are likely to contain more mentions of SPACs as exit routes and not without some credibility.

A last aside is a small bit of validation on the investment numbers on climate action we, at CFI HQ, have been estimating. Chamath Pahalipatiya, perhaps the leading SPAC + climate action advocate, identified the private market opportunity of renewable energy in India over the next 10 years as US$ 300 billion in his investment thesis note for Renew Power. This is the same number we had identified in our initial State of Climate Finance report that launched the Climate Finance Initiative. Another bit of effective crystal ball gazing :).


Climate Finance by the Numbers

US $15 billion

The amount of investment expected by Reliance Industries Limited towards renewable energy over the next 10 years

Back in August 2020, India’s largest company, Reliance Industries Limited, outlined a commitment to be a net-zero GHG emission company by 2035. With 60% of their revenue coming from fossil fuel and fossil fuel-based products, e.g. plastics, this may look like quite the tall order. 

One part lies in RIL spinning off their oils-to-chemicals business into a separate entity, and making clean and renewable energy more central to RIL. The main part, however, is putting the largest investment commitment in India into the renewable energy space, outside of power generation.

It is not only the amount that is worth looking at but the expected focus areas of these investments from RIL. Renewable power generation is relatively mature, seeing around US$ 18 billion in investment in the 3 years until 2020. The next big need and opportunity areas are what comes after generation: alternate forms of energy such as hydrogen, energy storage and batteries and more demand-side technologies, such as mobility. These are the areas that Mukesh Ambani and RIL seem to be focusing on.

Investments into these areas have been taking place and they are growing, e.g. Greenko’s US$ 1 billion into developing battery storage facilities announced in September 2020. RIL’s investment however takes it up a notch to the scale that can herald a sector to grow:

More investors enter ⟶ Existing innovators deploy solutions and scale ⟶ Adoption increases ⟶ New entrepreneurs enter the space ⟶ More large-scale investors come in

This cycle (which should also ideally include “government policy/incentives for better adoption” somewhere) is how a climate action sector grows big.

At least, it is the theory that should play out.

We’ll definitely be on “RIL-watch” and “Energy Storage-watch” to see how these commitments translate.

60%

The proportion of buildings in India that will exist in 2040 that have not been constructed

Today's overcrowded metro cities and the ghost town feel of empty apartment complexes in far off suburbs are expected to account for only 40% of India's residential building stock in 2040. This is a bit of a disingenuous statement as a lot of growth will come from Tier 2 and 3 cities where this scenario is not necessarily the case, so it perhaps functions as a warning to them.

Residential buildings in India are expected to almost triple by 2040 from 2019, from just less than 20 billion square metres to slightly more than 50 billion square metres. 70% of this new construction will take place in urban areas as the urban population increases to 740 million people by 2040 from 470 million today.

The energy demand of residential and commercial buildings overall is expected to increase by 30% by 2040, with this growth in residential buildings being the main driver.

The increase in residential buildings is one part of the energy demand story. The other part is the increase in household appliances used and the demand around air-conditioning and cooling, which is expected to be exponential, 1 billion AC units by 2050, a 40-fold increase from 2016.

The approach we take around construction and energy use in our buildings will define India’s energy footprint and security for the long-term. 

Instituting more widespread building material guidelines, energy-efficient building codes, and renewable energy targets without arbitrary roadblocks, are the sort of policy interventions that are needed to create more demand-side pull for less energy-intensive building materials, rooftop solar, energy-efficient appliances, and similar solutions to mainstream and improve on climate action.

There are positives in the steps India has taken. New and existing policies, such as the India Cooling Action Plan, have an energy-efficient and climate mitigation outlook in mind. Energy efficiency initiatives between 2000 and 2018 have avoided an additional 15% of annual energy demand and 300 million tonnes of CO2 emissions.

But we also do have our fair share of missteps such as net-metering limits creating disincentives for rooftop solar, and of course, the common refrain that our policies do not go far enough for the sort of action we need to take to effectively tackle climate change in the long-run.

US$ 9 trillion

The projected drop in oil revenues over the next 2 decades for the 40 countries most reliant on fossil fuel income

Petrostates, countries with a high reliance on fossil fuel revenues as part of their GDP, are going to see tough years ahead.

In a report focusing on the impact of Paris Emission commitments on petrostates, the Carbon Tracker Initiative found that the 40 countries most reliant on fossil fuel income could see oil revenues fall by an average of 46%—a total of US$ 9 trillion (that is trillion with a T)—over the next 20 years. Fosisl fuel revenue for these countries is derived by exports. As renewable energy and electric vehicles adoption and other low-carbon commitments increase in countries across the world, the export potential for petrostates shrink.

The chart above shows the impact of Paris Agreement targets on the potential oil and gas revenue shortfall of each petrostate over the next two decades (2021-2040), compared to the five years from 2015 to 2019.

What caught our eye is the very tangible impact the Paris Agreement commitments can create towards a low-carbon shift. Oil and gas as an energy source at least - plastics is another matter, but is starting to face pressure - is going to face a downturn. Indicators like this do throw up the potential of what can come to pass if our low-carbon committments are actually implemented.

The other point this throws up, is the nature of the countries that will face the brunt of this revenue shortfall: developing and emerging economies. They are going to lose a significant source of revenue essential for supporting their large, burgeoning populations, which is already over-strained.

Very few petrostates have the luxury of Norway, Qatar, or UAE, to leverage their petrodollars today to develop newer industries and sectors that can make up that shortfall. These other countries likely will not be able to do it on their own, so expect this to be the next stage for international development and cooperation.


THE BIG READ

The Billionaires’ Guide to Climate Action

What India’s richest can learn from the likes of Bill Gates and Tim Cook in taking the sort of bets we need to tackle climate change.

In 2015, Bill Gates spoke at what has now become an iconic TED Talk, claiming that the world was not ready for the next pandemic. Last year, as we faced the effects of COVID-19, he took a lead for the pandemic response, pumping billions into developing new vaccines. Now that vaccines are spreading out across the world, Bill Gates has turned his attention to the next, bigger challenge faced by the human race: climate change.

In this, Gates is not alone. While there is fair criticism that the world’s richest do drive the causes around climate change, they do seem to be shifting gear and are becoming the loudest voice to advocate for tackling climate change on a global scale, and backing their words with action. From their personal and company footprints to achieve net-zero emissions, to significant investments on climate action solutions, to advocacy, the past couple years have seen the richest people in the world taking a more significant step towards creating an impact on climate change than ever before.

The Billionaires’ Way to Save the Earth

There is question on whether these billionaires are bringing more to the table than your typical financiers. After all, the likes of Blackrock and KKR have committed billions in funding to climate action or have set net-zero targets for their portfolios. But when the top 10 on the world’s Rich List make it a personal goal, there are benefits to climate action that go beyond just financing:

  1. Scale: The world’s richest also control some of its largest corporations. They are building and buying really large cleantech capacities. The likes of Google have already declared itself to be carbon neutral and is now aiming to move to 100% carbon-free energy by 2030. LVMH has already achieved a 25% reduction in its CO2 emissions and is now headed to net-zero. Microsoft has a detailed roadmap to achieve 100% emission reduction by 2030, as does Apple.

    The playbook seems quite standard: large reductions in corporate emissions come from reduced energy consumption and use of more energy-efficient buildings and equipment, coupled with investments in renewables to offset their carbon footprint to get towards zero emissions.

    New markets for carbon credits are being created to offset personal footprints as well, at quite staggering numbers - Bill Gates has said he pays $6 million a year to offset the emissions from his personal travel and other CO2 emissions.

  2. Innovation: We intentionally omitted mentioning Jeff Bezos and Elon Musk in the lede of this piece due to the fact that their climate change pledges have been mired in controversy - Amazon’s carbon footprint and Musk’s bitcoin buys have both been in news this past month for the wrong reasons. The two, incidentally, also happen to be hedging their bets on Earth’s survivability of a climate catastrophe by building private space programs to allow humans to colonize Mars and or set up floating space colonies. Make of that what you will.

    That said, there is much that Bezos and Musk’s (as well as Gates) are doing some part in using their money and influence to give more capabilities in fighting climate change. All three of them realise that we only have part of the solution to global warming today, and the rest of the puzzle still needs to be figured out. Whether it is carbon capture or new ways to make steel, these billionaires are backing scientists and innovators in a way that no venture capitalist can. Bezos’ $10 billion Earth Fund does not only bring a lot of muscle to innovation funding; it also clearly recognises the importance of science and innovation in combating climate change. Likewise, Bill Gates’ billion-dollar innovation fund is backing technologies that most will consider too risky to finance.

  3. Influence: Bill Gates just wrote a book on climate change. While that is not news in itself, we were pleasantly surprised to see him discuss the book and climate change passionately on late-night television. Just as he did with healthcare, Bill Gates is making the discussion on climate change action mainstream as never before.

    There is another, more tangible influence that all of these billionaires have on climate action, which is around the influence their businesses have on their wider supply chain. . Their businesses are now thinking beyond just their own carbon footprint and towards making their entire supply chains carbon neutral. By committing resources and funding to their vendors and supply chain partners, these corporations are expanding the scope of climate action in a way that can influence whole sectors and countries.

How Do India’s Rich Stack Up

Let us start with the richest of them all. Mukesh Ambani has committed to make Reliance Industries Limited carbon neutral by 2035. Reliance’s announcement has come quite recently and we are yet to see a detailed plan on how this would be achieved beyond broad categories (hydrogen, renewable energy generation, energy storage) that we touched upon in #1 of the Climate Finance by Number section in this edition.

Beyond this, there is not very much. Other than Reliance, we have not seen a net-zero commitment from anyone other organization linked to India’s Rich List (except for Adani, who while setting gears to be a renewable energy business which would make them net zero by default, are also pushing to get an increasingly economically unviable coal mine operation in Australia).

Still, it is the first step that we hope will influence others. For India’s richest have much to learn from the progress made by their global peers. More than any form of financing, their personal commitments can drive and influence real change.

There are many who believe that their lives’ goal should be to be able to breathe clean air and leave a better planet for their kids. But when someone like Chamath Palihapitiya tweets about this goal, he brings his investments, corporations and influence to war against climate change. This is the sort of commitment that India needs from its business leaders.


Engaging with CFI

As always, if you are keen to engage or talk to us on our work plans (check out the deck here) or if you have something of your own to collaborate on, reach out to us below!

Work with CFI!


That’s it for Edition #7 of our newsletter.

As always, send all feedback, compliments and brickbats our way. And of course, we do appreciate you spreading the word about this newsletter.

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Best,

Simmi Sareen and Shravan Shankar