2050 is an important year for climate tech, with the Paris Agreement calling for emissions to reach net zero by then. In a conversation with GenZero’s Frederick Teo for SOSV’s Climate Tech Summit, we talked about realistic paths to hitting that goal and how startups can tackle what Teo called one of the most existentialist challenges of our generation.
GenZero is a $3.6 billion investment company that is backed by Temasek, already known for its climate investing. Teo talked about how it gauges companies before investing, supporting nascent technologies and solutions in the space and what startups can tackle in the next two decades. This Q&A was edited for length, and you can watch the full conversation here or at the bottom of the article.
TC: GenZero’s initial commit is from Temasek, which was already a leader in global investing when it announced GenZero in June. It’s a wholly owned company of Temasek, so why did Temasek decide to start GenZero and what is GenZero doing that Temasek isn’t already?
FT: Temasek, as you know, has already taken a lot of steps in the past few years into making investments into sustainability, as well as clean energy and climate-related spaces. It is important for us to think about how to deploy capital in this space because obviously all of us are aware of the climate emergency, the fact that this is actually likely to be one of the most existentialist challenges of our generation. It is important for us to be able to find solutions that can actually address many of these things like global warming, sea level rises, the challenges of food production in a sustainable way. So we wanted to be able to have a dedicated capability to access some of these decarbonization opportunities, and Temasek decided to park aside a sizable amount of capital to be able to develop a team that would be able to focus on issues like carbon markets, decarbonization technologies as well as nature solutions. So that is the reason why we established GenZero as a separate investment platform company.
In our work we have been looking at technology solutions such as low carbon materials and carbon capture capabilities, nature solutions that seek to protect and restore natural ecosystems, often with a view to generate carbon credits on top of that, as well as to invest into ecosystem enablers in the carbon market space. The reason for that is because we think that in the near term, energy transition would require some form of participation from carbon markets to allow people to gradually execute this transition. But we do need carbon markets to be credible, effective, transparent, high quality, and therefore there is still investments needed in order to be able to improve capabilities and technologies and solutions in that space.
For companies that are curious about trying to pitch themselves to you, what are some examples of your current portfolio companies?
In the technology space, we have invested into both funds as well as companies, so a major fund investment is Decarbonization Partners, and that is basically a climate-focused fund that is a joint venture between Temasek and BlackRock. We are an LP invested in that, and they are very focused on late-venture, early growth opportunities across different areas in the decarbonization space.
We have also invested into a technology company called Newlight, which seeks to be able to produce bio plastics from captured methane. On the nature side, we have been investing into a few forestry projects that generate carbon credits, and then on the carbon market side, we count among our portfolio companies things like South Pole, which is a global leader in providing project advisory, technical advisory solutions and project development for companies seeking to embark on a net zero decarbonization journey, as well as a carbon exchange called Climate Impact X, which is headquartered here in Singapore.
For companies that are curious about potentially getting investment from you, what investment stage does GenZero typically look at?
We are kind of flexible. For very early-stage companies, say around the Series A or just before, we will work with different partners to be able to evaluate and deploy capital to support early-stage companies, but I think it’s important to understand why we need to do this. If we think about the broader net zero decarbonization challenge, everybody talks about this 2050 timeline to get to net zero. But the reality is that if we want to create significant climate impact by 2050, we are looking at new solutions that must already somewhat exist today or are starting to come into being today, because we will need another 10 to 15 years for the technologies and solutions to mature and get to a stage where they could be commercialized, and then probably another 10 to 15 years for it to actually be able to be deployed and create some kind of impact. That basically means that this current cohort of young companies are going to make a difference to the 2050 agenda. That is the reason why we are very excited to participate in this space right now, because the action must take place now in order to have any meaningful difference by 2050.
Considering that, with technology not coming to fruition by them until then, or making actionable results by then, in light of that, what kind of metrics or milestones do you like to see companies bring to the table before you consider them for your portfolio?
I think it goes back to the way we evaluate our performance at GenZero. We have a double bottom line, so our shareholder expects us to be able to obviously achieve some level of financial returns. That’s a given. But we also take the idea around measuring climate impact rather seriously. We try and understand, for example, the kind of climate impact that a solution would be able to achieve if successfully deployed. We also look at the kind of carbon yield that the company or solution would be able to deliver. For example, for every dollar invested in capital, how much carbon bang for the buck can we actually get, because obviously many solutions could be practical, cost effective and great.
But for every dollar of invested capital, how much carbon impact can we actually achieve on a per annum or cumulative basis? So that is actually one metric that we think about because capital is going to be finite. We also have a very limited time to be able to achieve a significant amount of climate impact to be able to address the climate change challenge. So it is vitally important for us to understand how to deploy capital into the areas that will make the most meaningful difference.
One of the questions I want to ask in terms of working with startups, especially for the long-term, because I think it’s fair to describe GenZero as an active investor that works closely with startups. Some of their work might take a while to come into fruition, so what kind of value add are you able to bring to startups?
We work with a range of different companies, whether they are very, very early-stage startups or they are slightly further along on the journey. But I think there are a few things where we hope to be able to bring value to our partners, but the first one is a more considered view around how the carbon markets and developments around carbon are taking place around the world. Because at the end of the day, we are solving for a decarbonization challenge or climate change challenge, that understanding how we are underwriting investments, how we are thinking about the movement of carbon price, and how people are thinking about decarbonization strategies, policies, are being introduced will be important, and I think GenZero hopefully will be able to provide a useful perspective on that front.
The second aspect is that GenZero is not alone. We do not profess to be the only game in town. There are many others who are doing great work in this space and we often want to think about how we are able to foster a sense of partnership, a kind of open architecture type of ecosystem in a way that we are able to partner each other dynamically in order to find new and interesting solutions and, more importantly, ways of actually applying them. It is not good enough for us to come up with great ideas. It is much more important to think about how we can actually get those ideas deployed, used and scaled.
Being part of a broader Temasek ecosystem here in Singapore, and globally, we have a network of relationships and contacts that might be quite useful for startups, to either try out solutions, bounce ideas, get some of the solutions implemented and also be able to find other sources of financing and support on their own journey of growth. We have a Temasek portfolio in a range of different industries that could certainly use innovative decarbonization solutions, whether it’s, for example, airlines making sustainable aviation fuel, or some of our utility companies looking at carbon capture capabilities, so there is that opportunity to be able to deploy some of these solution across the network or to make those introductions and get actual practitioners and operating companies to provide feedback on what would be needed for some of these solutions to scale and be effective. Oftentimes, I think we are also talking to a broader network of fund managers and fellow investors, and therefore through that collective understanding of issues, we hope to be able to value add to some of our partners.
For founders that are listening into this, what kind of opportunities do you think there are for startups in climate tech, or what in particular are you excited about?
I think its limitless. The ones we are really watching for in the technology space includes some of the carbon capture and carbon removal technologies, low carbon fuels, low carbon materials and, in particular in the near term, probably things to do with a hydrogen transition that I think would be quite meaningful in terms of being able to push the envelope by around 2030 or so. I think there are also a lot of opportunities in supporting nature solutions. It is a class of investments and opportunities that many investors and corporates might be less familiar with, but nature is as important as technology in trying to solve for near-term decarbonization.
Then finally into the carbon market space, I think we do need a lot more capabilities in the MRV space. These are the ones that are doing monitoring, reporting and verification of carbon project rating capabilities, to be able to improve the transparency, credibility and quality assurance in the carbon market space. But let me end off by just saying one thing. There is always a tendency for us to think about digital solutions and software solutions to be able to solve this and they are vitally important because they seek to optimize, and if you do not digitalize, you cannot optimize energy efficiency and many of those are critical to this decarbonization space. But I will certainly have a shout out and encourage many of our founders in the room to also think about the core engineering, the tougher kinds of solution sets that we need, because at the end of the day, even as we optimize, somebody has to fundamentally do something about taking the carbon out, improving the core underlying engineering efficiency of some of our solution. So that’s tougher to do, I think sometimes maybe depending on your point of view, as sexy or not as sexy. But it is vitally important, and I think therefore, there is space for many of us with varied interests to be able to tackled this climate crisis.