A Holistic Approach to Investing in the Green Economy

Investing in the green economy has massive economic potential as the global economy turns from a centralized, commoditized and carbon intensive one to one that is decentralized, diversified, smarter and cleaner. Disruption of the fossil fuel energy base on which the global economic architecture is built poses both uncertainty and opportunity for investors searching for capital preservation and returns.

On the one hand, fossil fuel / carbon based corporate models offer investors a long track record of performance and stable yields – but with the rise of scalable renewable energy sources, those predictable cashflows are now more uncertain. Similarly, the explosion of new energy sources and methods for distribution, means it is difficult for investors to determine which new clean technology will emerge as the base on which the new sustainable economy will be built. The supply chains that are constructed off this base face similar issues, as consumers demand surges towards sustainability. Investors need exposure to markets that provide resilience of current institutions that will thrive in the new economy as well as exposure to the disruptors that will create the institutions of the future. 

RESILIENCE & ANTIFRAGILITY

Resilience allows a system to maintain its current operations or return to its previous condition if stressed. Resilience depends on knowing what kinds of stresses you be subject to and building defenses against those stresses. Society, as well as incumbent industries with proven business models, value order and predictability, and strive for resilience. This order and predictability of cashflow allows these businesses to tap the global bond markets to fund their operating models. Specifically, for the environmentally motivated investors, green bonds allow these same companies to raise capital for capex associated with reducing their own carbon footprint. Green bonds facilitate incumbent companies to leverage the “current ecosystem” (current tools and technology) to enable change and tackle the carbon problem at the source. Companies can use green bonds as a protective, risk management-based approach to improve resilience in vulnerable business models and geographies.

As a senior unsecured obligation of the issuer, green bonds are at the top of the capital structure – providing investors with a lower risk return profile. For issuers, green bonds provide a funding tool that allows them to deploy non-dilutive capital to reduce their own carbon footprint. Green bonds rank pari passu with other senior unsecured obligations of the issuer, and as such, leverage the liquidity associated with the $100trn+ global bond market. For environmentally focused investors green bonds represent the most liquid, scalable impact investment product. Public equity markets by comparison are a more expensive funding tool for corporates to utilize to make their business models more resilient against climate change – and is more limited in scale in terms of the amount of capital that can be deployed.

Antifragility goes beyond resilience – the antifragile gets better in times of increased stress or disorder. Antifragility does not require that you know what stresses will be in advance since you expect to be strengthened by them. Venture Capital startups strive to identify antifragile, disruptive technology that will benefit from a change in the status quo. This revolutionary ecology allows VC firms in the clean tech space to cannibalize current pernicious carbon economy ecosystems to build a better future. By capitalizing these firms, investors are seeding opportunities that arise from social and ecological crises that allow for stretching and deepening of the market for solutions to climate change. This adaptable investment ecology works across multiple systems, networks and scales – and enables “moonshot” solutions to GHG emissions / climate change.

Whilst the antifragile venture capital markets are attractive in terms of disruption and impact, the market is risky and has a longer time horizon for investors looking for returns. Alternatively, by deploying capital to these firms in the form of venture debt, investors can help accelerate these new products to commercialization and therefore bring forward the impact associated with their technology. Venture debt is a non-dilutive form of financing that allows firms that have graduated from proof of concept to fund the milestones necessary to bring new technology to market. It also allows investors to gain exposure to these potentially disruptive technologies at the top of the capital stack which insulates them from equity risks and the longer duration associated with equity investing. Venture debt also generally contains an embedded warrant structure that gives investors options on the expansion of the green economy.

OUR APPROACH

At Artesian we are passionate about making a difference in the fight against climate change and we believe that by combining green bonds with venture debt through our High Impact Green Bond Fund, we offer a way for investors to direct their capital towards helping the environment and the global economy more sustainable. Learn more about our High Impact Green Bond Fund: