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BFD Expert Voices - Climate Deals

BFD Expert Voices

The SEC's 3-1 vote in favor of the proposed climate disclosure rules could be a windfall for enterprise companies that track emissions as a service ⁠("TEaaS," anyone?), Megan reports. 

Why it matters: Companies bracing for the rules to go into effect are scrambling to understand their overall emissions footprint, and paying for specialty software may be the easiest and cheapest way to stay on the SEC's good side.

Companies like Persefoni and Riskthinking.AI offer compliance software for companies with ESG or broader net-zero programs or emissions-accounting services, as Axios previously reported.

Changes to match the existing suite of software solutions with the SEC rules should be minimal because the rules closely mirror existing voluntary reporting frameworks, says Kristina Wyatt, former SEC senior counsel for climate and ESG and now deputy general counsel at Persefoni.

Building similar technology in-house could be cumbersome and expensive. 

Zoom in: The proposed rules are still far from going into effect. Top emitters (looking at you, oil, gas and utility companies) will first be required to disclose three types of emissions and open up reporting systems to audit in 2023. 

Initial disclosures will include Scope 1 and 2 emissions. The rules are currently vague on what constitutes "material" Scope 3 emissions, which tend to be harder to measure but comprise a much larger portion of a company's total carbon footprint. (See chart at bottom of newsletter.)

Delays could arise if companies push back by arguing that the rules are overreaching. 

Some observers believe individual companies will remain publicly quiet to avoid negative PR and instead allocate funds to quietly lobby against additional regulations.

The big picture: Requiring companies to accurately disclose climate risk will help the public markets operate more efficiently by shining a light on previously unknown risks, Riskthinking.AI CEO Ron Dembo tells Axios.

"If you are the SEC and understand the issue of the supply chain risk and understand how mispriced it is in the market, you have to deal with it sooner or later," Dembo says.

Between the lines: Emissions tracking software could prove somewhat akin to sales software back in the day.

Nearly every SEC-regulated company has become a potential customer for emissions tracking companies.

"This is an entirely new industry that's developing," says Libby Toudouze, director at PE firm IQ-EQ.

The bottom line: The SEC single-handedly expanded an entire market overnight, and the companies with a head start in tracking emissions have the potential to become industry heavyweights.

1 big thing: Emissions trackers win

Illustration of a one hundred dollar bill coming out of a measuring tape, measuring the smoke coming up from below.

Less than one-third of U.S. companies publicly reported their carbon emissions last year, according to Bain & Company partner Debra McCoy. The scramble now for better reporting — or simply reporting at all — is going to fuel climate deal volume for a long time to come.

Why it's the BFD: Absent a standardized approach, companies will seek to become the "Good Housekeeping" of emissions reporting, and investors and carbon accounting firms will spend big to get it right — or make it seem that they are. 

The broad array of carbon accounting approaches underscores a central challenge: how investors and execs (and folks like us) can possibly figure out which schemes are most accurate.

"Reduction isn’t the issue, in the sense that we have the technology. The issue is standardizing a way to measure, track, report emissions," Franco Ciulla, managing director at the consulting firm L.E.K, tells Alan. 

The big picture: The SEC's proposed climate-risk disclosure rule purports to set at least a baseline for tracking and reporting emissions. 

But companies will still have enormous wiggle room for exactly how they'll track emissions — especially more indirect Scope 3 emissions along the value chain.

Across 510 pages, the proposed rule is long on the "what" — but comparatively shorter on the "how."

By the numbers: Research firm Verdantix says public companies will spend $6.7 billion in just the next three years to comply with the proposed rules.

The number of companies looking for help to track Scope 1, 2 and 3 emissions "has surged," says FTI Consulting senior managing director Ken Ditzel.

Energy Impact Partners is seeing the same: "Our own team is now seeing perhaps five [companies] a month or more, up from one or two a year two years ago," chief impact officer Peter Foxpenner tells Climate Deals.

What they're saying: "I imagine there are two types of firms this week: Those with real portfolios of new clean energy and climate investment opportunities who welcome more certainty in disclosures and are eagerly poring through the details," says Franz Hochstrasser, CEO of Raise Green. "And some at major financial institutions who will now have to spend the week figuring out just how many financial products in their portfolio will not be able to stand up to such disclosures. I suspect there is going to be a lot of the latter."

💭 Our thought bubble: We are inundated with pitches and press releases from B2B firms trumpeting their approach to tracking emissions. FTI's Ditzel offered three questions to consider in reviewing a company's emissions report or a carbon-accounting firm's pitch: 

Does the firm follow a standard like the Greenhouse Gas Protocol? 

Do the results make sense relative to peers?

2. The BFD: Exposing disclosure 

Illustration of a hand in a suit blocking the smoke being emitted from a smokestack 

The rule's long-term impact on the C-suite:

"Today, a few companies, mostly bigger companies, have a chief impact officer or chief sustainability officer, but two or five years from now every single organization will need a CIO or CSO, and every law firm and consultant agency will bring on a practice to do that."  

Libby Toudouze, director at PE firm IQ-EQ.

The unintended market consequences of the disclosure rule:

"I don't think, in the short- and medium-term, that it sets the stage to link financial performance to sustainability performance, but it will for the long-term."  

"What you don't know is that one [investment] has huge climate risk and supply-chain risk and one has less risk because it's not priced in, it's not presented anywhere, and the two look equal but they're not. If you are the SEC and want to create a fair market, you have to fix the mispricing that is hurting consumers and investors." 

"The SEC’s proposed new rule can drive an industry standard that allows commercial operators to report on the important work they are already doing. Some of our largest customers like Walgreens, Chipotle and Wendy’s are already publishing sustainability reports to provide transparency of their emission reduction efforts." 

Jason Narod, senior vice president of revenue and customer experience at GridPoint

"Regulation and reporting standards will hopefully increase the quantity and quality of companies’ accurately reported Scope 3 emissions data, but regulation can only take us so far."  

Patricia Pina, head of product research and innovation at Clarity AI

3. What they're saying

Speaking of tracking emissions: S&P Global launched what it's calling a "comprehensive framework" to standardize and better assess how well (or not) oil and gas firms are estimating the lifecycle of greenhouse gas emissions associated with crude oil.

Two steps forward, one step back: Global build-out of new natural gas plants is now larger — on a capacity basis — than that of new coal plants, according to Global Energy Monitor. Though natural gas generally produces fewer lifecycle emissions than coal (and there is growing doubt about that when methane leaks are taken into account), the new construction also promises to lock in decades of emissions.

Color us surprised: A new report finds that the world's biggest banks and insurers are failing to fulfill their public pledges to align their investments and business practices with 1.5 degrees C of warming, such as by bankrolling new fossil fuel projects. The analysis is from advocacy groups Reclaim Finance and Rainforest Action Network (and provides some corroboration for the scuttlebutt we hear in conversation with non-advocates).

4. 🌡️ Temperature check

Beep, a Lake Nona, Florida-based autonomous EV shuttle startup, raised $25m in Series A-1 funding. ABS Capital led the follow-on round with supporting participation from Intel Capital, Blue Lagoon Capital, TDF Ventures and Hidden Creek Management. http://axios.link/wrJm

Dance, a Berlin-based e-bike subscription startup, raised €20m (~$22m) in debt financing from Silicon Valley-based TriplePoint Capital. http://axios.link/excs

bp Ventures announced a £3m ($3.97m) equity investment in Flylogix, which deploys unmanned drones to measure methane offshore. The startup has been working with bp in the North Sea since 2018, and apparently holds the British record for the longest commercial drone flight. http://axios.link/MXUz

PepsiCo made a "founding investment" in the Colorado River Basin Fund, a $5m "future of water" VC fund focused on technology solutions for the deeply stressed watershed. http://axios.link/KUdr

Ara Partners, a private equity firm that specializes in industrial decarbonization investments, has partnered with climate tech investor Laurence Molke to create CycleØ Group Limited, a European biomethane platform, through the acquisition of FNX Liquid Natural Gas S.L. http://axios.link/ttuU

Gevo, Inc. (NASDAQ: GEVO) has signed a “take-or-pay” agreement with Delta Air Lines to supply 75 million gallons of sustainable aviation fuel per year for seven years, generating about $2.8b in revenue for Gevo. http://axios.link/o6B3

Siemens Financial Services and Siemens Smart Infrastructure have launched a $100m capital program to help U.S. small and medium sized businesses decarbonize. http://axios.link/ESat

Columbus, Ohio-based American Electric Power's (NASDAQ: AEP) 998-megawatt (MW) Traverse Wind Energy Center is operational and providing energy to customers in Arkansas, Louisiana and Oklahoma. http://axios.link/XOP6

Urbix, Inc., an automotive battery-grade graphite processing company, says it is at the advanced stages of production of its material for anodes, with full-scale production set for 2024.

5. Hot deals

Micah Kotch is joining early-stage tech firm Blackhorn Ventures as partner. He was previously the managing director for URBAN-X, a BMW Group-backed accelerator for climate tech startups. http://axios.link/a4aW

6. It's Personnel

 Data: Datamaran; Chart: Will Chase/Axios

Companies have already started including more references to the Scope 3 emissions along their value chains. 

7. Final numbers

🌎 Happy Tuesday and welcome back to Climate Deals.

👋🏻 We're Alan Neuhauser (@alneuhauser) and Megan Hernbroth (@megan_hernbroth), and we've got the rundown on investments, transactions and the 💰deal-flow💰 in sustainable energy and climate tech.

Let's get to day 2: SEC disclosure-rule edition.

🐶 Both of Megan's dogs now recognize "let's go to work" as a command for going into her home office/guest room. Now if only they could figure out how to manage her inbox...

 📈 Today in inflation: Alan's dog-walker (understandably) increased his rates due to rising prices for, it seems, just about everything. 

Thanks for reading Climate Deals, and please be sure to share with your walking buddies, dog park friends and book club members.

March 22, 2022

1 big thing: Emissions trackers win