Patient green capital

The value of shares in Scottish Mortgage, and any income from them, can fall as well as rise and investors may not get back the amount invested.

What is the greater challenge to decarbonisation? The speed at which we need to find breakthrough innovations to reform carbon-intensive sectors at scale or the patience investors require to fund the companies set to do just that?

It’s a trick question. They are two sides of the same coin. If we are to limit global warming to 1.5-degrees, the world will have to decarbonise at 13 per cent a year – over eight times the rate historically achieved since 2000. Thankfully, we can already see a new generation of entrepreneurs forming, primed to find solutions in carbon-intensive sectors. Over the next decade, their business models and drive will be key to triggering the tipping points that will invite further investment and thus accelerate adoption.

The first step will be securing significant funding from a particular breed of investor. Decarbonising technologies typically take longer to develop and scale than traditional ‘digital’ technology offerings. Investors need to be prepared to show more patience with their capital than they might do with more established industries. Scottish Mortgage can provide that patient capital, which will be integral in enabling this new wave of companies to achieve the exponential growth needed to make meaningful steps towards decarbonisation. 

The next generation of green technologies

Solugen, for example, is a highly ambitious and potentially transformational business, ready to meet the challenge of decarbonising the chemicals industry. Using synthetic biology, it has created a platform to make cleaner chemicals by moving away from carbon-based inputs. The chemicals industry is colossal at almost $6tn a year. But it is also one of the dirtiest, responsible for 30 per cent of all global carbon emissions. Solugen could have a significant impact if it succeeds in cleaning up the chemicals industry.

Another company tackling global warming from a different angle is Climeworks. Its carbon capture plant, Orca is situated just outside Reykjavik, Iceland and is currently the largest installation in the nascent ‘direct air capture’ industry. This technology aims to remove carbon dioxide from the atmosphere. Once sealed underground, the gas becomes ‘negative emissions’. This is a potentially essential but underdeveloped method for tackling global warming. 

On the outskirts of the Arctic circle in a small city in northern Sweden lies one of the most ambitious renewable energy projects in the world. Northvolt has begun building Europe’s largest lithium-ion battery manufacturing plant, which will be powered by 100 per cent clean energy. Where it leads, others will follow. But in the meantime, it takes vision and foresight on the company’s part, and understanding, patient capital from investors to see this through.

Supporting the green industry to scale

Solugen, Climeworks and Northvolt share a similar challenge – scale. Scaling these infrastructure companies is going to need support in a different way from their ‘digital era’ predecessors.

The structure of traditional venture capital strategies was well suited to digital business models. Because digital technology scales easily, investors can make a swift exit within the typical 10-year fund life. However, investing in decarbonisation technologies is going to require longer time scales and potentially different investors. These will be investors – including Scottish Mortgage – whose philosophy and fund structures can match the time horizons required to support these companies as they deal with the challenges of high upfront costs.

Investors will need to have courage and assume the risk hurdle of moving away from the safe sanctuary of scaling digital technologies. Venture cap funds will need to be lured away from focusing on areas with demonstrated success and a healthy pipeline of late-stage funding.

The sooner technologies, such as those being worked on by Solugen, Climeworks and Northvolt, can achieve scale, the greater the total emissions reduction potential for our society. As it stands there is a mismatch between the proportion of capital in the private markets allocated to decarbonisation and the respective share of global carbon emissions depreciation they contribute to.

Scaling may be a challenge for the three companies, but they are fortunate in that they share a similar attribute – they have been created and are run by founders who are not afraid of the challenges that lie ahead. While the investment community may have some apprehension about the lack of track record many of these founders have in the deep understanding of decarbonising technologies given its nascency, we are buoyed by the interdisciplinary nature of this space and what solutions a fusion across industries can create.

Solugen’s founders Gaurab Chakrabarti and Sean Hunt epitomise this fusion in action. The former a physician scientist, the latter a chemical engineer – are testament to how the cross-pollination of ideas from other industries can lead to radical thinking and solutions. We believe this is what makes a company like Solugen special, in that they have combined two viewpoints from completely different ends of the scale spectrum and in doing so have arrived at a fundamentally different way of viewing the emissions problem inherent in the chemicals industry. Unlike more defined areas such as software or biotech, the companies at the forefront of the energy transition – like Solugen – are going to depend on several different talent pipelines. We as investors should be encouraged to look beyond traditional ‘sector silos’. Addressing climate change is going to need more holistic thinking as it is a complex, cross sectoral problem.

Financial returns for positive impact

The examples above take us back to the underlying purpose of the financial markets, which many participants have largely forgotten. The provision of patient aligned capital to help transformational companies scale is the essence of investing in progress.

For Scottish Mortgage, our investments in these companies are driven both by a desire to have a positive impact and the potential to make significant financial returns for our shareholders. We see it as our mission and duty to provide primary capital to businesses, by directly funding investment in future economic growth. Aligning investment capital with environmental impact can maximise future progress, which can only be good for our shareholders, our society and our planet.