Capital Series: Ian Smith, The Nature Conservancy

Financial Services

Sep 6

This episode is part of our Capital Series hosted by MCJ partner, Jason Jacobs. This series explores a diverse range of capital sources and the individuals who drive them. From family offices and institutional LPs to private equity, government funding, and more, we take a deep dive into the world of capital and its critical role in driving innovation and progress.

Ian Smith is the Director of Investments at The Nature Conservancy (TNC), where his primary responsibilities include managing due diligence, research and portfolio oversight across public equity, fixed income, and impact and diversity offerings.

TNC is a global environmental nonprofit working to create a world where people and nature can thrive. They were founded in the US through grassroots organizing in 1951, and they've grown to become one of the most effective and wide-reaching environmental organizations in the world.

As a formidable force in the NGO world, TNC also has a pretty big endowment and they're investing that endowment as good fiduciaries to generate market-beating returns, but they also have this broader mission to reckon with as an organization. This makes for a fascinating conversation that digs into how TNC handles balancing impact and profit, and how they think about climate investing, private investing, and investing in general.

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Episode recorded on Aug 9, 2023 (Published Sept 6, 2023)

In this episode, we cover:

[2:21] An overview of TNC and its investments
[5:59] TNC's endowment asset allocation
[7:47] Ian's background
[11:55] Benefits of TNC's transition from outsourced investing to in-house portfolio management
[16:46] Diversification of TNC's endowment capital
[19:40] The org's decarbonization strategy
[24:29] Integrating sustainability without sacrificing market-grade returns
[26:38] TNC's criteria for evaluation
[28:49] Ian's assessment of the state of climate tech venture as an investible asset
[34:34] How he views and measures impact
[37:06] An overview of TNC's privates' portfolio
[40:51] Ian's suggestions for balancing investible assets and grant-making
[44:25] His thoughts on how the transition is going to pan out
[48:09] Why this time is different than Cleantech 1.0
[50:53] Ian's thoughts on the term 'impact investor'
[52:04] TNC's perspective on carbon capture and the role of big oil in the transition
[57:58] How Ian thinks about direct investing
[1:02:58] His concerns about climate tech innovation and what he's excited about

Jason Jacobs (00:00:00):
Today on the MCJ Capital Series, our guest is Ian Smith. Ian is the Director of Investments at Nature Conservancy, where his primary responsibilities include manager due diligence, research and portfolio oversight across public equity, fixed income, and impact and diversity offerings. The Nature Conservancy is a global environmental nonprofit working to create a world where people and nature can thrive. They were founded in the US through grassroots action in 1951, and they've grown to become one of the most effective and wide-reaching environmental organizations in the world. I was excited for this one because TNC is such a formidable force in the NGO world, and they also have a pretty big endowment, and they're investing that endowment as good fiduciaries to generate returns, but also of course have this broader mission to reckon with as an organization.
(00:00:57):
So it's fascinating to dig into how they handle balancing those two, impact and profit, and how they think about climate investing, private investing, and investing in general. But before we start...
Cody Simms (00:01:11):
I'm Cody Simms.
Yin lu (00:01:13):
I'm Yin Liu.
Jason Jacobs (00:01:14):
And I'm Jason Jacobs. And welcome to My Climate Journey.
Yin lu (00:01:20):
This show is a growing body of knowledge focused on climate change and potential solutions.
Cody Simms (00:01:26):
In this podcast, we traverse disciplines, industries, and opinions to better understand and make sense of the formidable problem of climate change and all the ways people like you and I can help.
Jason Jacobs (00:01:39):
And with that, Ian Smith, welcome to the show.
Ian Smith (00:01:42):
Hey, thanks Jason. Thanks for having me. Really excited to be here.
Jason Jacobs (00:01:45):
Well, really excited to have you. I mean, you're just in such an interesting spot because not only do you have a quite sizable endowment, but as an endowment on behalf of The Nature Conservancy, which is one of the most important climate NGOs. So for a climate tech investor like myself, I think there's just so much to learn from you and how you think about the world. So thanks for making time to come on the show.
Ian Smith (00:02:11):
Well, I mentioned this to you, Jason, but being an active connector of the community here across all stakeholders is so important in advancing the climate conversation. So just really excited to be here and offer our perspective.
Jason Jacobs (00:02:21):
Awesome. So maybe for starters, just give an overview of The Nature Conservancy and its work as well as your group on the investment side.
Ian Smith (00:02:31):
Sure. Well, interestingly, TNC is a really long and illustrious history, extends back over a hundred years, but maybe I'll start from when it was formally incorporated. So TNC was formerly launched, incorporated in 1951. The first field office was in Eastern New York. That has since branched into I think 48 different business units in the United States. We operate in now 79 different countries either directly on the ground or through our existing partnerships. And today we have over 4,000 employees and nearly a thousand scientists and scientists support staff. So it's a very global mission. We're international, we're domestic international, and our conservation efforts span the globe.
Jason Jacobs (00:03:09):
That's insane, by the way, just the scale.
Ian Smith (00:03:11):
It's crazy. And I've gone back through the history and thought through what are the evolution points of TNC's mission and strategy, and so I'll take you through some of that. But 1951, it was really incorporated purely to buy land, protect land. That over time evolved into things like conservation easements, land trusts. Over time, that mission has continued to progress in the sense of how do we develop these eco-regional planning tools to prioritize conservation efforts for the benefit of local communities, expanding in, as I mentioned, international. We moved into the 2000s. Now we're thinking about marine life, biodiversity, these other aspects of our mission today.
(00:03:47):
And so I think some of the more innovative things that we've done, and TNC has always been a science first organization, but some of the very innovative things on the finance side, things like debt-for-nature swaps or blue bonds in more recent years. So our first project with the Seychelles for blue bonds in 2014 was helping them restructure their municipal debt in exchange for obviously lower interest rates, but also agreeing to protect certain hectares of their ocean ecosystems and sustainably manage those over time in partnership with TNC. So TNC has always been a very innovative organization. We're doing things now even on the finance side through these debt-for-nature spots and blue bonds that are quite innovative and I think translating that into the investment office.
(00:04:24):
So I work within our office of investments. We oversee about $4 billion in long-term financial assets for The Nature Conservancy. What's really interesting, as you mentioned, we like to believe we're a leading environmental nonprofit. We have this wonderful endowment portfolio that's around $3 billion. For the better part of two decades, it was outsourced. And so our CIO who came on board in March of 2020, he came in with the remit of building out an internal team, helping to bring a lot of that agency in-house in terms of managing the portfolio. And a lot of that was also aligning it with the broader values of the organization. We're financial investors first and foremost, but we have a duty to our stakeholders to have the portfolio live and breed the values of TNC.
(00:05:04):
And so we always like to say, 1A financial goals, 1B TNC sustainability and mission goals, and that's helping to move the portfolio towards benefiting the 2030 goals of the organization.
Jason Jacobs (00:05:15):
Got it. And so if I'm hearing right, it sounds like Nature Conservancy, given that it's a nonprofit, are the donors the primary source of revenue or are there other revenue sources as well?
Ian Smith (00:05:26):
There are other revenue sources. We take in obviously everything from membership donations to major and principal gifts, but brand funding, obviously federal funding that comes through that. So it's a broad array of different resources that we get as an organization and we are fortunate to take some of that into the endowment portfolio if it's unrestricted or quasi-restricted endowment funds or capital that is locked up for strategic projects in, say the three to five year timeframe where we're able to invest that capital in the interim for the benefit of the organization and then pay that back to the organization to fund conservation efforts.
Jason Jacobs (00:05:59):
And so if you look at the overall assets in the endowment and otherwise investible, maybe talk a bit about how that's allocated overall and also just which pieces of that you're thinking about.
Ian Smith (00:06:11):
So we always like to say we look and feel like a traditional, say university endowment just because other people can kind of understand what that means and what that feels like. To put that into actual numbers, our broad asset allocation today, it's 35% public equity, long only strategies, so think stocks and that's globally allocated. There's a 30% in what we call head strategies. So that is hedge funds. It could be some absolute return funds that are providing a differentiated return stream to the broader market. Then 20% in what we call private investments that runs the gamut of private equity to private credit strategies. A lot of our climate tech is in that part of the portfolio, and then 15% in both cash and fixed income.
(00:06:51):
So that is the long-term strategic asset allocation and of course we tilt across that over time. In terms of where I spend my time, I focus a lot on our public equity strategies and climate and sustainability broadly across the portfolio. And the nice thing about that is climate as a mega theme, a lot of the investible opportunity today is in the private markets given the duration of the opportunity set. But we also have strategies that are investing in public stocks that are using a ESG integration lens or constructive activist lens to help companies disclose their emissions, come up with credible transition plans and help those companies move their business models to be hopefully carbon-neutral or negative by 2050.
(00:07:29):
So that climate lens extends broadly across the portfolio. So even though we have defined swim lanes in terms of asset class focus, we're generally generalists across the team. We'd like to look at things across the portfolio in terms of risk-reward, but a lot of that time is still spent on the private side and thinking about the early stage climate tech opportunity.
Jason Jacobs (00:07:47):
Great. And I have a ton of questions about TNC and about the investment side, but before we get too far down that path, how did you get here? What led you to do this work and maybe talk a bit about your journey.
Ian Smith (00:07:59):
I'd love to. I wish it was as thoughtful and as curated as many of the past members on the show. But coming out of college, I knew I wanted to work in finance and the markets. I had started off as an engineer. My dad was an engineer. Realized that wasn't what I wanted to do once I was two years into college. And so thought about, "Well, the markets seemed interesting and finance and economics." So switched over to economics. But coming out and graduating in 2011, that was really after the great financial crisis. The Dodd-Frank Act was being legislated and enacted, and there were a lot of private advisors that were contemplating getting registered with the Securities Exchange Commission. So I got this job that I thought was consulting, it was doing regulatory audits for hedge funds and private equity firms as they were thinking about getting registered.
(00:08:40):
At the end of the day, it wasn't what I wanted to do, but what it did afford me was the experience of, "Wow, all these firms are doing really interesting things. I want to be on the other side of the table. I want to be on the buy side." Whatever that means. I was fortunate that just through my network from the University of Virginia, thinking about opportunities in the DC area, coming back and working at a firm called Strategic Investment Group, which was an outsourced CIO office. The original founders spun out the pension assets of the World Bank in the 1980s and built up a third party advisory business around that. But what was really nice about that firm was most of the assets and at the time peaked it around $37 billion in assets under management when I was working there.
(00:09:16):
Fully discretionary mandates spanned the gamut of institutional portfolio types, so endowments, foundations, healthcare organizations, corporate pension plans. I moved to work in the private side there and what I loved about that was a lot of our bigger portfolios were mission-oriented investors. So they were thinking about, this is going back to 2013, 2014, how do we actualize impact in our portfolio? A lot of that was happening on the private side. So I got a lot of exposure and interest in the world of impact investing, and as I started to speak to more GPs about the space, it was clear that if I want to progress, I think I need to go back to business school. I had this ambition of doing social venture or social philanthropy, getting closer to the assets themselves. Of course, I went to business school.
(00:09:59):
Everybody tells you that you should have a pretty good articulated plan. I think if you can tell, I'm a very curious person. So I was interviewing all over the landscape talking to many different companies. I grew up internationally. My mom's Malaysian, my dad had a 40-year career at Exxon, so lived in the Middle East and Japan and all over. And so I started speaking to the airlines and they were thinking about domestic airlines in the US and expanding internationally. That was a really interesting business problem that I was very curious about. So I interned at Delta Air Lines. I actually returned there full-time to be in their corporate strategy team, really interesting experience. And also moving from the investing world to the corporate side and seeing how these big companies come up with strategic plans, make decisions, especially in an industry that is quite competitive and monopolistic in the US is the airline industry.
(00:10:47):
Unfortunately COVID happened so the passenger revenues evaporated overnight. I was thinking about, "Okay, let me go back to the drawing board, think about what I want out of the next phase of my career." I've always been interested in mission-driven companies. I thought Delta actually had a really strong mission and what drew me there in the first place. But I knew that thinking about where I wanted to be, I still wanted to work for a strong mission, a strong leader that I was really excited about. And also just get back to investing because those were my roots historically. And if I wanted to start to generate an impact in the world, as much as I liked being part of a commercial leadership rotational program at Delta Air Lines, I knew it was going to take me a long time there to get to a point where I was going to be able to make decisions.
(00:11:24):
So I wanted to come back to a smaller, more nimble team and be able to feel like my voice had weight and was able to drive decisions. So I got really lucky. March of 2020 was when Bola, our CIO, took over the CIO seat here at The Nature Conservancy. I knew him from my prior life at Strategic Investment Group. We kicked off a many month conversation in which he was sending pitch decks to me and asking me to opine on certain managers and strategies. But I was really fortunate to join him in September of 2020, and I've been here now almost three years. So it's been a wonderful journey in that respect.
Jason Jacobs (00:11:55):
And it seems like it's a pretty big change to go from an outsource function to bringing it in-house. Maybe talk a bit about that transition and what are some of the things that are consistent now with how they were done historically, and then what are some of the biggest changes in terms of the way you operate, your criteria for investment, strategy, et cetera?
Ian Smith (00:12:21):
All great questions. So interestingly, TNC's first sort of director of investments, chief investment officer. He managed the portfolio kind of single-handedly for almost 15 or 16 years, and that's kind of from the eighties into the early 2000s. He left to join an OCIO himself. TNC decided to outsource the management of the endowment to him at the OCIO that he joined. And they did a wonderful job for the better part of two decades building a portfolio that really resembled the risk tolerance of the organization, but was trying to drive optimal risk adjusted returns over that time period. What does that really mean? So you fast-forward to when we in source the management of the portfolio, there were clear opportunities for us to contextualize the mission of the organization into a risk weighted context and thinking about that long-term strategic asset allocation.
(00:13:10):
If you look at our liquidity payouts and what we provide to the broad organization, we pay out 5.75% of our endowment on an annual basis, which is a bit more outsized than some of our peers. So liquidity is important to us. Capital preservation is important to us, and that manifested in a larger uncorrelated portfolio of hedge funds and hedge strategies that we inherited. The portfolio also had a much lower allocation to private equity, venture capital, growth equity strategies that traditional peers would have in their portfolio. And if you think about the fact that we're into perpetuity endowment, we should theoretically be taking advantage of that term premium of illiquid investments and compounding that over time. I think being able to kind of in source it, have a fresh set of eyes in our CIO and now our team today look at that long-term asset allocation.
(00:13:54):
There were clear opportunities to increase the illiquid exposure for the benefit of long-term compounding. But I would say that interestingly, one of the best benefits has been when you have an internal team and you're living and breathing within the TNC ecosystem, we're a conservation and science first organization. And so we need to be able to liaise and connect insights from our programmatic side, from our science side as we think about certainly climate opportunities, but kind of where the world is moving to in the future across the climate megatrend. So our ability to now draw on insights from the science side of the organization to help us diligence, think about early stage climate tech opportunities. That gives us that dry powder or that intellectual capacity to lean into climate tech investments that an outsource function can do, right?
(00:14:36):
They're handling portfolios on many different client types. Do they have the time and the bandwidth to be talking to our scientists on a daily basis or weekly basis to understand what is the leading and bleeding edge science that you're seeing on the ground? How do we translate that into investible opportunities in our endowment portfolio? And not only has that led to many millions of dollars of commitments into climate tech funds and climate strategies, but we've also stood up a co-investment program for us to follow on at early stage mission aligned startups that come through our existing VC managers portfolios. But we're able to diligence those opportunities because we sit within the TNC ecosystem, we can pull in scientists or corporate engagement specialists to understand can these companies scale? Does their science make sense?
(00:15:18):
Is it going to benefit climate biodiversity and also lead to financial returns? So those are some of the things I think it's really difficult in an outsource function to really internalize the mission in a way that can breed financial return, but also alignment of the portfolio over time.
Jason Jacobs (00:15:31):
So if I'm hearing right, and I just jotted down some notes, but it sounds like in summary, more climate investing, more privates and more co-investments, all powered by deeper integration with the rest of the organization.
Ian Smith (00:15:48):
That would be right. I think it's not so much that breeds into say, financial return over time, but I think it's really important in terms of allowing us to provide insights back to the organization and building trust with our stakeholders and our governance committee. If we have an internal team, I think one of the great things that our CIO has done is try to increase that connected tissue to the broader organization in terms of reporting back performance, reporting back some of these mission-aligned investments, reporting back to our employee base in IC around what is the de-carbonization strategy, what are the metrics that we're using to measure ourselves in terms of aligning that portfolio to TNC's mission.
(00:16:23):
So stakeholder communication, socializing what we're doing in the endowment and how that benefits the broader TNC organization. It's really powerful in terms of us feeling like we're a support function at the end of the day, TNC is a conservation first organization, and so our goal is to enable that. But being able to socialize what we're doing for the betterment of the organization and have that two-way dialogue, that's just been really fulfilling I think for both sides as well.
Jason Jacobs (00:16:46):
Now, the types of GPs that you speak with, and you know this better than I, but there's many different flavors of capital. There's generalists, there's specialists, there's strictly market returns based. There's more catalytic capital. There's some that try to marry both of those and meet happily in the middle. I never asked this question to an endowment, but are there different flavors of endowment capital as well of a similar ilk? And you're a particularly interesting person to ask this question to because of the mission-driven nature of the overall organization.
Ian Smith (00:17:20):
We are much more diversified than many of the GPs that we're looking at first and foremost, right? We have hundreds of partnerships across many different managers in the portfolio. I think many of our peers always malign the level of diversification and endowment portfolios, but capital preservation is really important and we have diversification both in terms of that asset class mix and then also within those asset classes, different managers that have different styles and philosophies. So I would say what's different for us is we have certain biases that reflect our mission, but also reflect the styles of investing that we think are really important. I think a lot of endowments, portfolios think about the lens with which you evaluate a GP pretty similarly. It's people, philosophy, process, and we all might weight that differently or we've come up with some of our own mental frameworks and paradigms.
(00:18:05):
We have what we call an AP process. So we look at everything from philosophy to the people, to the partnership, to a planet at the very end. What is the alignment of that strategy to our mission? For us, I would say as we think about some of these more... Like climate, right? Of course it's so near and dear to us. How do we think about generalist strategies for sector specific and the like? All of them can win as long as the partnerships that we're evaluating have the right people in place, the right competitive advantages, whether to actualize a generalist strategy or a more sector specific strategy. But I would also say that what we consider complimentary to the portfolio really depends on the existing partnerships that we have.
(00:18:42):
So as we were building out a lot of our climate exposure, I think we had a greater tolerance for more generalist strategies, ones that had really good top of the funnel, really good sourcing at a really good systems level, thinking about where are these markets moving towards and how does climate overlap with that? As we've now built out that portfolio, every marginal opportunity that we think about needs to provide some differentiation to what we already have. So I think generally that's why endowments start to translate or focus in more and more sector specialists because you already have a portfolio that exists or an opportunity cost that is probably generalist in nature, even if you add a bunch of sector specialists over time.
(00:19:15):
So as we think about the climate space and we get smarter ourselves and GPs like yourselves, you guys get smarter. Try to understand who's really thinking about the market differently. How's that translating into different networks of sourcing or them closing on different deals that are going to be additive to us over time? That's our evolution, I think. And so I think most endowments have to think about what is that opportunity cost? What are the installed investments that you have and how are new investments differentiated or complimentary to that?
Jason Jacobs (00:19:40):
And as you thought about how to deploy in that climate bucket, which it sounds like can go up and down the stack to different tools and mechanisms and stages and types of capital, maybe talk a bit about that journey. So where are you on that journey? What are some areas that are most interesting and exciting to you as an endowment across tools? And then we can come back around and talk specifically about private sense of course that's relevant to a lot of our listeners.
Ian Smith (00:20:11):
I'll give a brief overview of this de-carbonization strategy that we architected three years ago, really when I joined. And again, kudos to our CIO for pushing us in this vein, but we have a strategy that is holistic. It's across the portfolio, it's across asset classes. The key takeaways for how we think about it is that we need to have a level of accountability. We've moved from an era of intent and we have language in our IPS. TNC even 10 years ago, started some modest divestment efforts away from companies that were generating revenues from coal and oil sands. We started to do some impact investing around 2017.
(00:20:44):
There was a carve out in the portfolio, but today we have the intent, we've done some work, but now it's about accountability. And with different approaches across asset classes based on the nuance of that asset class and also the different investment structures. So I'll give you a brief overview. On the public equity side, we have an exclusionary policy and we want to make sure that we're not being invested in some of the most carbon intensive companies globally. And so how do we do that? We use S&P's true cost database to look through, they have over 350 KPIs. Our research showed that many of the different high level impact scores through true cost or Sustainalytics or these various service providers, they all tend to correlate.
(00:21:22):
So it's really important to look through to the underlying metrics that they're using to build these scores and figure out which ones are most important to your mission. We looked through this big database of ESG KPIs. We came up with four that we thought were most meaningful to us, a company's scope one emissions, a company's land use considerations as a proxy for biodiversity risk, future emissions profile. Then also a percentage of their revenues that can be attributed to extracted activities. So those are the four criteria that we base our restricted list on. Interestingly, our restricted list internally, once we built up this new methodology, expanded about 10x, it went from 50 companies to 500.
(00:21:59):
We also had to find the right wedge of what is both exclusionary and meaningful to us, but isn't going to create too much friction or turnover in the portfolio to the undue benefit of the financial returns over time. And so I think we were able to find that wedge. We exclude a large portion of global emissions in our public equities benchmark while minimizing portfolio turnover. And I think that's also a reflection of a lot of the partnerships that we already had in place. There's a lot of philosophical alignment around non-investing in oil and gas companies because of not wanting to be linked to the underlying commodity risk or stock prices.
(00:22:29):
At the end of the day, finding investment partners that think about the world like you do is probably the best hedge towards aligning the portfolio. But we do have a very explicit exclusionary policy in place that we overlay into our separately managed accounts, but we also used to monitor all of our portfolio holdings. And if a manager introduces a holding on our restricted list into their portfolio, we engage with them, have a conversation around, do you understand the carbon intensity of this business? Is there a good transition plan in place that we aren't familiar with? Why does it make sense to hold this business for the next five or 10 years? So that's on the public equity side. It's a very sort of purest approach in the sense of let's exclude companies that we really don't think are congruent with our mission.
(00:23:07):
I would say that one way we contextualize that is we also try to include companies that have strong incredible transition plans in place. And that's a bit more nuanced of talking with our corporate engagement teams or talking with our partners to say this company is a carbon intensive business model today, but it's a critical company and they've committed towards a credible plan to transition by 2030, 2050, or whatever those targets are. And then just shifting over to the private side, that's where we really think a lot of our additional and catalytic benefit will happen over time. Again, it goes back to the early stage exposures that we have in our private portfolio, even sustainable real assets' exposure that we have.
(00:23:41):
Whether it's catalyzing the innovation that we need to transition to a sustainable future or investing in funds that are lending into distributed energy resources or distributed infrastructure that is helping to build that next generation of sustainable real assets or infrastructure that we need to transition. So that's where we're more thematically aligned. It's tough to find exact metrics that support a lot of the impact of our early stage managers or early stage investments today, but we're hoping as they scale and progress and those companies evolve over time, they will lead to revenue traction, impact metrics that can demonstrate that they are having an appreciable impact and we can tie it back to TNC's mission.
Jason Jacobs (00:24:18):
Are there times when you're making these decisions, and I guess this is not public specific or private specific, it's more just generally where you will sacrifice returns to stay true to the mission?
Ian Smith (00:24:29):
No, so we don't sacrifice returns. Everything that we do is market grade. What I will say is that even if you are a financial first investor and you're thinking about this, I mentioned this balance. How do we align the portfolio without changing it wholesale overnight and excluding everything that could be possibly deemed incongruent with our mission? So you have to think about that transition and those frictions. The way we think about it is real authenticity will lead to complexity, which will lead to some amount of turnover. And so if we look at our own track record over the last three years, again, everything that we do is financially oriented. There's been maybe one case where we have actively divested from a manager because we didn't see eye to eye with them.
(00:25:09):
Philosophically around what represents a good sustainable business to be invested in and what does not? It really is more actionable in terms of everything that we do, whether we add to a manager, divest from a manager, it's part of a mosaic of information. So if we have two managers that offer similar risk reward opportunities in the portfolio or that we have similar conviction in, but one is running a more carbon intensive portfolio, then that is sort of an easy lens to understand, "Okay, let's concentrate our exposure into the one partnership where we have greater philosophical alignment. There's a greater orientation towards more sustainable businesses." And so on the margin, it helps us dictate manager decisions.
(00:25:46):
And then on the private side, as we think about the future budget in our early stage venture portfolio, impact or climate oriented strategies have been about 50% of our capital deployment over the last two, three years. We believe in the opportunity set. We spend a lot of time in the opportunity set. We think we're partnering with the best GPs there, but that's one way for our mission to lower that opportunity cost for us around, "Okay, we have the insight. We're going to spend time understanding the space, this ecosystem." And that allows us to actively allocate more capital into that opportunity set. I think those are the ways where it leads to more action for us as opposed to saying, "This is really going to contribute to our 2030 goals, but it's not going to generate market rate returns."
(00:26:24):
We're not going to do that because we know that the broader organization has that capacity to do that. We need to stay true to our endowment portfolio, the real return targets that we're seeking, and over time that will benefit the organization because we do support 10 to 15% of the overall operating budget.
Jason Jacobs (00:26:38):
So when you evaluate, let's say a venture fund, although I guess this could be applied elsewhere as well. Is it the same team that would evaluate a generalist tech venture fund versus a climate one? And same question about the criteria used. Is it the same criteria to evaluate a generalist fund versus a climate fund or if they're different, how are they different?
Ian Smith (00:27:00):
We like to think of ourselves as, what's the adage? One team, one dream. So we have different swim lanes and pockets, but everybody on the team opines on investments that move through our pipeline. And that could be, I opine on hedge fund investments, more traditional private equity or venture capital investments. And likewise, my team members also opine on any climate or sustainability strategy that might come through my network, but we build small deal teams internally and the whole team opines on the risks and considerations around those. And that process is standard across all GPs and kind of give a flavor of it. I think I mentioned we leverage what we call the eight Ps process.
(00:27:36):
So we try to rate managers across eight different dimensions around, "Okay, do we have philosophical alignment?" Their people, are they high integrity? Are they skilled? Do they come from the right networks? What is their process? What is their performance spend? How does the portfolio complexion look? What are their risk guidelines? And then all the way down to again, planet, which is that mission alignment aspect. So the process is the same. I would say that in terms of your question around do generalists evaluate climate strategies? We tend to believe that it is important to have a little bit of sector specialization.
(00:28:05):
So we have two or three of us on the team that really focus our time on all climate tech opportunities or more sustainability oriented opportunities because the universe is so vast, it's really important to build some of those networks to understand who are the strongest GPs. But again, we take that, we take the diligence, we bring it back to the broader team. We have sort of various stages of socializing opportunities with the team. And so that's when the other team can bring a more traditional mindset if you want, or basically ensuring that every opportunity that makes its way into the portfolio is of the same level of quality, whether it's impact or not impact. So staying true to your process and running a discipline process, that's the only way to do that, right?
(00:28:43):
To make sure that every investment meets that bar that we're looking for and can achieve the market rate returns that we're seeking.
Jason Jacobs (00:28:49):
And there's a lot of endowments out there that have not yet deployed in climate tech, and there's varying reasons. I mean, some is [inaudible 00:28:59], others want to see the returns, and the category is still relatively immature, perceived risk, perceived time horizons, denominator effect. You probably know more of these than I do, but what's your assessment on the state of climate tech venture as an investible asset? How is that different than maybe how you might've thought about it a year or two ago? And how do you think about that maybe looking forward three years or five years in both directions?
Ian Smith (00:29:30):
What's tough about climate for a lot of institutional allocators is there's two things. One, it's horizontally pervasive across every industry, right? It's easier to be a sector specialist or have a thesis around one particular sector or industry dive deep there. Think about investible opportunities. Climate tends to be quite difficult because it intersects and overlays with all these traditional industries that we viewed as maybe not great investment opportunities in the past, like manufacturing firms or industrials or whatever the case is. So it can conflict with existing biases that allocators have around what is a high quality business, what is capital light, what is scalable?
(00:30:01):
And then of course the second bit would be some of the bruises from Clean Tech 1.0, right? And some of the blowups that happened then. So why is the world different today than the past? The way I think about it today and when I talk to other peers is that climate is so pervasive today that if you are not taking an active view or if you don't have a prepared mind in the space, you are intentionally betting against tailwinds that already exist in the market. So by virtue of not doing anything or not being explicit in your understanding of the space, that is making a bet too, right? You're basically making an anti-bet into the space. So you should probably have a prepared mind in that sense.
(00:30:34):
I would also say that the opportunity set has evolved such that you have to think about the duration of different investible opportunities and how does that fit into your asset class framework and of course the risk and return tolerance of the organization. And there are different ways to play it. So for us, we have a long-term into perpetuity endowment. We also have a mission that wants us to catalyze innovation in the climate vein. So we are going to take a lot of risk in our privates' portfolio, but it's sized appropriately in the context of the broader portfolio. It's not one outsized bet, just like we don't have any other big outsized bets that can kill us in the portfolio, but we do have a meaningful bet into the climate early stage opportunity set, such that if it does well, it'll be very additive to the portfolio over time and additive to our mission.
(00:31:13):
If you don't have an organization that has that sort of into perpetuity or evergreen investment vehicle, there are near term opportunities. It could be sustainable real assets or infrastructure. I was talking about companies or funds that can invest in that next generation of say, biogas facilities, wastewater management, whatever it is, and they could do that through project finance vehicles or more traditional infrastructure lenses. And there's even buyout strategies to capitalize development teams to do that, right? So that's a near term opportunity. And then if you're even more risk intolerant or you have more skepticism around it, there are ways to play this theme in the public space. You could look at physical carbon credits or carbon allowances. There are opportunities to buy futures that track those markets.
(00:31:53):
And if that is both a liquid and it's an opportunity set that should materialize gains and returns within, say the next two or three years, if those market-based mechanisms come to fruition. You really have to think about your duration. What are the intended outcomes you want to have? How additional is that? Then you can take those factors and figure out where do they make sense in your portfolio? That's something that is a self searching exercise that all endowments and portfolios should think about. Then kind of delving into, "Okay, we know we want to do more in privates. How do we build up an ecosystem or an understanding of the different strategies and GPs out there?" If you're just getting into the space, something more generalist in nature probably makes sense.
(00:32:28):
And then to answer your question, kind of tying this all back to venture, it's still a pretty immature opportunity set. I mean, if you look at 2021, 2022, eight tenths of every venture dollar went to, or maybe it was six tenths into mobility and transport startups. And of course if you look at the mosaic of carbon emissions, mobility transportation is maybe 15 or 20%. And there's really the harder to abate industries that we really have to solve for that don't attract a lot of venture funding. So for groups that can have a really skilled understanding of where our markets moving towards, what do corporates have the willingness to pay for? I think there's a lot of opportunity there for them to really select in an efficient opportunity set and have a lens that a broader VC market doesn't have.
(00:33:08):
And then groups that also can understand which companies can get the kind of financing either through non-dilutive sources that could be government funding or the loan program or project financing over time to kind of scale their solution for the broader marketplace. Those are the groups, I think we'll have a lot of opportunity set and just reflects that we're not seeing a lot of those groups. So if you're out there, come talk to me, but there's still a lot of immaturity in the space and that complexity breeds opportunity.
Yin lu (00:33:33):
Hey everyone, I'm yin a partner at MCJ Collective here to take a quick minute to tell you about our MCJ membership community, which was born out of a collective thirst for peer-to-peer learning and doing that goes beyond just listening to the podcast. We started in 2019 and have grown to thousands of members globally. Each week we're inspired by people who join with different backgrounds and points of view. What we all share is a deep curiosity to learn and a bias to action around ways to accelerate solutions to climate change. Some awesome initiatives have come out of the community. A number of founding teams have met, several nonprofits have been established, and a bunch of hiring has been done.
(00:34:08):
Many early stage investments have been made as well as ongoing events and programming like monthly women in climate meetups, idea jam sessions for early stage founders, climate book club, art workshops and more. Whether you've been in the climate space for a while or just embarking on your journey, having a community to support you is important. If you want to learn more, head over to mcjcollective.com and click on the members tab at the top. Thanks and enjoy the rest of the show.
Jason Jacobs (00:34:34):
When you look at climate specific investments, how do you think about impact and how do you measure or track it if at all?
Ian Smith (00:34:43):
So because of that data opacity issue in the private markets, it's very difficult for us to pull bottoms up metrics from all these early stage companies, nor do they really exist. And then we'd also have to go through the exercise of standardizing them. So the way we think about that, which is very different to our public investments where we can track every holding in terms of these specific ESG KPIs. On the private side, it's more about thematic alignment for us today. And as those companies scale and get later stage, then we can start to layer on what are some of those commercial metrics that tie to the impact that we're hoping to see. So thematically, we're in the process of tagging all of our portfolio holdings on the private side, whether or not they're in our climate tech funds or what we would call an impact fund or more generalist strategy.
(00:35:23):
Companies that kind of align with TNCs 2030 goals, we can thematically tag those, we can see what the representation is of those investments over time in our portfolio. And then the idea is that as those companies scale and get revenue traction and commercial traction, we can then transition them into really getting bottoms up metrics for those companies that it could be sort of north star impact metrics or metrics that tie with our 2030 goals around carbon sequestration or avoidance or land conserved or marine ecosystems that have been sustainably managed. We can try to tie those operational metrics back to TNC's 2030 goals, which are a great sort of north star for us and our team.
(00:35:59):
Just to summarize, it's more thematic alignment today and the representation of those thematic investments in our portfolio. And then over time as they scale, we can start to drive more impact metrics from those specific investments.
Jason Jacobs (00:36:09):
And yet you mentioned how one might be inclined to start more generalist initially and then look towards specialization over time, not because the generalist doesn't matter. But because if you have that coverage, you're looking for additionality or to fill in the gaps in what you already have covered and expand your coverage. The visual that comes to mind for me is almost like a puzzle, but it's like an amoeba. It's like a puzzle that's shifting and the blobs are growing in certain places and shrinking in others, and you're always trying to fill it in, but it's a moving target. Maybe just give a sense of where you are with that to date.
(00:36:43):
And I'm not looking for names or anything that you're not privy to share, but to the extent that you can just talk about on the private side, here's where we are and on the public, here's where we are. And here's some of where we have coverage and here's some of the gaps just to give listeners a sense of where you're at, but also flag for maybe ones that could help you fill in the gaps on who it might make sense to get in touch with you.
Ian Smith (00:37:06):
Absolutely. I'll focus in on the private side because it's really where we spent most of our intentional time thinking about it. If we want to be impactful to the broader TNC organization, when you think about what TNC has on our balance sheet, right? The assets that we have, it's a lot of nature-based assets. I mean, it's a lot of land. It's also marine ecosystems and the like. Our ability to take risk and to innovative technologies around carbon capture utilization storage or early stage climate tech, that is really additional to the organization. And it just so happens to dovetail with our long-term time horizon, our ability to generate that term premium in illiquid investments. Of course, that's where the talent is.
(00:37:40):
We have to think about that as well. The majority of our investments to date on the private side have been early stage climate tech where we found opportunities to diversify that. We have a couple investments into quasi project financing vehicles or what I call sustainable real assets. So it's these groups that are taking majority stakes into development companies that are looking to build out pipelines of battery storage or other types of distributed energy assets. And then sort of near term, as I mentioned, we also have more liquid allocation, say to carbon credits and things like that. And that sits outside of the privates' portfolio. But what would I like to see? So on the private side, many groups have talked about this kind of the dearth of capital at the mid-stage.
(00:38:16):
So there's been so much funding that have gone to early stage pre-seed series A type climate startups, but a lot of those companies aren't going to gain material revenue traction until they might get some LOIs from corporate customers or advanced open market commitments. But do GPs really understand what some of those milestones are to garner series B type funding? And again, these are very divorced and different from traditional capital light enterprise SaaS type startups. So what VCs are coming to the marketplace with a really strong technical and scientific understanding at the mid-stage, I'm really interested in that. We're not seeing a lot of that today. You've had some groups here in the past that can think about that, but it's definitely an underrepresented area of the market.
Jason Jacobs (00:38:57):
Mid-stage being Series B?
Ian Smith (00:38:58):
I don't have the best grasp on what qualifies as a Series A or Series B, but groups that are definitely going to take more capital to build first of a kind projects or plans to support their technology or processes. And precision fermentation would be a great example of that. So one of the VCs that could say, "You have a pilot that is successful. We think the science and the technicals are there. We know you're going to need to get funding. We're going to help you bring in those sources of funding in a non-dilutive way or in a supportive way to scale what you have here to be really attracted to the later stage ecosystem." Because the dollar existed later in the growth stage. They exist at the early stage, who's connecting the two dots?
(00:39:35):
And of course, as the market fundraising environment slows down, there should be better even risk adjusted opportunities to say, "Okay, we can now see a little bit of time to evaluate our startups progress from series A to series B, and we can understand what have been the positive milestones and whether or not those companies deserve that level of funding." So I tend to view it in the series B stage. I think these things are a little bit fungible. And then Jason, to go back to your question on maybe just quickly outside of the privates world, always looking for strategies on the... There's a ton of public equity strategies that have an ESG integration or ESG lens. I think a lot of those are becoming more commoditized over time. I like groups that can constructively engage with management teams around disclosing, coming up with transition plans.
(00:40:12):
But if you're going to do that in the large cap world, you need to have a very large fund and a bit of gravitas to do that with management teams. Maybe that's easier on the small cap or mid-cap space. And then in the hedge fund world, strategies that are looking to actualize a climate thesis in building out long positions and maybe shorting structural losers in the energy transition. I'm interested in that, there's not a lot of opportunities there. I think the difficulty is the time horizons are different. It's a very long-term opportunity set, to build out structural shorts can be very costly. And so we've oriented most of our exposure to be long biased, but the hedge fund world is just a world that is much farther behind in terms of adopting an ESG lens with their investing approach.
Jason Jacobs (00:40:51):
And this is not a TNC specific question, but it's interesting. If you look at 401Ks for example, you've got people who do mission-driven work and they work in mission-driven organizations. And let's say DAF, they'll set up a DAF, they'll do grants from the DAF, but then how is the money that's in the DAF actually being invested while it's in the DAF in between doing grants. And it seems at least historically, whether it's DAF holders or big endowments or whoever, that there isn't necessarily consistent of values between the investible assets and the grant making. For other endowments out there that are maybe in that position, what advice do you have for them given you don't want to compromise returns, but you do want consistency of values throughout everything you do? So how should one balance that? Where do you even start?
Ian Smith (00:41:46):
I think we all understand the importance of capital markets and enabling the energy transition. We don't get there unless capital is available and these companies can get financing. So first and foremost, we are not going to be successful at the society at large or within our portfolio unless we generate some financial returns that we're looking for. That is first and foremost. When I talk to employees internally here at TNC they are quite vocal and passionate about their 401K holdings and how can we better align the 410K assets and offerings within TNC. Our investments, they're long-term, they're a bit of an expression of the global economy. And we also recognize that there's just critical industries that are still carbon intensive today that need to transition over time, right?
(00:42:25):
It's not an overnight process. And for allocators also, being engaged in the climate, aligning your portfolio, these are huge pools of capital. Moving 1%, 2%, 3% can be exceptionally catalytic, can unlock a lot of capital into the ecosystem. So I view it more of we need to as allocators be willing to challenge our negative biases and preferences and maybe our older paradigms of investing to embrace newer economies, newer markets. And so even the willingness to spend time in the climate to move a small portion of your portfolio to talk to GPs that are moving into this space, that can be entirely additional and catalytic over time. And it can be very risk adjusted exposure in the portfolio. It can be only one to 5%. But for those GPs and for the companies that they're funding, it's exceptionally catalytic. So I don't view it so much as these things happen. Portfolios are glaciers.
(00:43:13):
It takes forever to move them in one direction. And so starting that work today, building that knowledge compounding, that is just all part of the process, and it's very important to move the ecosystem in that direction. And it takes time and it needs to be authentic. And to do that authentically, it's going to take a lot of work and building up a team and talking to people in the landscape just like you're doing. So I'm very optimistic about it. I know everybody thinks we're not moving as quickly as we should be, but we manage very precious pools of capital. We have to preserve capital and we have to do things in a diversified and risk adjusted way. Otherwise, nothing that we do is going to be for the benefit of the organization.
Jason Jacobs (00:43:45):
So we started talking about TNC stuff and then we just elevated to talk about other endowments or asset holders. I guess maybe the next step, and again, this is an Ian question, not a TNC question. But just given where you sit, how's this transition going to go? I can't help, but when I'm hearing you talk, it seems like it's orderly and methodical and not straying from your approach and sticking to your knitting, and that's a good peacetime approach. There are some people out there that are literally hurling their bodies in front of rush hour traffic and tossing paint on fine art at museums and quitting their jobs and shedding all their belongings and building bunkers.
(00:44:25):
Is the overall transition from where you sit, do you feel like it's going to be an orally transition? How bad are things going to get? Are we driving the train off a cliff? How do you think about that? Nothing to do with investing, but just big picture.
Ian Smith (00:44:38):
We have the benefit of having just a leading edge science team that leads and emboldens our conservation efforts. So we see all the data. It can be really disheartening at times, but I think the philosophy that we have and the approach that first of all, still optimistic, we have to have that level of optimism that we can actually effectuate positive change. Otherwise, we're not going to be incentivized, we're not going to be motivated to do what we do on a daily basis. That doesn't mean that we shouldn't respect the gravity of the crisis, both in terms of climate, but also biodiversity. So we need to be thinking about these things on a daily basis, how we can do more in a risk adjusted way, at least in our world. How can we place more capital in these strategies? Do we need to be doing more sourcing?
(00:45:16):
Do we need to be adding to our existing positions? Do we need to be thinking about changing the broader portfolio? So that sort of mind share is really important because we think about it all the time, and we think about it in the context of the portfolio. But what I want to say is that thinking about the last three years and hopefully the change that we've effectuated today that will lead to long-term results, we have to be pragmatic. That is the only way to create sustainable change, at least in our investible universe and the portfolio that we manage. Because again, if we over allocate to any one opportunity that we haven't fully understood the risks, and that leads to a loss of permanent capital.
(00:45:49):
That will just preclude us from doing those opportunities going forward or adding more capital in this space. So how do I think that works over time in terms of our portfolio and the economy at large? I like to think about it in sort of three different phases. The first is that we're still in the awareness phase. Corporates are still looking to measure the carbon intensity of their supply chains. What are the investments that they're going to need to decarbonize over time? And so if you think about how that works from the investment lens, it's offsetting today, and I know there's been a lot of alignment of the offsetting ecosystem, but it still plays a really valuable role in enabling the transition in my mind. So companies need to first measure then figure out, "Okay, how can we apply some bandages to that in the short term?"
(00:46:27):
And then over time, they need to start in setting. So they need to start investing in technologies that are going to help them decarbonize their supply chains or help their suppliers decarbonize, and then obviously the end consumer. Even making proactive investments to help the ecosystem at large, because now they recognize that we can't think about our business in isolation. We have to think about the broader supply chain and the impact we have on the communities that we operate in. So how do we invest as a corporate to enable that holistic progression towards a more sustainable future? That all breeds investment opportunity, right?
(00:46:57):
Offsets in the near term, decarbonizing technologies in the longterm and everything in between. So you have to really think about diversifying across the duration of different investible opportunities, public to privates, climate tech infrastructure, and alike along the way. I think that's really important because it's such a big and structural theme.
Jason Jacobs (00:47:14):
One thing that comes to mind is you mentioned, and I actually jotted this down as you were talking, a prepared mind and how given the tailwinds that already exist, whether you pay attention or not. They're there and they're real and they're accelerating. So you owe it yourself to get a prepared mind. I'm just wondering, from a catalytic standpoint, how do we get more financially oriented institutional investors to have a prepared mind around climate tech and de-carbonization? Are there groups that are working on facilitating this at broad scale? Is there white space there? Are there opportunities?
(00:47:50):
Because no one is suggesting that you should sacrifice your permanent capital, but to the extent that you can generate returns not compromise returns while accelerating the transition. That would be a good thing for you, for your employees, for your stakeholders, for the world. And it seems like getting more prepared mind is like an easy win to accelerate that.
Ian Smith (00:48:09):
Going back to why is this different than the Cleantech 1.0 era? First of all, all the big consulting firms have written reports around why this time is different in terms of where we are in terms of cost curves, talent moving into the ecosystem. We've moved off even from the premium around companies that have a sustainable mission like these companies are just profitable today. But also really digging deep into a lot of the government credits, the IRA. Why is that so important to these companies? There are many allocators out there that still think about the regulatory risk or these companies would not be economical without these tax credits or incentives. And it's like, yeah, but also investment tax credits and production tax credits for solar and wind have been in place in the perpetuity since they were enacted in the law.
(00:48:49):
And that helped those businesses and those industries get down their levelized cost of electricity down to the in cost parity or even better than traditional hydrocarbon. So these things matter. The governments is playing a critical function and role. And if you can get a seat at that table, be a part of that party. There's really interesting businesses today that are even looking to benefit from 45 [inaudible 00:49:09]. So I think just spending the time to understand those structural tailwinds, talking to people in the space, not just even yourselves, talk to all the generalists VCs that you think highly of. They're building out climate practices. They're investing in people that can have a thesis around climate from an early stage perspective. Look at Lowercarbon, Chris Sacca, right?
(00:49:25):
Transitioning as a legendary tech investor to being climate only today. If you want to have a seat at that table, you want to follow that talent. Again, not investing in the space is making intentional bet also, right? And so allocators just need to spend the time, talk to GPs that you're not investing with around where's talent flowing in the ecosystem, both from an investor lens but also at the underlying startup level. Why are employees so much more excited to work in say, climate than tech or other industries today? But how do those companies draw a dotted line to being profitable over time? It's the ones that the prepared mind would be maybe they have to access non-dilutive sources today.
(00:49:58):
We have to think about project financing in the interim, but in the longer term, there's a pathway towards accessing more scalable voluntary carbon market or something. So VCs that have a really good understanding of these are the different evolutions and financing mechanisms that we need to scale these technologies. And we know the demand will be there. I mean, if you look at corporate pledges for really permanent carbon removals or credits. Today, I mean there's very little supply in the marketplace, but they can pledge 1% of their top line to buying these carbon removal offsets, and that would create a whole industry in and of itself. So even marginal amounts of demand are going to move investor returns.
(00:50:32):
And I think it just behooves all of us to have an understanding of the space. And even if you're against it, just following the talent and understanding where the tailwinds are, you probably want some representation in the space. It's just a function of going back to your risk return tolerance. What is the makeup of your portfolio today? What is the level of risk and illiquidity that you can bear? That will dictate how you want to express your bets across the opportunity set.
Jason Jacobs (00:50:53):
I have kind of a random hodgepodge of things that I wanted to ask you about that we haven't yet touched on. One is, given what you laid out in terms of your philosophy and approach, what do you think about the term impact investor?
Ian Smith (00:51:04):
Going back to the Global Impact Investing Network when they first came up with it. The definition of bringing more capital to the ecosystem by virtue of saying you can do both. You can have market rate and you can have impact, right? The problem is people anchor on the impact side and say, "Oh, well you must be concessionary." I have no problem with the term. I wish we could just divorce ourselves from this view that if you have an impact lens that somehow you're a concessionary in nature. Every investment can be somewhat concessionary if you let it. So being a financial investor and having that process and understanding what is the highest quality investment you can introduce to a portfolio.
(00:51:37):
I think the beauty of being a mission-driven investor is that you do have the time and the bandwidth to delve into those areas that are important to your organization. And if you can find those investible opportunities that align with that, even better. That also means that you're probably swimming in more inefficient markets or markets that other investors aren't looking at as deeply. So that should be additive from a financial end. So I don't really have a problem with it. I think it's just been that term has been abused by the marketplace unduly.
Jason Jacobs (00:52:04):
I'm jumping to the next juicy question. You mentioned on the public side that one of the filters that you picked out of that long list of potential ESG filters is carbon intensity of the business. And I'm wondering, as a pragmatist who believes that it is a transition and will take time. Some of the most carbon intensive businesses also have huge balance sheets and huge sets of expertise, like the same way that you have hundreds of scientists. They have hundreds of drill engineers and things that can be very useful to another thing you mentioned you're excited about, which is carbon capture.
(00:52:41):
I guess help me understand if you believe that they should be excluded from the investing, does that also mean that they should not partner with the companies that you invest in or that your fund managers invested in, not partner with those companies, not invest in those companies, not invest in those funds, or is it only excluded in some ways? What should the role be of big oil in the transition?
Ian Smith (00:53:05):
Going back to that point around pragmatism and that creates an enduring and sustainable program that will actually generate impact or change over time. We recognize that that exclusionary lens is going to not resonate with other investors specifically in the climate community. I mean, there's a lot of people that say divestment and restriction just doesn't move the needle, but that doesn't mean that we have to remove ourselves from businesses that are going to help those types of companies transition over time on the private side. Carbon capture is a great example. We know that even if we can transition every business today, there still is a certain amount of gigatons of carbon emissions that have to just be sequestered and permanently stored over time.
(00:53:39):
So I think on the public equity side, the way we try to contextualize it is, first of all, you mentioned carbon intensity. Actually, the way that we think about the aspirational goal of our marketable investments is we don't want to be exposed either $1 or tens of millions of dollars to 90% of emissions that exist in our global equity benchmark. And so we actually don't normalize for our investment position. We don't normalize for a company's revenue in that way. And that's very purist and we think that is important to how to respect TNC's values and mission. But we also know that there's many ways to look at that and it's imprecise. And so that's why on the private side, we want to be thematically invested in companies that are going to help those legacy emitters transition over time.
(00:54:21):
How do you do that also on the public side in the near term? I think you really need to have groups that are willing to engage with those management teams, those boards. There's some great examples of groups that we're not partnered with, but like in engine number one that has been able to take more activist positions to help legacy oil and gas companies think about that. The problem with that is that you have to have a scale and a gravitas again in a brand in the marketplace to create that action. But it's really important to have those players demonstrate that you can add value that way and that'll bring more people into the ecosystem. And then I should also say, I highlighted this before. Over time, there's so many great initiatives measuring the credibility of companies transition plans. SBTI is one of them.
(00:54:59):
And so we try to use those rating systems to contextualize our restrictions list to make sure that, look, if there's a heavy carbon emitter today, but that is committed to transitioning over time, we should not exclude them. In fact, we should try to use them as a case study for other holdings to say, "Okay, what are they doing right and what is so credible about their transition plan? They should be excluded from the investible universe for us." So that's a qualitative and nuanced exercise. And over time though, I am very bullish that more companies will have credible transition plans in place, not just proclamations around certain targets, but credible plans.
(00:55:34):
That is also an incentive for them, I think for the investible community at large to say, "Okay, you warrant the marginal dollars opposed to a company in your industry that doesn't have a credible transition plan in place." So hopefully that answers the question. It's a very difficult question. We want to be purist, but we also want to be realistic as well.
Jason Jacobs (00:55:49):
This next question is not an impact question. It's more of a financial question, but we talked about how climate investing touches so many different sectors and industries and business models and geographies. I understand it's a moving target, but do you have biases in terms of the types of sectors that are investible, the types of business models that are investible, the types of risk that you'll take on or that you are comfortable with the fund managers that you work with taking on? And follow up to that, just to give you a preview is then same question in terms of how you think about directs.
Ian Smith (00:56:26):
We haven't thought about that explicitly around let's look at our commitments today and then look through exposures and where do biases exist? But take my personal view, so maybe not the view of our investment office. We're all traditional investors, so there are certain business models, capital like business models that I think we're going to have a bit more exposure to in the climate vein because the VCs that we've invested with bring a bit more of that traditional venture capitalist mindset. What that could be, this is just a representative example, carbon accounting software methodologies, helping companies figure out and map what their carbon exposures are across the supply chain.
(00:56:57):
There's probably a bit of representation there just by virtue of where dollars go into in startup creation, in the space, mobility, transportation, batteries, things like that. There's probably a bit of a bias there. Where I will say that we have taken more risk than other peers is carbon removal, carbon capture, carbon storage technologies. There's not that many groups that are doing that explicitly. Most groups try to balance hardware, software, from the timeline to profitability and companies that have to leverage government tax credits along the way to do that. But we do have a bet there with a couple groups, and I think we're a bit more risk-taking in that perspective.
(00:57:31):
So at the end of the day, it's going to be a diversified climate portfolio. It is such a big opportunity that we think it's important to be diversified across time horizon, but also different industries, different types of technologies, because it'd be very difficult to pick any one winner. But the companies that are thinking about it today should hopefully have a first mover advantage and should benefit from that transition more than hopefully the next company that comes into the space. But at the end of the day, we're going to commit consistently across vintage year, across these funds. So I think we'll be broadly expressed across it for many years to come.
Jason Jacobs (00:57:58):
And in a similar vein, how are you thinking about the direct investing? Is it primarily in companies that come from the fund managers that you work with? And how will you prioritize in terms of which opportunities you'll go for, what stage, what check size, any guidelines you have to the extent that you have them?
Ian Smith (00:58:17):
For us and the directs, the scope of our co-investment program and our direct investing program kind of borrows from other successful programs from other peers that we've spoken to in the space. So the idea is that it's all deal flow that comes through our existing managers. And again, we have a bias towards the earlier stage in our private investment portfolio, that's early stage climate tech, pre-seed to series A. And so the idea of the co-investment program was let's find the winners that are coming out through that portfolio, start to follow on and maintain our pro rata in those investments at the series B stage. But what's really important for us is that we are investing alongside our managers.
(00:58:52):
So there has to be a situation where our manager continues to have strong conviction and they're willing to bring us in either through an SPD or directly onto the cap table. And we're not a big check. We're never going to lead far from it, but our ability to make these decisions of we can see these companies progress through our early stage partners portfolio and we can make an active decision to say, "This company fits the impact pieces broadly across the organization. It will contribute to our 2030 goals if successful. But they also have a business model that has scaled to a point that warrants a dollar from us at that sort of mid-stage." And fortunately, as I mentioned, the [inaudible 00:59:28] capital in this part of the market, we're trying to meet some of that by being a direct investor in this space ourselves.
(00:59:33):
And so I think that's what's really nice about our direct program. And in terms of the process there, we have to continue to socialize with our managers that we're interested in those opportunities. And founders should bring us onto the cap table in a very small dollar amount because we can hopefully connect some really value added insights from TNC's programmatic side or the science side of our organization to better their understanding of how they should scale their business over time. And so that's where we've been successful in the limited ones that we've done to date, but hoping to scale that effort going forward.
Jason Jacobs (01:00:01):
Your capital on the investing side is intentionally not catalytic. That's not a judgment, that's just a fact. Ours isn't either, by the way, with MCJ collective. Our help is additional not our dollars. And we seek opportunities where there's plenty of accessibility to capital because they're incredible market opportunities like impact aside, they should have high impact too. But catalytic is like going where their marketplace capital won't, right? That's how I think about it. There are some organizations I've seen that are doing really impactful things with catalytic capital, prime coalition or [inaudible 01:00:37] comes to mind as one example of that.
(01:00:39):
Is there any role for catalytic capital in the TNC umbrella? And one of the reasons I ask is that you talked about that capital gap and first of a kind, it's like, gosh. I know you said there's not that much out there. If you guys put your mind to it, you could actually be part of that solution.
Ian Smith (01:00:56):
I think today for us, you have to... Remember, we have a huge balance sheet that exists on the programmatic side, which I think is doing all these great catalytic things and nature-based solutions and natural climate solutions. And TNC is doing that. We are a very small part of that mosaic.
Jason Jacobs (01:01:10):
On the grant making side, you mean?
Ian Smith (01:01:12):
And of course we have NatureVest too, right? That is investing balance sheet capital alongside other GPs into a more impact oriented, again, we're going to abuse this term. But it's into deals and fun constructs that have an impact first lens and can have a marketing return. But generally are more concessionary in nature. So all to say there's other constituents and pockets of capital at TNC that are doing exactly what you're talking about. Does TNC's endowment have a need or a right to play in that ecosystem? I think today we still need to stay true to our financial return targets and those mandates because we do support the meaningful part of the budget here at TNC.
(01:01:47):
And the better we do, the more that we can support that over time, it just becomes tough. You start to blend those two worlds. And there are other groups that are better equipped, I think to understand is this worth catalyzing because there could be some great impact benefit? I think our ability to assess what's going to generate impact because it scales and generates revenue traction and these companies are building into really big markets over time. That's our sweet spot. That's our competitive advantage. And I think we can still leverage the same insights that our catalytic pockets of capital are using.
(01:02:17):
We just package it in a different way or we contextualize it in a different way, or we find different opportunities to put those insights into investible opportunities. So sorry for the non-answer there. I don't think we have a place to play in it explicitly today, but it's not to say that we aren't deriving insights from that ecosystem or that TNC isn't participating there. TNC at large is very much participating in the catalytic side.
Jason Jacobs (01:02:37):
Thanks for that. And I think I know the answer here, but given what we've already talked about. When you think about climate tech innovation on the private side, what are you most worried about? And if you could make one change that's outside your control that would most accelerate progress there, what would it be and why?
Ian Smith (01:02:58):
I feel like a broken record, but I think a lot of the winners in the climate vein will be the groups that can continue to get financing, get capital to scale their solutions. I very much believe every climate software company or every asset-like climate company is just really enabling a hardware implementation at some level. The companies that we have to resolve this valley of death, this dearth of capital of companies that are trying to progress from the earliest stages, pre-revenue traction to whatever the 10 million ARR scale that a later stage or growth investor would get excited about.
(01:03:29):
So how do we get there? What are the groups that are going to be thoughtful in saying, "Yeah, we see that you have the right scientific or technical milestones in place. We're willing to lend against that." So I think the financing spectrum has to evolve. It has to proliferate. It has to scale. That worries me because there are a lot of great companies out there with great missions. That if you're still going to get equity and venture returns for those initial investors, they're going to have to tap into different sources of capital that those investors aren't probably used to or they're not used to syndicating out deals for that type of capital.
(01:03:56):
So that worries me then of course, there's also so many risks. We understand the space more, right? What does it mean to be conscious about biodiversity risks? What does it mean to... For sustainable aviation fuels, we have this debate. Is it better to try to scale SAF or in the near term because there's a present discounted value of carbon, do you just allow traditional engines to operate and then just invest in carbon removal or direct air capture? What is better from a climate perspective? So part of me worries that it's going to be really difficult to come to the right solution there, but we'll never know the counterfactual.
(01:04:26):
And I think it's really important to incentivize all these different approaches to see which ones went out because of the severity of the crisis, of the urgency of it. We don't have time to waste, and it's okay to try to invest and catalyze a portfolio of approaches, but I do worry sometimes that it's not the most efficient capital allocation given how pertinent and urgent both the climate and the biodiversity crises are.
Jason Jacobs (01:04:47):
I don't think I've ever asked this before, but the flip side of that is just in that same vein, what are you most excited about?
Ian Smith (01:04:54):
I'm so excited that... I mean, personally, I feel like I'm at just this wonderful point in my career that I can see this 30 year window that hopefully... Today I really feel like I've been able to align what I love with having a very fulfilling career and feeling like I have an impact and not being to the detriment of, I don't know, career opportunities or things of that nature. So people in my position or people even coming out of college today, there's so many great opportunities to align purpose and passion with profit and commercial opportunity and ambition. I think that's so exciting. In terms of the ecosystem at large, we've done so much in partnering and evaluating climate tech opportunities, making bets in that space.
(01:05:33):
It'll be so meaningful if we fast-forward 5, 7, 10 years and these fund opportunities and the startups that those fund managers have invested in have truly been the winners that we think that they will be. That will be so rewarding. It will just draw in so much more capital into the space. Because to your point, there needs to be some DPI and there has been, but there needs to be more DPI to really catalyze more capital in. And I'm really excited about that. I'm really bullish on it, obviously. Fast-forward 10 years from now and we have those massive winners, and we're no longer having these questions around should you be investing in climate or not. It's more of what amount of your portfolio is invested in sustainability oriented companies or climate tech. And that's what I'm looking and excited too in the future.
Jason Jacobs (01:06:13):
And this has been such a wide-ranging discussion. Is there anything I didn't ask that I should have or any parting words for listeners?
Ian Smith (01:06:20):
We talked about this before the conversation, Jason, but I think the continued opacity of data on the private side, there's a lot of reports that suggest 60% of global emissions come from private companies. So we spend so much time beating down public companies and demanding disclosures and trying to optimize portfolios for carbon benefits or to have the least carbon intensity. But the majority of those emissions are coming from a world that we have no real transparency or understanding into. So how do we do that better over time?
(01:06:51):
What service providers will exist in the future or that exist today, but how can we plug those into big pools of institutional capital in a way that's both authentic, but it's objective and it drives real change? And we can actually say 10 years from now that we did invest in things that we know will do well financially, but did they do better than the benchmark or better than... What was the opportunity cost of that dollar from an impact perspective, and can we really demonstrate that they generated outsize impact on their industry or the economy at large? So I continue to think through that problem and hope more people come into the space to try to solve that.
Jason Jacobs (01:07:24):
If only there was an organization with hundreds of scientists who might be able to assist in that effort.
Ian Smith (01:07:30):
You know what? I also hope that... No, I do hope that we will be able to have a part to play there, and hopefully we talk again in a few years and we can say, "Look at all the great metrics we have coming through our privates' portfolio." It'll take a lot of work but I'm also really excited for that because that will be a big unlock for us and I think for the industry at large.
Jason Jacobs (01:07:48):
Well, this was awesome, Ian. I really enjoyed this discussion. I learned a lot and also just got kind of the juices flowing. I think there's a bunch of things that aren't resolved yet that I'm kind of stimulated to think more about from this. So thank you for making the time to come on the show. Thanks for all the work that you and TNC are doing in the space. I'm looking forward to continued collaboration in whatever form that takes.
Ian Smith (01:08:10):
Thanks so much, Jason. I feel really honored to have been a guest on such a remarkable podcast. Thank you for the time.
Jason Jacobs (01:08:16):
Thanks again for joining us on My Climate Journey podcast.
Cody Simms (01:08:20):
At MCJ Collective, we're all about powering collective innovation for climate solutions by breaking down silos and unleashing problem solving capacity.
Jason Jacobs (01:08:29):
If you'd like to learn more about MCJ Collective, visit us at mcjcollective.com. And if you have a guest suggestion, let us know that via Twitter at @mcjpod.
Yin lu (01:08:42):
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Cody Simms (01:08:52):
Thanks, and see you next episode.