July 9, 2025 • 31 mins
The climate transition is expected to require significant capital expenditures, with private equity being an important vehicle. In this episode of the ESG Currents podcast, Vikram Raju, head of Private Equity Climate Investing for Morgan Stanley Investment Management, joins Bloomberg Intelligence’s senior ESG analyst Shaheen Contractor. They discuss the financial viability and risks of climate-focused investments, the complexities of measuring impact, investment themes with untapped potential and more.
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Speaker 1 (00:09):
ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mounting regulatory attention and pressure from other stakeholders.
The rapidly evolving landscape has become inundated with acronyms, buzzwords
and lingo, and we aim to break this down with
(00:31):
industry experts. Welcome to ESG Currents, your guide to navigating
the evolving ESG space, one topic at a time, Brought
to you by Bloomberg Intelgence part of Bloomberg's research department,
with five hundred analysts and strategists working across all major
world markets. Our coverage includes over two thousand equities and credits,
(00:52):
as well as outlooks on more than ninety industries and
one hundred market in disease, currencies and commodities. I'm Shy Contractor,
senior ESG analyst for Bloomberg Intelligence and your host for
today's episode. So today we're joined by Vikram Raju, Managing
Director and head of Private Equity Climate Investments for Morgan Stanley. Now,
(01:15):
as we all might have heard, getting to a two
degree world is going to take a huge amount of
a capital, with private equity being an important vehicle. So
today I'm excited to speak with someone who's been making
these investments for many, many years and learn more about
some of the investments made, some opportunities and challenges ahead.
(01:35):
So Vicram, thank you for joining us.
Speaker 2 (01:38):
Happy to be here.
Speaker 1 (01:39):
Vickam, Maybe start us up by telling us a little
more about the type of investments you make, maybe the scale,
some quick examples. Just give us an idea of the landscape.
Speaker 2 (01:51):
Sure, so we you know, in our team we joke
we do everything from fish to fashion nice. So anything
that moves as long as we think it's a good
investment and will make a good return for our investors
and has something fundamentally provable about it in terms of
carbon impact, emissions avoidance, abatement. Those are the two things
(02:15):
that we're looking at. Now, what do we not do?
We're not early stage investors, so those are the real
heroes of this the climate story. We're coming in right
after those investors have done the seed round series A
through C, and we're coming in somewhere between C to E.
Right when a company has mature to the point it
(02:37):
has ten twenty million dollars in revenue may or may
not be profitable, but we've got that visibility that it's
going to get to cashual break even profitability. That ten
million in revenue is getting to one hundred million. That's
the part of the journey that we're along for. And
we step off when it becomes a much larger company
where you know, the the larger controlled investors. He drug company,
(03:00):
if it hasn't already gone to.
Speaker 1 (03:02):
Strategy makes sense. I was just going to ask, I
would love a few examples if you have some many
Just look.
Speaker 2 (03:10):
The spectrum is pretty wide. We're in everything from quite
recently a company called inside m which uses aircraft to
track methane emission fugitive methane emissions in parts of energy infrastructure,
all the way to on the ocean. We're in a
company called Exocean, which tracks sends these uncrewde survey vessels
(03:33):
which is the size of maybe two dining tables, and
it goes out like a lawn mower in the sea
and high seas and attracts the ocean floor, which is
very critical provides critical data to set up ocean based infrastructure,
right wind farms and so on. At the other end
of the strect spectrum. We're in something like Heel, which
is a meal replacement drink that basically, if you're doing
(03:56):
this podcast, you don't have time for breakfast today, you
drink a heel that gives you all the energy and
nutrients you need and it happens to be plant based, right,
So that's the entire respectrum. We're also in supply chain software.
We can talk about that and a company you had
recently on your show called Instagrad, which provides diesel generator
replacements for construction sites.
Speaker 1 (04:17):
Very exciting. So m I want to jump to a
question that's probably on everyone's mind, the regulatory environment. Now,
I know it's probably safe to say that the climate
space we've seen quite a bit of a whiplash right
from the current political environment, especially in the US. I
guess how has it impacted the companies you evaluate and
(04:38):
what's your long term view?
Speaker 2 (04:41):
I think the main thing we look for in any
company we invest in is resilience, right. We look for
companies that work in a variety of policy environments, a
variety of economic cycles, and a variety of your customer
sentiment cycles as well. Looking at something that fundamentally adds
(05:02):
value to the end customer. It adds economic value, it
saves them, time, saves them energy, saves the material. And
so that is something that is fairly robust in a
variety of geographical settings, across policy environments, across time. And
(05:23):
we developed this. Yeah, I've been doing this for thirty
one years now, investing in general. And I started my
life in during the Mexican crisis. I worked through the
dot com boom and bust, through the global financial crisis,
COVID climate one point zero, the nuclear winter that followed,
and now and the lesson that learned that basically you
(05:44):
know has come through is if there is something fundamental
networks and adds value for people, and you have a
unit economics model that works, they will be demand for it, right,
And if you've relied on something less strong than that,
something more flake key, then you're in trouble.
Speaker 1 (06:04):
Yeah, that makes sense. So it's almost sounds like you're
a bit agnostic to the regulating environment. You look for
fundamental and economic drivers. Is that fair to say?
Speaker 2 (06:14):
All forms of regulatory support and include carbon pricing in
this are essentially zeroized in our model. And if we
still find it compelling, then we do it.
Speaker 1 (06:24):
So Okay, so fundamental economic reason to do that makes sense.
I guess my next question is, you know you evaluate
the fundamentals, you evaluate the economic stance. What is the
biggest pain point for these types of investments across your table? Oh,
what is the biggest challenge you know you face when
(06:46):
you're investing in these businesses?
Speaker 2 (06:49):
Let me give you an insight into your day in
my life. Right we are, we see a lot of
investment ideas come and the first thing to say is
that it's very humbling to be able to see the
people who have backed their vision and are doing something
very hard in turning that vision into a company. The
(07:10):
second thing to note is that it is it's fairly
common to see a reasonable amount of early traction. By this,
I mean you see a bunch of logos, right, people
have made inroads into some pretty impressive names. The pain point,
as you refer to it, is converting those initial entry
point logos into something more substantial and enduring which we
(07:35):
can fundamentally underwrite.
Speaker 1 (07:36):
Two.
Speaker 2 (07:37):
And this is as one of my portfolio company CEOs said,
getting out of the corporate petting zoo. Right, It's easy
to get in and remain very subscale because you're someone's
pet project. But to be integrated into the mainstream buying
decision is a very different thing. And that transition is hard,
(07:59):
and that transition requires capital, and that transition sometimes requires
sort of organizational enhancement in order to get there, which
takes us to the last point. If you factored all
these things correctly, and you worked out a business model,
a scaling model, unit economics that work, are you being
the right price for it? And you know this In
(08:22):
the market, there've been cycles where there's been exuberants and
pricing has been detached from where some of these fundamental
models should go. And to re factor all those things
in in terms of making our decision, is there enough
evidence that this pain point can be crossed with the
capital we have at the price we want to pay.
Speaker 1 (08:41):
So, Victim, you talked about scaling up these businesses. Curious
as to how much of a role you play in
let's call it advising or dealing with these companies and
what are some key points to note when we think
of scaling up these businesses.
Speaker 2 (08:59):
That's a good point. So firstly, we're coming into companies
where we feel they have a great runway right and
are able to be on the scaling journey and are
equipped to do it themselves. Founders and management teams are
really you know, driving the bus here. Our job is
(09:19):
to support them in any way we can. We're doing
it obviously with capital, we're coming on the board. We're
playing a sort of you know, trusted counselor role. As
part of Morgan Stanley. We have access to a team
of overs sixty people through our global sustainability office or
experts on multiple things from carbon pricing to climate rist modeling.
(09:40):
All of that resource is available to the company should
they need it, when they need it. We also work
as part of a global investment bank and helping them
access new markets, you know, meeting new customers, expanding, thinking
of creative financial solutions. All of that is what we
bring to the table. So we're operating somewhat curiously in
(10:04):
the growth space. But one of our portfolio companies said
to us is, you guys are growth investors, but with
buyout resources because we bring in sort of the large
investment bank resources that typically you don't see in this space.
Company leaders are very busy at this stage of growth
pushing product out the door, right, so their strategic visionary
(10:28):
think us who understand that there are fifteen sixteen different
ways we could help them. But often we will agree
and they will agree on two or three or maybe
four things max that we should spend time on at
any particular stage in the company's growth, and then those
four things can change.
Speaker 1 (10:46):
That makes sense, Wickham. One of the points you mentioned
when I asked you about challenges is getting out of
the corporate betting zoo, which is a phrase I really like.
Is this what is defined or what people call the
missing middle? And if not, can you tell us more
about what this missing middle is and how does one
(11:07):
fill this middle?
Speaker 2 (11:09):
Well, that's exactly the missing medal. It's going from you
very early signs of success to actually demonstrating that it's
really growing into a mature, large, established, meaningful, solid company,
and the capital that is to be provided here is
(11:31):
typically much less, both in terms of size and volume.
Then you see in either end of this medal. Right,
there's a significant amount of certainly number of players in
the venture capital early stage, there are a there's by
volume of dollars to be deployed, a large amount of
(11:53):
capital in the large cap buyout space, and definitely much
more so on the infrastructure space. In this growth space,
there aren't that many people who do what we do,
which we don't like. We want a lot more capital
to come into the space and help transition it from
the early stage growth to something that is more mature.
Speaker 1 (12:16):
Okay, And I guess you know, coming back to that
phrase getting out of the corporate petting, So do you
have an example of a company that has done this
really well or an example of something being done that
really scaled up more than you expected it to.
Speaker 2 (12:36):
I'd say if you look at you know, at least
sort of three of those companies that I mentioned, right, Instagrad,
ex Sotion and Insight them and we're at different stages
of our own journey with those companies. I'd say they're
all companies who have developed multi dimensional relationships with their
(12:58):
client base, who have seen the value of what this
company can bring in and then internally replicated it across divisions,
across geographies, and then it's going to become a mainstream
part of the customer's procurement decision. Right. So it's not
like a single reliant on a single internal champion saying
(13:21):
we really should do this because it's it's cool tech
or it's very good for our sustainability profile. It just
becomes something that at the C suite is acknowledged as
a very essential part of the business.
Speaker 1 (13:32):
That makes sense. So victam my next question. So I've
always heard and tell me if you agree that there
is quite a bit of capital in the space, but
there are very few companies to chase after at least
this is what I heard a while back. Do you
think that's true. If so, you know, what can these
(13:54):
companies do to attract this capital that's chasing around and
if not, just what are your thoughts on that.
Speaker 2 (14:01):
Actually, in our experience, there is not enough capital. There
are plenty of companies if you look at the venture ecosystem,
there are many companies that have graduated from that with
great technology, great ideas and have to demonstrate how they
can scale. And in this missing middle growth stage, there
(14:23):
isn't enough capital or enough of the right kind of capital,
by which I mean not all of it should be
equity backed to take it to the next level. And
we think that, you know, it's also true that a
lot of this, at least a significant part of this
doesn't come wearing a T shirt that says climate. There
(14:44):
are things that are software oriented or you know, could
call themselves industrial companies or food companies, et cetera. It's
for investors like us to find the climate impact that's
inherent in the product or service and classifies it as such.
Speaker 1 (15:00):
That makes sense, So we taking your point on finding
the climate impact. You know, obviously financial viability is one,
but then measuring the impact is the second piece. So
I'm just curious, how do you measure the climate impact
that the fund is making.
Speaker 2 (15:20):
So impact measurement is at the heart of what we do.
Climate impact, per se is a very big theme. It
includes water, it includes biodiversity, it includes pollution. And the
classic impact investing model is we take your money, we
invest it, we report on some impact stats back to you,
(15:43):
and generally speaking, that is the end of the story, right,
And it's good because it didn't exist before impact measurement
and impact stats. But we took out thinking one step
further and said, what does it mean to take capital
and call yourself a climate investor if you don't have
(16:04):
a very specific climate outcome that you're promising to deliver on. Right,
funds have a very clear sort of return target they're
trying to match. Why not have a clear climate target,
and in other words, why not have a benchmark. And
historically this hasn't been done because it's hard. So we said,
it's hard because there's so many different frameworks and metrics
(16:27):
and principles. Let's focus on one thing and just one thing,
and that's CO two emissions avoidance or COO too equivalent.
And we simplified lives life for ourselves and then complicated
it by saying, if we're going to focus just on
one thing, let's try and do it at scale. So
let's do one gigaton, which is the name of our
(16:48):
fund collectively across all the portfolio companies. Now, one gigaton,
you know, for a fund of this size is pretty
ambitious target, and there are three hundred climate funds out there,
so for us to really look at a way of
doing things slightly differently, we said, let's tie half of
(17:10):
our carried interest to this one gigaton goal. So we
have to make money for the investors, but we only
get half of our center fee of our carry if
we don't hit the carbon goal, and that then becomes
an interesting conversation in terms of who measures it. So
we could do a lot of that measurement internally have
(17:30):
the resources, but we make sure that it's an independent
third party that our LPs select and our please have
the opportunity five years from now, seven years from now,
ten years from now to come in and question all
the data, all the focus, all the assumptions, and have
that reaudited by someone else entirely independently, and they could
(17:52):
conclude that we're not the one gigaton fund and we
are the point seven gig aton fund, and if that's
the conclusion they reach, we get paid accordingly. And this
takes away all the discussion about greenwashing, impact washing, conflicts
of interest, lack of transparency, because our investors hold the
pen in terms of the impact measurement number.
Speaker 1 (18:13):
I like that, and I love the name of your fund.
I've told you that before. I guess, just a quick question.
So it's super it does what it says. I think
it's super interesting that you're actually measuring, you know, the
gh avoided. I guess my question is just in terms
of measurement, do you find companies reporting this information? Is
(18:39):
a lot of it forecasted by you, is a lot
of it estimated, And I know that might be some
impact team, but just if you have a sense of
how do you calculate that abated value?
Speaker 2 (18:54):
So the simple answers. Some of them do and some
of them don't. But for the sake of uniform we
come in using our consistent set of assumptions and models
to do our own calculation, and it tends to lead
you to companies that are relatively simple sort of you know,
single product companies or single geography companies, because otherwise measurement
(19:18):
becomes harder. I'm simplifying. We do more than that, of course,
but it's easier to do if you have a very
clear idea of where what is driving a lot of
co two And I'll just point out a simple example.
If you look at Instagrad, right, it's a company that
delivers a battery pack in a briefcase like structure that
(19:41):
you take to the construction site and you take out
the diesel generator. Now, the cootwo emitted by that diesel
generator is very clear, and you have to then look
at all the places that this goes to and replaces
the diesel generator, and in some places maybe using a
diesel generator, some places are not. So you adjust your
model accordingly, and that's clear a company like Everstream, which
we backed, which has software where the decision based on
(20:05):
that software tells you, you know, you should actually move
goods out of an airplane and into a ship, or
out of a truck into a train. They're doing it
in order to help the customers save money. But money
in transportation is fuel, which is CO two. So we
calculate the specific impact of that, and this is how
(20:29):
we're doing it now. Instances vary, geographies vary, the baseline
will vary, but we normalize for all of that in
our calculation and we say, just as we do with
financial underwriting, right, we forecast that this year a company
is going to increase its revenue by thirty percent or
forty percent. That's our forecast. It may be correct or
(20:52):
may not be correct. But the good thing is wherever
they end up our climate forecast, our climate numbers move
according because our climate numbers are tied to the number
of units sold in our revenue forecast and simply flows
from that.
Speaker 1 (21:10):
That's that's super interesting that you're calculating this yourself and
not relying on a lot of information I guess provided
by the company. Uh you mentioned, you know, you invest
from fish to fashion. Did I get that right? Or
was that farm to fashion?
Speaker 2 (21:29):
Fish to fashion? And sometimes this fishish to fashion.
Speaker 1 (21:31):
Okay, well let's not go there, Okay, fish to fashion.
So I'm curious as to you know, the different themes
and particular themes that you think might be crowded versus
themes that there are a lot more room to play with.
Then you know, we can span across the many hundreds
(21:54):
of themes, you know, clean energy, ev sustainable agriculture. I
won't get into it, but just what has untapped potential?
Speaker 2 (22:00):
I guess in climate investing, energy gets a lot of attention,
and the other big spaces are rightly so, because these
are huge sources of emission, you know, cement and steel
and the built up world and the areas such as
(22:20):
hydrogen carbon capture. These are very important, but they're big,
they're capecks heavy, they're not always necessarily best you know,
investments for a growth equity strategy, and there are questions
about how the unit economics needs to evolve. I have
(22:41):
no doubt that one day this will evolve to a
point where you know, when I started the industry, solar
was something like two dollars, right, and it had come
down from one hundred dollars, so we said a massive
amount of improvement. Today it's at twenty cents. So there's
been in my own time of doing this massive compression
and pricing. That's no doubt what will happen that some
(23:04):
of these big technologies, but the unsung heroes are things
which are actually fairly smaller tickets in terms of spend,
but very crucial. So if a lot of focus goes
on energy generation, not enough goes an energy transmission. For example.
You know, these grid systems that we have are old
(23:26):
and in a lot of cases fifty percent of the
electrons that get transmitted don't make it to the other end,
and that's a huge amount of loss. So if you're
able to save some of this loss, or if you're
just able to reduce the amount of energy consumed in
a building by using some energy efficiency software, that to
us are some of the quicker wins in this area.
Speaker 1 (23:49):
That makes sense, Vicram, what you said about solar red
going down to two cents, It really tells me. I
guess how much things have changed, and sorry, how much
thanks pay too, but hopefully yeah maybe thirty years and
never mind, I guess you know you mentioned You've been
(24:10):
in the space for a very long time, so I'm
curious as to what you've seen changed the most and
how so over your entire career besides the you know,
renewable price.
Speaker 2 (24:24):
I guess I think I think since you know, I've
been doing investing per se across cycles for about thirty years,
and the last fifteen or so have been very climate focused.
And a climate goes through these cycles where the ratio
(24:46):
of hope to rigor varies from time to time. So
when I first got in, it was at the sort
of bottom of climate. At one point, a lot of
very smart people had backed businesses that proved to be
bounded on a lot of hope and faith and aspiration
(25:08):
and they went to the wall and that A lot
of the hardcore commercial orientation we have today is based on,
you know, seeing some of the scar tissue that emerge
from the end of climate at one point zero. What
is I'd love to tell you what has changed is
that that has gone away completely and today we're all
very sort of you know, strictly commercial, rational, rigorous investors.
(25:32):
Those cycles come and go. There are periods where there
is a lot of enthusiasm, periods where people lose their
way a little bit. Periods where the massive belief in
the potential of humankind to change significantly and pay for
that change gets overestimated, and then it comes back. But
(25:55):
what has changes that the arc is progressing.
Speaker 1 (26:00):
That and maybe maybe a flip side of that question
is what has not changed that you would maybe like
to see change in.
Speaker 2 (26:12):
It will be utopian of me to expect this, but
climate investing, for whatever reason, continues to have some amount
of call it, you know, hope or faith based investing,
or the willingness to believe that mankind will change pretty
significantly and pay for that change in some ways and
(26:37):
in some pockets continues to persist. It gets more pronounced
at certain points and sort of peak climate cycles, and
then gets disillusioned very fast, and then the reverse of
that happens. Right then people get very negative, extremely negative
for a very long period of time. And I think
(27:01):
that those cards are getting more shallow. Right, It's not
as extreme as it used to be. The debate between
the quote unquote hard nosed investors and the tree huggers
on the other side, that gap has narrowed, but it
surfaces from time to time, so that hasn't changed. But
(27:24):
what has changed is that the gap has narrowed and
you see the trend moving more closely towards These are
businesses that fundamentally long term society, corporates, governments, individuals cannot
afford to ignore because they add value. And if you
(27:45):
are a regular investor, a company is nothing but a
series of cash flows. You cannot realistically or honestly expect
to focus those cash flows without considering a variety of
climate factors which are material to your exit value. Right, So,
this is the value of your physical assets. This is
the security of your supply chain. This is the cost
(28:07):
of your raw materials. All of these are highly highly
relevant to people who wouldn't call themselves climate investors at all.
Speaker 1 (28:16):
That makes sense, Vigram. Maybe a closing question, So, Vigram,
I know you to be a frequent cop visitor. Am
I right?
Speaker 2 (28:26):
That is true?
Speaker 1 (28:27):
That is true? What have you I guess, what have
you learned from free Vius cops and what do you
expect to learn this year?
Speaker 2 (28:37):
Learning at the copy events is always unexpected and highly inriching.
And I'll tell you why it's different from any other
event that I go to. It's a combination of the
you and general assembly and davels and woodstock. Right, what
(28:59):
you end a meeting are people from all walks of live.
You know, the hardcore cop happens in a room with
all the climate negotiators and I'm certainly not part of
that group. But outside of that, you see tribal leaders,
you see architects, you see scientists, you see government policymakers,
(29:20):
you see journalists all having a pretty free flow dialogue
about things. You'll see somebody from a shoe company showing
you sneakers made entirely of recycled materials. You'll see someone
else talking about the impact that weather forecasting has made
on the predictability of insurance for farmers. These are live,
(29:45):
unstructured and highly motivating conversations. So the text in the
corp agreements always tends to be fairly diplomatic and around
certain set of numbers, and there's new Really, no one
is happy with the final outcome, but the buzz around
that is extremely valuable in terms of if you're looking
(30:08):
for a world where some very smart and motivated people
are gathering to try and solve this very urgent problem
that's happening, and every year it gets better.
Speaker 1 (30:20):
That's that's quite heartening to hear that you found previous
cops to be enriching. That brings us to the end
of our episode. I think my biggest takeaway and the
phrase that I that I really like that you mentioned,
was you know that we're moving from hope to rigger
and something that I hope you know continues as we
(30:42):
move forward. So with that program, thank you so much
for joining and for our listeners. You can find more
information on sustainability issues on BI space ESG on the
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to ask BI expert handlers or learn more about our research,
please send us an email at ESG Currents at bloomberg
(31:05):
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ESG has become established as a key business theme as
companies and investors seek to navigate the climate crisis, energy transition,
social mega trends, mounting regulatory attention and pressure from other stakeholders.
The rapidly evolving landscape has become inundated with acronyms, buzzwords
and lingo, and we aim to break this down with
(00:31):
industry experts. Welcome to ESG Currents, your guide to navigating
the evolving ESG space, one topic at a time, Brought
to you by Bloomberg Intelgence part of Bloomberg's research department,
with five hundred analysts and strategists working across all major
world markets. Our coverage includes over two thousand equities and credits,
(00:52):
as well as outlooks on more than ninety industries and
one hundred market in disease, currencies and commodities. I'm Shy Contractor,
senior ESG analyst for Bloomberg Intelligence and your host for
today's episode. So today we're joined by Vikram Raju, Managing
Director and head of Private Equity Climate Investments for Morgan Stanley. Now,
(01:15):
as we all might have heard, getting to a two
degree world is going to take a huge amount of
a capital, with private equity being an important vehicle. So
today I'm excited to speak with someone who's been making
these investments for many, many years and learn more about
some of the investments made, some opportunities and challenges ahead.
(01:35):
So Vicram, thank you for joining us.
Speaker 2 (01:38):
Happy to be here.
Speaker 1 (01:39):
Vickam, Maybe start us up by telling us a little
more about the type of investments you make, maybe the scale,
some quick examples. Just give us an idea of the landscape.
Speaker 2 (01:51):
Sure, so we you know, in our team we joke
we do everything from fish to fashion nice. So anything
that moves as long as we think it's a good
investment and will make a good return for our investors
and has something fundamentally provable about it in terms of
carbon impact, emissions avoidance, abatement. Those are the two things
(02:15):
that we're looking at. Now, what do we not do?
We're not early stage investors, so those are the real
heroes of this the climate story. We're coming in right
after those investors have done the seed round series A
through C, and we're coming in somewhere between C to E.
Right when a company has mature to the point it
(02:37):
has ten twenty million dollars in revenue may or may
not be profitable, but we've got that visibility that it's
going to get to cashual break even profitability. That ten
million in revenue is getting to one hundred million. That's
the part of the journey that we're along for. And
we step off when it becomes a much larger company
where you know, the the larger controlled investors. He drug company,
(03:00):
if it hasn't already gone to.
Speaker 1 (03:02):
Strategy makes sense. I was just going to ask, I
would love a few examples if you have some many
Just look.
Speaker 2 (03:10):
The spectrum is pretty wide. We're in everything from quite
recently a company called inside m which uses aircraft to
track methane emission fugitive methane emissions in parts of energy infrastructure,
all the way to on the ocean. We're in a
company called Exocean, which tracks sends these uncrewde survey vessels
(03:33):
which is the size of maybe two dining tables, and
it goes out like a lawn mower in the sea
and high seas and attracts the ocean floor, which is
very critical provides critical data to set up ocean based infrastructure,
right wind farms and so on. At the other end
of the strect spectrum. We're in something like Heel, which
is a meal replacement drink that basically, if you're doing
(03:56):
this podcast, you don't have time for breakfast today, you
drink a heel that gives you all the energy and
nutrients you need and it happens to be plant based, right,
So that's the entire respectrum. We're also in supply chain software.
We can talk about that and a company you had
recently on your show called Instagrad, which provides diesel generator
replacements for construction sites.
Speaker 1 (04:17):
Very exciting. So m I want to jump to a
question that's probably on everyone's mind, the regulatory environment. Now,
I know it's probably safe to say that the climate
space we've seen quite a bit of a whiplash right
from the current political environment, especially in the US. I
guess how has it impacted the companies you evaluate and
(04:38):
what's your long term view?
Speaker 2 (04:41):
I think the main thing we look for in any
company we invest in is resilience, right. We look for
companies that work in a variety of policy environments, a
variety of economic cycles, and a variety of your customer
sentiment cycles as well. Looking at something that fundamentally adds
(05:02):
value to the end customer. It adds economic value, it
saves them, time, saves them energy, saves the material. And
so that is something that is fairly robust in a
variety of geographical settings, across policy environments, across time. And
(05:23):
we developed this. Yeah, I've been doing this for thirty
one years now, investing in general. And I started my
life in during the Mexican crisis. I worked through the
dot com boom and bust, through the global financial crisis,
COVID climate one point zero, the nuclear winter that followed,
and now and the lesson that learned that basically you
(05:44):
know has come through is if there is something fundamental
networks and adds value for people, and you have a
unit economics model that works, they will be demand for it, right,
And if you've relied on something less strong than that,
something more flake key, then you're in trouble.
Speaker 1 (06:04):
Yeah, that makes sense. So it's almost sounds like you're
a bit agnostic to the regulating environment. You look for
fundamental and economic drivers. Is that fair to say?
Speaker 2 (06:14):
All forms of regulatory support and include carbon pricing in
this are essentially zeroized in our model. And if we
still find it compelling, then we do it.
Speaker 1 (06:24):
So Okay, so fundamental economic reason to do that makes sense.
I guess my next question is, you know you evaluate
the fundamentals, you evaluate the economic stance. What is the
biggest pain point for these types of investments across your table? Oh,
what is the biggest challenge you know you face when
(06:46):
you're investing in these businesses?
Speaker 2 (06:49):
Let me give you an insight into your day in
my life. Right we are, we see a lot of
investment ideas come and the first thing to say is
that it's very humbling to be able to see the
people who have backed their vision and are doing something
very hard in turning that vision into a company. The
(07:10):
second thing to note is that it is it's fairly
common to see a reasonable amount of early traction. By this,
I mean you see a bunch of logos, right, people
have made inroads into some pretty impressive names. The pain point,
as you refer to it, is converting those initial entry
point logos into something more substantial and enduring which we
(07:35):
can fundamentally underwrite.
Speaker 1 (07:36):
Two.
Speaker 2 (07:37):
And this is as one of my portfolio company CEOs said,
getting out of the corporate petting zoo. Right, It's easy
to get in and remain very subscale because you're someone's
pet project. But to be integrated into the mainstream buying
decision is a very different thing. And that transition is hard,
(07:59):
and that transition requires capital, and that transition sometimes requires
sort of organizational enhancement in order to get there, which
takes us to the last point. If you factored all
these things correctly, and you worked out a business model,
a scaling model, unit economics that work, are you being
the right price for it? And you know this In
(08:22):
the market, there've been cycles where there's been exuberants and
pricing has been detached from where some of these fundamental
models should go. And to re factor all those things
in in terms of making our decision, is there enough
evidence that this pain point can be crossed with the
capital we have at the price we want to pay.
Speaker 1 (08:41):
So, Victim, you talked about scaling up these businesses. Curious
as to how much of a role you play in
let's call it advising or dealing with these companies and
what are some key points to note when we think
of scaling up these businesses.
Speaker 2 (08:59):
That's a good point. So firstly, we're coming into companies
where we feel they have a great runway right and
are able to be on the scaling journey and are
equipped to do it themselves. Founders and management teams are
really you know, driving the bus here. Our job is
(09:19):
to support them in any way we can. We're doing
it obviously with capital, we're coming on the board. We're
playing a sort of you know, trusted counselor role. As
part of Morgan Stanley. We have access to a team
of overs sixty people through our global sustainability office or
experts on multiple things from carbon pricing to climate rist modeling.
(09:40):
All of that resource is available to the company should
they need it, when they need it. We also work
as part of a global investment bank and helping them
access new markets, you know, meeting new customers, expanding, thinking
of creative financial solutions. All of that is what we
bring to the table. So we're operating somewhat curiously in
(10:04):
the growth space. But one of our portfolio companies said
to us is, you guys are growth investors, but with
buyout resources because we bring in sort of the large
investment bank resources that typically you don't see in this space.
Company leaders are very busy at this stage of growth
pushing product out the door, right, so their strategic visionary
(10:28):
think us who understand that there are fifteen sixteen different
ways we could help them. But often we will agree
and they will agree on two or three or maybe
four things max that we should spend time on at
any particular stage in the company's growth, and then those
four things can change.
Speaker 1 (10:46):
That makes sense, Wickham. One of the points you mentioned
when I asked you about challenges is getting out of
the corporate betting zoo, which is a phrase I really like.
Is this what is defined or what people call the
missing middle? And if not, can you tell us more
about what this missing middle is and how does one
(11:07):
fill this middle?
Speaker 2 (11:09):
Well, that's exactly the missing medal. It's going from you
very early signs of success to actually demonstrating that it's
really growing into a mature, large, established, meaningful, solid company,
and the capital that is to be provided here is
(11:31):
typically much less, both in terms of size and volume.
Then you see in either end of this medal. Right,
there's a significant amount of certainly number of players in
the venture capital early stage, there are a there's by
volume of dollars to be deployed, a large amount of
(11:53):
capital in the large cap buyout space, and definitely much
more so on the infrastructure space. In this growth space,
there aren't that many people who do what we do,
which we don't like. We want a lot more capital
to come into the space and help transition it from
the early stage growth to something that is more mature.
Speaker 1 (12:16):
Okay, And I guess you know, coming back to that
phrase getting out of the corporate petting, So do you
have an example of a company that has done this
really well or an example of something being done that
really scaled up more than you expected it to.
Speaker 2 (12:36):
I'd say if you look at you know, at least
sort of three of those companies that I mentioned, right, Instagrad,
ex Sotion and Insight them and we're at different stages
of our own journey with those companies. I'd say they're
all companies who have developed multi dimensional relationships with their
(12:58):
client base, who have seen the value of what this
company can bring in and then internally replicated it across divisions,
across geographies, and then it's going to become a mainstream
part of the customer's procurement decision. Right. So it's not
like a single reliant on a single internal champion saying
(13:21):
we really should do this because it's it's cool tech
or it's very good for our sustainability profile. It just
becomes something that at the C suite is acknowledged as
a very essential part of the business.
Speaker 1 (13:32):
That makes sense. So victam my next question. So I've
always heard and tell me if you agree that there
is quite a bit of capital in the space, but
there are very few companies to chase after at least
this is what I heard a while back. Do you
think that's true. If so, you know, what can these
(13:54):
companies do to attract this capital that's chasing around and
if not, just what are your thoughts on that.
Speaker 2 (14:01):
Actually, in our experience, there is not enough capital. There
are plenty of companies if you look at the venture ecosystem,
there are many companies that have graduated from that with
great technology, great ideas and have to demonstrate how they
can scale. And in this missing middle growth stage, there
(14:23):
isn't enough capital or enough of the right kind of capital,
by which I mean not all of it should be
equity backed to take it to the next level. And
we think that, you know, it's also true that a
lot of this, at least a significant part of this
doesn't come wearing a T shirt that says climate. There
(14:44):
are things that are software oriented or you know, could
call themselves industrial companies or food companies, et cetera. It's
for investors like us to find the climate impact that's
inherent in the product or service and classifies it as such.
Speaker 1 (15:00):
That makes sense, So we taking your point on finding
the climate impact. You know, obviously financial viability is one,
but then measuring the impact is the second piece. So
I'm just curious, how do you measure the climate impact
that the fund is making.
Speaker 2 (15:20):
So impact measurement is at the heart of what we do.
Climate impact, per se is a very big theme. It
includes water, it includes biodiversity, it includes pollution. And the
classic impact investing model is we take your money, we
invest it, we report on some impact stats back to you,
(15:43):
and generally speaking, that is the end of the story, right,
And it's good because it didn't exist before impact measurement
and impact stats. But we took out thinking one step
further and said, what does it mean to take capital
and call yourself a climate investor if you don't have
(16:04):
a very specific climate outcome that you're promising to deliver on. Right,
funds have a very clear sort of return target they're
trying to match. Why not have a clear climate target,
and in other words, why not have a benchmark. And
historically this hasn't been done because it's hard. So we said,
it's hard because there's so many different frameworks and metrics
(16:27):
and principles. Let's focus on one thing and just one thing,
and that's CO two emissions avoidance or COO too equivalent.
And we simplified lives life for ourselves and then complicated
it by saying, if we're going to focus just on
one thing, let's try and do it at scale. So
let's do one gigaton, which is the name of our
(16:48):
fund collectively across all the portfolio companies. Now, one gigaton,
you know, for a fund of this size is pretty
ambitious target, and there are three hundred climate funds out there,
so for us to really look at a way of
doing things slightly differently, we said, let's tie half of
(17:10):
our carried interest to this one gigaton goal. So we
have to make money for the investors, but we only
get half of our center fee of our carry if
we don't hit the carbon goal, and that then becomes
an interesting conversation in terms of who measures it. So
we could do a lot of that measurement internally have
(17:30):
the resources, but we make sure that it's an independent
third party that our LPs select and our please have
the opportunity five years from now, seven years from now,
ten years from now to come in and question all
the data, all the focus, all the assumptions, and have
that reaudited by someone else entirely independently, and they could
(17:52):
conclude that we're not the one gigaton fund and we
are the point seven gig aton fund, and if that's
the conclusion they reach, we get paid accordingly. And this
takes away all the discussion about greenwashing, impact washing, conflicts
of interest, lack of transparency, because our investors hold the
pen in terms of the impact measurement number.
Speaker 1 (18:13):
I like that, and I love the name of your fund.
I've told you that before. I guess, just a quick question.
So it's super it does what it says. I think
it's super interesting that you're actually measuring, you know, the
gh avoided. I guess my question is just in terms
of measurement, do you find companies reporting this information? Is
(18:39):
a lot of it forecasted by you, is a lot
of it estimated, And I know that might be some
impact team, but just if you have a sense of
how do you calculate that abated value?
Speaker 2 (18:54):
So the simple answers. Some of them do and some
of them don't. But for the sake of uniform we
come in using our consistent set of assumptions and models
to do our own calculation, and it tends to lead
you to companies that are relatively simple sort of you know,
single product companies or single geography companies, because otherwise measurement
(19:18):
becomes harder. I'm simplifying. We do more than that, of course,
but it's easier to do if you have a very
clear idea of where what is driving a lot of
co two And I'll just point out a simple example.
If you look at Instagrad, right, it's a company that
delivers a battery pack in a briefcase like structure that
(19:41):
you take to the construction site and you take out
the diesel generator. Now, the cootwo emitted by that diesel
generator is very clear, and you have to then look
at all the places that this goes to and replaces
the diesel generator, and in some places maybe using a
diesel generator, some places are not. So you adjust your
model accordingly, and that's clear a company like Everstream, which
we backed, which has software where the decision based on
(20:05):
that software tells you, you know, you should actually move
goods out of an airplane and into a ship, or
out of a truck into a train. They're doing it
in order to help the customers save money. But money
in transportation is fuel, which is CO two. So we
calculate the specific impact of that, and this is how
(20:29):
we're doing it now. Instances vary, geographies vary, the baseline
will vary, but we normalize for all of that in
our calculation and we say, just as we do with
financial underwriting, right, we forecast that this year a company
is going to increase its revenue by thirty percent or
forty percent. That's our forecast. It may be correct or
(20:52):
may not be correct. But the good thing is wherever
they end up our climate forecast, our climate numbers move
according because our climate numbers are tied to the number
of units sold in our revenue forecast and simply flows
from that.
Speaker 1 (21:10):
That's that's super interesting that you're calculating this yourself and
not relying on a lot of information I guess provided
by the company. Uh you mentioned, you know, you invest
from fish to fashion. Did I get that right? Or
was that farm to fashion?
Speaker 2 (21:29):
Fish to fashion? And sometimes this fishish to fashion.
Speaker 1 (21:31):
Okay, well let's not go there, Okay, fish to fashion.
So I'm curious as to you know, the different themes
and particular themes that you think might be crowded versus
themes that there are a lot more room to play with.
Then you know, we can span across the many hundreds
(21:54):
of themes, you know, clean energy, ev sustainable agriculture. I
won't get into it, but just what has untapped potential?
Speaker 2 (22:00):
I guess in climate investing, energy gets a lot of attention,
and the other big spaces are rightly so, because these
are huge sources of emission, you know, cement and steel
and the built up world and the areas such as
(22:20):
hydrogen carbon capture. These are very important, but they're big,
they're capecks heavy, they're not always necessarily best you know,
investments for a growth equity strategy, and there are questions
about how the unit economics needs to evolve. I have
(22:41):
no doubt that one day this will evolve to a
point where you know, when I started the industry, solar
was something like two dollars, right, and it had come
down from one hundred dollars, so we said a massive
amount of improvement. Today it's at twenty cents. So there's
been in my own time of doing this massive compression
and pricing. That's no doubt what will happen that some
(23:04):
of these big technologies, but the unsung heroes are things
which are actually fairly smaller tickets in terms of spend,
but very crucial. So if a lot of focus goes
on energy generation, not enough goes an energy transmission. For example.
You know, these grid systems that we have are old
(23:26):
and in a lot of cases fifty percent of the
electrons that get transmitted don't make it to the other end,
and that's a huge amount of loss. So if you're
able to save some of this loss, or if you're
just able to reduce the amount of energy consumed in
a building by using some energy efficiency software, that to
us are some of the quicker wins in this area.
Speaker 1 (23:49):
That makes sense, Vicram, what you said about solar red
going down to two cents, It really tells me. I
guess how much things have changed, and sorry, how much
thanks pay too, but hopefully yeah maybe thirty years and
never mind, I guess you know you mentioned You've been
(24:10):
in the space for a very long time, so I'm
curious as to what you've seen changed the most and
how so over your entire career besides the you know,
renewable price.
Speaker 2 (24:24):
I guess I think I think since you know, I've
been doing investing per se across cycles for about thirty years,
and the last fifteen or so have been very climate focused.
And a climate goes through these cycles where the ratio
(24:46):
of hope to rigor varies from time to time. So
when I first got in, it was at the sort
of bottom of climate. At one point, a lot of
very smart people had backed businesses that proved to be
bounded on a lot of hope and faith and aspiration
(25:08):
and they went to the wall and that A lot
of the hardcore commercial orientation we have today is based on,
you know, seeing some of the scar tissue that emerge
from the end of climate at one point zero. What
is I'd love to tell you what has changed is
that that has gone away completely and today we're all
very sort of you know, strictly commercial, rational, rigorous investors.
(25:32):
Those cycles come and go. There are periods where there
is a lot of enthusiasm, periods where people lose their
way a little bit. Periods where the massive belief in
the potential of humankind to change significantly and pay for
that change gets overestimated, and then it comes back. But
(25:55):
what has changes that the arc is progressing.
Speaker 1 (26:00):
That and maybe maybe a flip side of that question
is what has not changed that you would maybe like
to see change in.
Speaker 2 (26:12):
It will be utopian of me to expect this, but
climate investing, for whatever reason, continues to have some amount
of call it, you know, hope or faith based investing,
or the willingness to believe that mankind will change pretty
significantly and pay for that change in some ways and
(26:37):
in some pockets continues to persist. It gets more pronounced
at certain points and sort of peak climate cycles, and
then gets disillusioned very fast, and then the reverse of
that happens. Right then people get very negative, extremely negative
for a very long period of time. And I think
(27:01):
that those cards are getting more shallow. Right, It's not
as extreme as it used to be. The debate between
the quote unquote hard nosed investors and the tree huggers
on the other side, that gap has narrowed, but it
surfaces from time to time, so that hasn't changed. But
(27:24):
what has changed is that the gap has narrowed and
you see the trend moving more closely towards These are
businesses that fundamentally long term society, corporates, governments, individuals cannot
afford to ignore because they add value. And if you
(27:45):
are a regular investor, a company is nothing but a
series of cash flows. You cannot realistically or honestly expect
to focus those cash flows without considering a variety of
climate factors which are material to your exit value. Right, So,
this is the value of your physical assets. This is
the security of your supply chain. This is the cost
(28:07):
of your raw materials. All of these are highly highly
relevant to people who wouldn't call themselves climate investors at all.
Speaker 1 (28:16):
That makes sense, Vigram. Maybe a closing question, So, Vigram,
I know you to be a frequent cop visitor. Am
I right?
Speaker 2 (28:26):
That is true?
Speaker 1 (28:27):
That is true? What have you I guess, what have
you learned from free Vius cops and what do you
expect to learn this year?
Speaker 2 (28:37):
Learning at the copy events is always unexpected and highly inriching.
And I'll tell you why it's different from any other
event that I go to. It's a combination of the
you and general assembly and davels and woodstock. Right, what
(28:59):
you end a meeting are people from all walks of live.
You know, the hardcore cop happens in a room with
all the climate negotiators and I'm certainly not part of
that group. But outside of that, you see tribal leaders,
you see architects, you see scientists, you see government policymakers,
(29:20):
you see journalists all having a pretty free flow dialogue
about things. You'll see somebody from a shoe company showing
you sneakers made entirely of recycled materials. You'll see someone
else talking about the impact that weather forecasting has made
on the predictability of insurance for farmers. These are live,
(29:45):
unstructured and highly motivating conversations. So the text in the
corp agreements always tends to be fairly diplomatic and around
certain set of numbers, and there's new Really, no one
is happy with the final outcome, but the buzz around
that is extremely valuable in terms of if you're looking
(30:08):
for a world where some very smart and motivated people
are gathering to try and solve this very urgent problem
that's happening, and every year it gets better.
Speaker 1 (30:20):
That's that's quite heartening to hear that you found previous
cops to be enriching. That brings us to the end
of our episode. I think my biggest takeaway and the
phrase that I that I really like that you mentioned,
was you know that we're moving from hope to rigger
and something that I hope you know continues as we
(30:42):
move forward. So with that program, thank you so much
for joining and for our listeners. You can find more
information on sustainability issues on BI space ESG on the
Bloomberg term. If you have any SG quandary you'd like
to ask BI expert handlers or learn more about our research,
please send us an email at ESG Currents at bloomberg
(31:05):
dot net. And if you like this episode, please subscribe
on Apples, Spotify, or your favorite podcast platform. Thank you everyone,
Host
Eric Kane
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