Capitalism is a tool. Just like any other tool, it can be leveraged for good or bad. Modern capitalism is broken, leaning towards negative impact. Capitalism in its modern form started to take shape with the famous Friedman doctrine of the 70s:
The Social responsibility of business should be to increase shareholder value i.e Profits
This philosophy has had its consequences. Not paying attention to the externalities of such business has led to challenges such as rapid climate change, increasing wealth inequality, biodiversity loss etc.
On the bright side, a new philosophy is emerging. Stakeholder value over Shareholder value. We are seeing an increase in the number of assets falling under the sustainability bracket. An increase in the number of emerging venture capital firms are now focused on sustainability or impact - whatever impact means today?!
Does the sustainability market have enough potential to provide returns while also solving some of the problems? The answer isn't clear but that's exactly what capital allocation should be repurposed for.
Allocate capital to leverage talent and resources to solve hard problems. If solved, the returns will be enormous in terms of both profit and progress.
Measuring shareholder value is easy aka profits. Measuring stakeholder value is difficult. There are quite a few frameworks and methodologies but no established standard. It is precisely hard because stakeholder values span across:
- Sustainability - waste reduction/removal, emissions reduction/removal, recycling etc
- Socioeconomic - Product performance, wealth distribution, diversity, job creation, and
The traditional way of measuring stakeholder value has been through the direct lens of input and output. Input being raw materials used for business activities and output being direct results such as Green House Gas(GHG) emissions.
But it should also include the outcomes: How can we quantify i.e measure the externality costs of business activities in
- climate patterns
- human health
- Biodiversity changes
For established businesses, there aren’t standard metrics or universal measures of externalities measured across industries or geographies. Value Balancing Alliance initiative and the Impact-Weighted Accounts Project at Harvard Business School are two of the new strategies aimed at sustainable accounting.
For startups harnessing new innovative solutions to tackle these problems, their outcomes should be measured in metrics that include factors such as:
- Reduction/Capture of GHG emissions
- Enhancement of Human Health
- Ecosystem restoration
On the startup front, imposing the metrics may not work. Getting a viable product is hard but if there are rigid structures to follow in terms of ESG, things get a lot harder. VCs across Europe and some across the US have been gathering to develop a standardized ESG framework to benchmark portfolio companies and guide them in making improvements.
Escaping the Malthusian trap:
Thomas Malthus is an economist who infamously predicted many people would die from the shortage of food because there was going to be a higher population than the availability of food.
The Malthusian Trap is the idea that higher levels of food production created by more advanced agricultural techniques create higher population levels which then lead to food shortages because the higher population needs to live on land that would have previously used to grow crops.
Thanks to breakthroughs like Haber-Bosch Process and other technological innovations, we could produce more food from lesser resources. This meant that we didn’t have to reduce our consumption but innovate new ways to make scarce resources such as food production abundant. We see similar kinds of traps that we fall into, especially wrt climate change where there are large movements demanding we reduce our consumption.
There are two opposing views towards tackling climate change:
- The idea of progress by using less: reduce meat consumption, ban plastic straws, reduce travel footprint,
- The Idea of progress through alternate abundant sources: clean energy, cellular agriculture, carbon capture, decarbonize steel
The former relies heavily on individual changes that constrain freedom, invoke regulatory changes and stagnate economic growth. This is a bad philosophy and the majority of the participants in the sustainability movement share this philosophy. This philosophy entirely forbids the concept of free-market. One could argue that we do not live in a world driven by free-market: oil companies receiving subsidies, lobbying by traditional meat companies are clear stand-out examples of why we need policy interventions. It is likely that a big portion of investments in sustainability will rise from regulatory restrictions and economic incentives.
It also expects all consumers to be aware of the gazillion choices that need to be made to build a sustainable world. In theory, it sounds good but practically not feasible. Consumers can only do so much if the entire economy has been built on a model that encourages waste and emissions, directly or indirectly. We need systemic changes, so that sustainability doesn't only depend on consumer choices.
Can we expect strong returns in stakeholder value from such activities? Maybe. However, the goal for the long run should be to steer away from this philosophy which is a topic of discussion for another day.
The latter is where real solutions lie. Real solutions driven by deep science and technology that can create systemic changes while accelerating progress. Though the solutions can't be guaranteed to be 100 % perfect from scratch. Through lifecycle technology assessments, transparent discussions and simulations thanks to advanced machine learning techniques can help us understand potential second-order or third-order effects.
Business can't succeed in a world that'll be increasingly dictated by the impacts of climate change. Not tackling climate change could cost trillions of dollars while tackling it could be seen as trillion dollars of opportunities.
Of course, there are intangible economic benefits associated with tackling climate change. Preventing extreme weather events can save millions if not billions of dollars for countries. Phasing out fossil fuels and growing food in labs could bring down air pollution and make it easier to feed more people, respectively. As we see more and more startups, as well as VC funds, joining the sustainability bandwagon, we will also see tangible economic benefits. As bringing down Green House Gas(GHG) emissions becomes the norm, more startups will scout for opportunities to offer new, low-carbon technologies, solutions and services.
While major focus goes toward carbon dioxide, GHG emissions consist of CO2 and short-lived climate pollutants(SLCP) such as methane, nitrous oxide, black carbon and hydrofluorocarbons(HFC). CO2 has caused most of the warming and they tend to stay longer in the atmosphere. SLCPs are short-lived but have the potential to warm the atmosphere many times greater. They also directly impact human health and crop loss.
Climate Tech: Is not one industry. It spans across multiple industries. Energy is the biggest culprit in GHG emissions leading to climate change. Specifically, energy used in electricity, heat and transport across multiple industries. The path to reducing GHG emissions can be broadly classified into 4 inter-related levels:
Level 1: Observe and Measure: The first step in solving any problem is to understand the problem and its impact. Our World in Data provides the most accurate and researched data on the leading causes of climate change. Climate-modelling-as-a-service is another key area that helps forecast the potential impacts of climate change. Companies like Jupiter Intelligence and Cervest aim to accurately identify signals, or early-warning signs, of extreme events such as floods, fires, and strong winds.
Level 2: Energy. Shifting to low-carbon energy sources which power other sectors is like building a strong AWS(Amazon Web Services) on which a wide range of applications can be hosted.
To reduce GHG emissions and decarbonize power and fuel, we need to:
- shift to alternate sources of energy such as renewables(sun, wind, green hydrogen, osmotic), nuclear, biofuel and geo-thermal
- enable clean sourcing of electric batteries, build energy storage systems and smart grid systems
Level 3: Innovations across all the other sectors since there are no universal solutions. To do this we need to:
- Re-shape industrial operations to cut down emissions
- Shift low-tech industries such as food, transportation, fashion to high-tech industries through AI-based and Bio-based economies.
- Switch to electric mobility
- Enable smart buildings and smart systems to flourish
- Track supply chain and build a circular economy - where waste and pollution are designed out in the first place; products and materials stay in use for much longer or can be re-purposed at end of life; and natural systems that can regenerate.
Level 4: Direct Capture of CO2 and GHG emissions
To meet the target of limiting global warming to well below 2 deg Celsius requires not only GHG emission reduction and GHG offset but also GHG removal.
Credit: David Babson at Impact Tech
On the carbon front, the University of Oxford released its report on principles for net-zero aligned carbon front. While stressing enough on carbon reduction and short-term storage solutions, the report encourages carbon removal and long term storage solutions.
A quick summary of the Oxford Principles for Net Zero Aligned Carbon offset by Alexandre Terrien of Future Positive Capital
The report also argues that “a good net-zero aligned portfolio of offsets must increase the portion of carbon removals over emission reductions, and the portion of long-lived storage over short-lived storage, over time.” The long-lived storage solutions include biological carbon sequestration (planting trees, soil carbon enhancement, etc.), bioenergy with carbon capture and storage (BECCS), direct air capture with geological storage (DACCS), converting atmospheric carbon back into rock through remineralisation, or repurposing the captured carbon for feedstock such as fuel.
Credit: Principles for Net Zero Aligned Carbon by University of Oxford
A lot of the above-mentioned technologies require scientific innovations. To realize advanced science-based technology and bring it to the global market takes 20-25 years, take Tesla for example. The clearest path to accelerating this progress is encouraging more experiments and failures, increasing funding opportunities and reducing scrutiny by the government on government grants for scientific projects and startups.
Looking forward to a future where we have completely shifted to stakeholder value-based capitalism, created sustainable progress through abundance and enough GHG emissions captured to limit the impacts of climate change.
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