General Atlantic on why climate is a ‘multi-decade’ investment theme

This article is sponsored by General Atlantic

What was behind General Atlantic’s expansion into the climate space with BeyondNetZero?

Two major themes have governed General Atlantic’s investment programme since its launch in 1980: a belief that digitalisation is going to impact every sector and that globalisation is an unstoppable trend. More recently it has become clear there is a third multi-decade wave of opportunity emerging around the transition to a more sustainable economy. That is going to require enormous amounts of capital, expertise and innovation and was the genesis of our work with BeyondNetZero.

BeyondNetZero is focused on using tech innovation to create a more sustainable world. The fund launched in 2021 and has invested in seven companies that are not only focused on their own decarbonisation agendas but also on reducing Scope 2 and 3 emissions. Like the two mega-themes that have underpinned our investment philosophy since our genesis, we see this as a significant and long-term investment opportunity.

How would you describe LP appetite for climate investing?

We see increased demand for climate-related investments, both within the industry at large and our investor base, citing a sense of urgency to invest in technological change, protect our planet and drive the energy transition. The scale of investment needed for the transition is an attractive structural growth opportunity and around 50 percent of capital raised by the BeyondNetZero fund came from existing GA LPs, and the other half came from new investors.

What was particularly encouraging was seeing corporate partners coming onboard. We attribute this to three likely reasons: they see the long-term tailwinds we are witnessing as growth investors; this allocation helps many work towards their net-zero plans; and we are overcoming the misperception that climate ambitions come at the expense of financial returns.

Where are you seeing the most interesting investment opportunities today?

One key theme for our investment strategy is a focus on decarbonisation. Emerging economies in Asia, Africa and Latin America are expected to lead global growth over the next decade. With this growth and continued digital transition comes increasing power demand. We must find a way to meet this demand with low-carbon energy sources. That touches on infrastructure, supply chain optimisation and industrial process cleansing.

We see a lot of opportunities in energy efficiency, given energy is wasted during consumption due to inefficient materials and dated infrastructure. Energy efficiency solutions enable us to enhance infrastructure to use less electricity and thus reduce emissions. Our team is also looking into investments in resource conservation – how do we do more with materials we already have and use data and software to support these efforts; and emissions management – how can we measure, track and remove emissions from the air?

There is a huge amount of innovation in each of these sectors. Some of that is at a stage of maturity that is relevant to us, others are not yet at that growth investment stage.

Are there particular emerging technologies that excite you?

Looking at where VCs are putting their money is a great indicator of what might be coming into our programme with time. Looking at the decarbonisation theme, technologies are being developed around carbon capture, sequestration and storage that could become solutions that fall under our scope. Removing carbon dioxide from the atmosphere is clearly exciting, but those technologies haven’t yet reached a proof point in their evolution where they can provide real unit economics for us to invest. The same is true with new sources of energy such as hydrogen and nuclear fusion. We look forward to a time when it is possible to scale these technologies into viable companies.

General Atlantic recently acquired Actis. How does a move into the infrastructure space fit with the firm’s climate investment strategy?

BeyondNetZero was a natural starting point for us because it involves scaling technology businesses that are typically asset-light and intellectual property-heavy, which is in line with what we’ve always done as a growth investor. But a huge proportion of the capital required to transition the economy will involve real assets, and real asset investment is a very different business, requiring different skill sets.

We have known Actis for many years and saw the firm as a natural partner for us, given our shared business-building expertise, global approach, and value creation-focused investment philosophy. As we looked at where we see global growth, Actis shares a belief that economic activity is shifting towards the Global South – a trend we have witnessed over the past few years. While GA is fairly balanced between developed and emerging economies, Actis is predominantly focused on emerging markets, bringing a new lens to this investment opportunity.

Taken together, the acquisition will complement our climate offering and BeyondNetZero’s focus on innovative technologies that can combat climate change at scale.

Climate solutions in emerging markets have historically been underfunded. What are the main obstacles to investment and how can they be overcome?

It’s true that a lot more investment is flowing into more risk-averse markets, supported by major pieces of legislation in the US and Europe. However, the need for capital in emerging markets is even more acute. These regions are still building out their power capacity and shame on us if we don’t allow them to leapfrog fossil fuel generation, particularly given the natural resources available in regions such as Africa.

Investors are often scared of what they don’t understand or cannot control, such as FX, geopolitical or economic risk. But with the right local expertise, it is more than possible to drive innovation and make good returns while doing it.

What are the challenges to measuring climate impact and what’s your approach?

We’ve positioned BeyondNetZero as a climate rather than impact fund, and from the beginning we wanted our portfolio to have a positive climate impact. It only invests in companies willing to submit themselves to science-based measurement of their greenhouse gas emissions – Scopes 1, 2 and 3 – and commit to a reduction plan for their own operations and their entire ecosystem, with the goal of reaching net zero.

Monitoring and reporting on our portfolio’s decarbonisation outcomes is a key element of our climate investing approach. As LPs set their own decarbonisation strategies, they need accurate and robust data to report on progress against their own targets. The challenge has always been to do this in a way that can never be called into doubt. For that reason, we partnered with Systemiq, a McKinsey spin-off focused exclusively on climate.

Systemiq has been fully incorporated into our investment process, working with us on due diligence, coming up with independent emissions reduction plans, and auditing each company annually to ensure they are living up to their promises. The biggest challenge has been the lack of consensus on reporting frameworks and standards, and the current limitations around data, but we’ve seen progress on both fronts since BeyondNetZero launched.

How optimistic are you about reaching net-zero goals?

It’s a daunting task, and we have no choice but to give it everything we have got. COP28 was encouraging from an awareness perspective but we still need global coordination and collaboration from every element of the global economy – from governments to publicly listed corporates, the private sector and asset allocators – to finance and scale climate solutions globally.

I think we are a model for how growth capital can play a role in accelerating the transition, but the massive investment needed for scale will involve many more players. However, at least we are all pushing in the same direction and with the same sense of urgency, and that gives me hope.

Gabriel Caillaux is head of climate, co-president, and head of EMEA at General Atlantic