By Erik Schatzker (BLOOMBERG)
Two of the world’s most powerful money managers are joining forces to build a business on climate-change investing and raise one of the largest venture-capital funds dedicated to carbon-cutting technologies.
BlackRock Inc. and Singapore’s Temasek Holdings Pte. formed a new firm, Decarbonization Partners, to take stakes in startups that have the potential to reduce the world’s reliance on fossil fuels and meet the goal of zero-carbon emissions in three decades. They’re committing a total of $600 million to the effort, including $300 million of seed capital for a $1 billion first fund, and raising the rest from outside investors.
Eventually, Decarbonization Partners aims to manage billions across multiple funds, BlackRock Chief Executive Officer Larry Fink said in an interview with Bloomberg Television, adding, “I look at this as one of the greatest investment opportunities over our lifetimes.”
Although renewables are displacing coal in power generation and electric vehicles can be cost-competitive with gasoline-driven cars, there are no viable solutions for problems like large-scale storage of energy or clean alternatives to carbon-intensive cement and steel production. Hydrocarbons still dominate much of the economy because they’re cheap and easy to transport.
Today, the pools of money dedicated to clean tech are growing, but managers tend to focus either on the bleeding edge of innovation or cash-flowing assets such as solar arrays and wind farms. BlackRock and Temasek are zeroing in on late-stage VC, the point at which startups need greater amounts of capital to manufacture at scale and expand into new markets.
“As you look at the transition to greener options, there is obviously a need to address the gulf between the cost of what’s available today and the cost curve of those solutions,” Dilhan Pillay Sandrasegara, CEO of Temasek International, said. “That’s why private capital is required, to give these solutions a chance of making it to commercialization, to where the cost curves can be brought down to the levels of non-green options or even lower.”
Breakthrough Energy Ventures, founded by Bill Gates in 2015, is currently the largest VC player in sustainable energy. It has raised more than $2 billion for early-stage investing, where the risk of failure is high, and anticipates holding its stakes for 20 years or longer. Another, Energy Impact Partners, has raised $1.7 billion, mainly from power utilities and industrial companies.
More money is flowing into carbon-related investing. Dealmakers Chamath Palihapitiya and Ian Osborne plan to raise at least $1 billion for a publicly traded vehicle. Venture funding for climate tech startups totaled $16 billion in 2019, up from about $400 million in 2013, according to a PwC report published last year.
The first climate-investing boom between 2006 and 2011 ended poorly, with venture funds losing more than half the $25 billion invested. One notable bankruptcy was Solyndra, a solar-panel startup with financing backed by U.S. taxpayers.
Decarbonization Partners will operate like a traditional VC fund, asking investors to lock up money for about a decade and targeting annualized returns of about 20%. Fink offered $5 billion as a longer-term goal for assets under management.
“We’re going to be testing this, we’re going to be building it, we’re going to have proof of concept and then we’ll see,” he said. “This is not tens of billions of dollars. It may lead to those types of large-scale investments, but it doesn’t need to be that large-scale.”
Temasek, a state-owned investor that oversees about $230 billion, has pledged to reduce net-carbon emissions by its portfolio companies to half their 2010 level by 2030 and to zero by 2050. Because it controls Singapore Airlines, one of Temasek’s priorities is finding a sustainable and cost-effective alternative to jet fuel.
Pillay and Fink described their shared interest in making green hydrogen a practical replacement for fossil fuels. Decarbonization Partners also is targeting technologies in battery storage, autonomous driving and power grid reliability, as well as materials and process innovation for industries and infrastructure.
As the world’s largest asset manager, New York-based BlackRock has the reach and client relationships to marshal capital into new investment vehicles. Just last week, it raised $4.8 billion to buy renewable-power facilities and separately raised $1.5 billion from Temasek, the California State Teachers’ Retirement System and others for two exchange-traded funds. The ETFs use proprietary research and analytics to find stocks that’ll benefit in the low-carbon transition.
Fink has taken a vocal stance in the fight to reduce carbon emissions, declaring climate change an investment risk and pushing for sustainability. In his annual letter to CEOs in January, he said companies must disclose plans for making their business models compatible with a net-zero economy.
Temasek and BlackRock already are partners in a Chinese asset-management business and Temasek is one of BlackRock’s top shareholders. Pillay, who takes over as Temasek CEO in October, said he’ll judge the new venture’s success on two measures: the speed at which its investments help achieve carbon abatement in the economy, and profitability.
“We’re not going to look at sacrificing returns,” he said. “We may have to wait longer, given the early-stage element of this partnership, but we do believe the returns will come.”