Episode 002 | January 17, 2022 | Duration: 34:38
Transcript
Note: This transcript has been auto-generated and lightly edited for clarity. It may contain minor errors.
Joachim: [00:00:00] Welcome to episode two of this podcast and video. Real nice to be back with you here, Fred. Fred, likewise. How are you today?
Frederik: I’m feeling quite good, honestly. I’ve been sick for maybe four weeks with a very nasty flu that turned into a sinus infection, so right now I have in my forehead.
This strange sensation, like when you’re a greedy pig and you’re having a slush eyes right before you get the brain freeze. It’s like my forehead constant feels like that sort of cold numbness kind of thing. But besides that, I’m feeling quite great. It’s really, really nice to be back to work. That’s a
Joachim: very specific sensation.
Incredibly much better than used to be.
Frederik: How are you feeling?
Joachim: I’m also feeling quite good. Little speeded probably from three cups of coffee and a little bit of nervousness, [00:01:00] shooting these things.
Frederik: We haven’t had nearly enough coffee. So that’s a, that’s a huge sticking point for this production facility.
Joachim: But it’s also really nice to get going and I’m super excited about what we are going to talk about today,
Frederik: which Joachim: is, Frederik: so we are going to talk about how can we invest for the maximum potential CO2 reduction. And that comes into fruition as we got a call from someone asking us how might we invest 4 billion US dollars for the green transition in order to ensure.
The maximum amount of impact per dollar we invest. And that’s going to guide us through a few things. So first off, we’re going to talk about where to invest or last off actually. Then we’re going to talk about how we actually built the framework and some of the considerations we had on the way.
And then we’re going to get into the banana journey and the banana journey journey.
Frederik: That’s exciting. [00:02:00] So we’re really much looking forward to that.
Joachim: Yeah, really looking forward to the banana journey. I think we probably have to mention here that none of this is of course investment advice if you are a private person.
I’ve heard other people say that, so now I’m just saying it, it sounds super wise.
Frederik: Yeah. But if you are listening or watching this, do not try it at home.
Joachim: Yeah. Unless you are a $4 billion investment fund, then do give us a call and we probably try it at home. Please give us a call and try it at home.
And the fund mentioned this, the Green Future Fund, and what is the Green Future Fund?
Frederik: I’m glad you asked Joachim. I thought you would never ask and get around to it. So basically the Green Future Fund was established in Denmark after the Danish government said we want to reduce our CO2 emissions on a national level by 70% before the year 2030.
I think someone thought later on, how are we going to do that? And then they decided, well, let’s take this big old bag of money and try and get that to help. And then they established the Green Future Fund and it’s 25 billion Danish kroner, approximately 4 billion US dollars. It’s managed by four different entities, each entity. [00:03:00]
It invests in its own way, so it’s not investing like you and I log on to our stock portfolio and invest in a bunch of stocks. It’s investing primarily in other funds or other funds of funds or directly into ventures in some cases. But the majority of the capital is actually loan financing. So they’re providing loans for major projects, made major entities.
So I hope that covers the basic understanding of what an investment means in this context. And what are the four entities? I’m glad you asked. IFU, they sit on 1 billion Danish kroner. [00:04:00] Then it’s EKF, the Danish Export Credit Foundation. They sit on 14 billion Danish, so roughly a bit more than 2 billion US.
Then it’s the Danish Green Investment Fund and the Danish Growth Foundation. Right now as we are recording, rumor has it that all of these entities are going to be grouped together in the Danish Growth Fund as a very large scale project. But back when this work took place last year, that wasn’t the case.
So let’s pretend that all of this is on the grape wire, things that they have not come to fruition yet. Maybe when this episode is released, it actually has happened. We don’t know. Long story short, that’s the idea behind the fund. And basically what happened was that this fund was established and then I got a phone call.
And I was like, Hey, it’s Fred. Who is it? [00:05:00] And he’s like, yeah, my problem is that we’re about to invest 4 billion US dollars in the green transition, and we need some help in how to structure a strategic framework to address that challenge. And we can’t just pick any ESG portfolio and trace that because it’s important to us that we actually get the maximum CO2 reduction per dollar invested.
And then you might ask, what is an ESG portfolio. It’s an acronym for Environmental, social and Governance. And it’s also a mandatory reporting criteria that all listed stocks in Europe are going to have to report on within a certain timeframe. So it’s a way to basically do environmental, social and governance accounting, you could say. So there will be an accounting standard where you’re going to look back in time [00:06:00] and say: How well did we do on child labor or equality, diversity, inclusion, et cetera. How well did we do on environmental pollution? How well did we do on CO2 emissions? How well did we do in fighting corruption or abiding by anti-money laundering standards, et cetera, et cetera.
That’s all fine and dandy, but it just doesn’t have very much to do with how we as a global society might reduce our collective CO2 emissions on a long enough timeline because it’s backwards oriented, backwards in time. So that was basically it. And then it was basically for me. I remember getting the call and I basically didn’t believe it because if I had to design the perfect assignment that I would dream of solving or working on, this would basically be it. [00:07:00] Great. So yeah, I just remember sort of pitching this to the rest of the Green Innovation group and being like, okay, so how are we going to go about this?
And I think that’s when you came up with the idea of introducing different frameworks and figuring out what’s the industry standard. So maybe this is a good transition into the Banana journey. I think a lot of the listeners have been curious about the banana journey.
Joachim: Yeah. Thanks Fred. A lot of the frameworks that are normally used are not very applicable here. Exactly, because of what you said, that it’s unlisted assets. So it’s not a publicly traded stock. And we needed something where that could guide us or guide the investment managers looking forward.
And one of the key problems in general when we are talking about sustainability is that, [00:08:00] where do you cut the lines? Who is responsible for which emissions and in case of looking forward, who is responsible or get to take charge of which CO2 reduction potentials. And this is illustrated by the banana journey.
So let’s imagine Fred, that I know you like to do this, you go down through the supermarket, you have yourself a banana once in a while.
Frederik: I’m purchasing six at a time, often and often with peanuts too. I know, don’t ask. It’s going to happen.
Joachim: If we take that bananas journey, the CO2 emissions that come from that banana, or if it was produced or in a better way that there were improvements along the journey, the CO2 reductions, who gets to be in charge of that?
If we take it all the way back from you as the consumer? Then once the banana was sitting on a palm tree, somewhere. Probably not in Denmark. And the CO2 emissions from that starts with that, probably the Amazon or some other forest was cut down. [00:09:00]
Frederik: There’s some deforestation going on there.
Joachim: Yeah. Which is a pretty big significant chunk of the CO2 emissions of that particular banana. Then there were the emissions from actually growing the banana, transporting it, including food waste along the food chain. Maybe there’s some packaging involved. Maybe it needs to be cooled or it’s matured with gases in a container.
And at one point it comes on a truck that ends in the supermarket getting bought by you. And here we see that there’s a lot of different parts to the emissions throughout the supply chain, throughout the value chain. Here you can see that it’s quite difficult to say when does one CO2 reduction potential stop and when does the next one begin? Which is also why you will often see a lot of different claims where the pie becomes more than one. [00:10:00] Stuff like the construction industry is responsible for 40% of all the CO2 emissions. The food industry is responsible for 40%. The transport industry is responsible for 20% and flights for 40%.
And it’s not because these people are lying. They’re usually just referring to this in different frameworks.
Frederik: Just to roll this back up, basically the problem that we are seeing is that if the construction industry is responsible for 40% of emissions, and the transport industry is responsible for 40% of emissions, and the food industry is responsible for 40% of emissions, then we have 40 plus 40 plus 40 equaling 120%, which is a lot more percent than a cent.
Joachim: Yeah. Even though we’re emitting way too much, we are still only emitting a hundred [00:11:00] percent on this particular planet. That seems to be the case.
Frederik: That seems to be the case.
Joachim: And because it was a lot of money and because they take things very seriously.
We mainly work with people from the Crow Foundation. We needed a pretty rigorous framework where we could say, okay, we need a fit way to fit all the CO2 reduction emissions of the world into one place, and make sure that we can throw a company or a project to be financed into technology and it will only come in one place and it will only be counted one place.
In consulting terms, that’s also called MECE, mutually exclusive and collectively exhausted. We needed a good framework for that, and we needed something where we could look at reduction potentials and not just where are the emissions currently coming from, which is where most of the reports and the data are usually looking backwards. [00:12:00]
Fred, how do we go about that?
Frederik: So the first thing we had to figure out is, in order to reach those targets, particularly in the Paris agreement, but also for the Danish government, we needed to figure out where do we actually see CO2 emission reduction potentials. So in order to figure that out, we went to the most respected entity in the world, the IPCC, on this area of greenhouse gas emissions.
Who is the IPCC? So the IPCC is the UN Climate Council. I forgot what the acronym actually means, but I’m sure we can get that in a nice header right here. So essentially in order to make the Paris Agreement, they needed to make sure that if we’re trying to stay below 1.5 degree temperature rise before the year 2100, we need to do it with technology that exists. [00:13:00] They were not going to allow that we made a plan for something that didn’t exist in order to save the world. And I think that’s actually a good plan. I like seat belts that exist to prevent me from having an injury when I go into a car crash much more than the imaginary seatbelt or protective hockey
Joachim: sticks,
Frederik: or protective hockey sticks.
If I may. So essentially we went through the IPCC data and consulted all of the different categories that had been identified as possible investment opportunities and proven investment opportunities by the year 2015, so that’s six years ago, the IPCC, the UN Climate Council deemed that it was actually feasible to invest in these areas and achieve only 1.5 degree global warming. And that was interesting. We had to do a lot of exercises for those reductions to not be accounted several times. [00:14:00] So we didn’t have the banana in hand problem, where the banana is both being in emission in the supermarket and at the farmer’s place, but where it would only end up fitting into one place.
And what sort of became the most acrobatic part of this exercise was now we had the CO2 reduction framework. That’s all great. Now we know where the reductions need to come from. And then I remember you having this brilliant idea, I think together with SMUs from the Growth Foundation about leveraging a framework from MSCI.
Joachim: Yes. So now that we had all the reduction potentials coming from, that’s still not very operational. When I sit with a bag of money and a mandate and I have to invest somewhere. [00:15:00] So what we did was tie it into the financial world and how they think usually.
Frederik: And we were basically asking like, what does this mean to me if I’m a banker?
Joachim: Yeah, exactly. And at most places there’s a bunch of different frameworks. And again, we had to come back to that. We had to be able to group the whole world in a consistent way where the industry and the related CO2 reduction potential will only be counted once.
So, for instance, if you go into the Danish VR again and use that framework, you can be in 20 different industries at once. So we ended up deciding on using the Global Industrial Classification system.
Frederik: And it’s a sexy name.
Joachim: It’s a very sexy name. Which is developed and used by Standard and Poor [00:16:00] and MSCI.
And if you have an index fund for instance, there’s a pretty big chance that it’s organized around this principle, and it basically just says that the determining factor of which industry you go into is where you get the most of your revenue from. If your revenue is too spread out, you’re a conglomerate, that’s the catchall that makes it possible.
Yeah. So when you have a company like Siemens, producing all kinds of things from windmills ranging to trains and laundry machines. They would be a conglomerate?
Joachim: Yes, I think so. At least in the, they might have one that spikes out too much. And then we took all the reduction potentials and divided them into, saying okay, where are which industries going to represent these reduction potentials. [00:17:00]
Then from there on, there’s still a lot of work to figure out what do I do in my everyday life? And especially when you’re doing venture investments or investments into high growth areas, there’s this conundrum that I’m investing together with CO2 reduction potential and some financial return, but for quite a big period of time if that venture is growing fast. The net CO2 is not going to be a reduction. It’s going to increase, even if it’s increasing less CO2 than an equivalent normal solution. As they’re ramping up day to day, they will not have a CO2 reduction. They will have a CO2 increase. So how do you account for that? But that’s a whole different episode and gets quite granular.
But Fred, in the framework, [00:18:00] where are the major CO2 reduction potentials going to come from?
Frederik: So basically we’re seeing that 70% or more of the combined total reduction potential in order to stay below 1.5 degrees global warming can be fit into five categories. And this was surprising to me, especially because of the banana journey.
I think I had an idea that food miles is a huge problem. Or what about single use plastic or the oceans, the plastic islands, all these things. So imagining that it could actually fit into only five categories out of the 32 or however many we came up with or ended up with, that to me was quite daunting.
And of course, there’s a few usual suspects. This is me building suspense by the way. But there’s also some major surprises in there. So I think it comes as very little surprise that solar electricity production and related technologies. That’s by far the biggest potential category with a combined potential of reducing 219 gigatons. [00:19:00]
CO2, if I remember correctly. Close second, almost relatively clear second, but yet quite big, would be wind and related technologies with 159 gigatons as the potential reduction. And then comes the big surprise, and this is something where I remember when analyzing the data and we came up with this one came in third, it’s like I find that quite difficult to believe actually.
And I double checked and I triple checked and I quadruple checked.
Joachim: It’s like a football team that moves up in the standings and you don’t really believe it.
Frederik: It just didn’t make any sense. But it’s cooling. [00:20:00] And it comes to show that with cooling, we’re actually seeing a combined CO2 reduction potential of 109 gigatons.
Then we have, we’re basically coming back to the usual suspects now with food waste accounting for 95 gigatons and plant-based diets accounting for 92 gigatons. So all in all these five categories, if we win those, we are doing incredibly well. And I think that’s one of the things that also struck me in this work was that it feels doable.
It doesn’t feel impossible. It was a very empowering feeling. And just getting those numbers down, educating ourselves and spreading the knowledge has been super rewarding actually. Because it’s not an unwinnable battle. And I think I had come to think that it was for quite a while.
That it just seemed [00:21:00] like it’s too complex. It’s too comprehensive, but knowing that this is with existing and proven technology that is at a stage where a pension fund, a very conservative investor can actually invest into these projects in order to achieve the CO2 reductions. That was very comforting.
Joachim: Yeah, definitely. And I think that’s, most people who are passionate about sustainability or work with it, I know for myself at least, you drift back and forth between depression and business and that it’s just not going in the right direction. We’re not doing enough. And then you do a cool project or you talk to someone and get inspired and hey, we can do this.
And so it’s constant oscillation. It’s constant back and forth. I think it makes sense. You mentioned something that I find very interesting: What is investible by pension funds. And just to make it clear, it’s quite a different and more of a mandate that the funds we [00:22:00] helped here have than pension funds with a lot more risk appetite.
And out of the five clusters that you mentioned, wind and solar are particularly interesting. Because they have made it so that it’s doable for institutional investors. It’s basically like a factory. They have whole teams over there. They know how to plot it into their spreadsheets.
The technology risk is perceived as very low, and the projects are relatively similar. Even though if it’s offshore wind, for instance, it’s in the middle of the ocean. It’s hard to service, but they’ve sort of managed to build this. And it’s not to say it’s easy because very skilled people are doing it, but they’ve sort of “McDonald’s-fied” it for a pension fund, which means that it’s become relatively easy to move very large amounts of capital into these areas. [00:23:00]
And in terms of financing and technologies, they’re relatively solid in that sense. Then there’s a lot of issues with the grid and how to have the surface foundation in the net because they’re very variable energy sources. And I think that’s one of the things that’s really missing in the three last categories.
They’re much harder to go into, especially as an institutional investor, but even for a non-institutional investor. And I wonder, could you give us some examples of what are solutions or projects that are cooling and food waste and shifting to plant-based diet that are working already now where you could go in and make an investment or make a project?
Frederik: It’s a great question. And it’s also one of these where sometime some of those answers can be a bit difficult to give, as some of it is about reducing an activity that’s already going on. [00:24:00] So when we’re looking at plant-based diets, for instance, it’s actually also a reformation of agriculture.
So you could say for us to win that large scale, we would have to go away from husbandry and into eating more plant-based. And that’s very intangible as an investor to say, oh, yeah, exactly, I want to invest in this global vision that no one is owning. But you could invest in a company that produces an alternative to an animal based drink like milk.
You could invest in a company that is producing a one-to-one replacement of animal based beef, pork, chicken nuggets or whatever have you. Those would be examples of investments that you could invest in as an institutional investor. Place your bet that Beyond Meat would go out and win that battle. [00:25:00]
But I think what’s even more interesting is if you’re looking at who are the owners of the technologies that will enable this and make it happen. Are we looking at someone with a very strong intellectual property portfolio that owns the technology that makes it possible to do, for instance, lab grown meat?
Rather than picking the winner of meat production, actually figure out what are the mandatory moving parts in this industry that someone is going to own, and then try to target that rather than picking the winner. Because I think right now in alternative proteins, we have impossible foods.
We have Beyond Meat, we have Print 3D, we have For Me, we have gazillion companies and basically when you’re looking at their valuations, they’re not at all up to speed. If you compare with Unilever, honestly, compare their revenues and their margins. [00:26:00] So there’s also some hype in the market that makes it tricky for an investor to go in there because there’s so little proof.
Joachim: So we are very far from institutional investors here. In those areas we’re quite a bit of a way out. Right. But the underlying mega trends in terms of demand are definitely supporting a shift to plant-based diets.
If you look at exactly how it’s going with meat consumption, with peak meat having various predictions, the turn in time where most meat is getting eaten, definitely early twenties for most predictions, between 21 and 25 and shifts into vegetarianism or plant-based diets moving along quite fast. [00:27:00]
How about something like food waste because that’s also one of those things. I mean, we are probably familiar with Too Good to Go, that at least if you’re a Danish person, UK based where you can buy a pack of food that was allegedly going to be thrown out.
But on a larger level, that seems like a very hard thing to get into.
Frederik: Maybe let’s take a few steps back when we’re looking at food waste and unfold the problem. Food waste can be categorized in three different categories, largely at a global level. So one third of all the food waste is wasted before the farm gate.
Another third is [00:28:00] wasted at the restaurants and in supermarkets in similar places, and the last third is wasted in households. So if we’re looking at these thirds, before farm gate, that’s a problem that is addressable by technology companies or by investing in different farming methods where you have more efficient agriculture.
So here that might be an easier place to look.
Frederik: It would definitely be a way where instead of looking at food waste, you have to kind of double click on the problem and then say, okay, so there’s three categories here. Am I looking into more efficient fridges in consumer’s homes? That would be one, right?
Joachim: They’re quite different problems. The solutions are quite different before farm gate or in the house. They’re going to be miles apart.
Frederik: Yeah. So it could be in precision farming. So you ensure high percentage crop yield, so successful harvest from the actual farm. [00:29:00]
It could be a technology that makes sure that some of the food that’s discarded at the farm is actually being redistributed to juice manufacturers or to consumers that don’t care if it’s an odd shaped carrot. There’s been a bunch of those cases around markets. Denmark is a great case for that.
Then if we’re looking at retail and the service industry, one technology could actually be an IoT technology that is measuring the shelf life of the products inside a supermarket, right? That would potentially help the retailer waste less food by lowering prices, discounting automatically, digitally, et cetera.
And then at the consumer home, there’s a case that I really like, the Danish startup called Plan Jama, that lets you tell the app: What do I have in my fridge? And then it’s suggesting a delicious recipe and giving you the guidelines for how to cook with that in order to ensure that the food that’s in your fridge goes into your belly instead of your waste bin. [00:30:00]
The butternut squash that I bought because I thought it looked cool and didn’t get around to it.
Frederik: You had no idea how to cook it, right? Yeah, I have one on my shelf right now. Me too. I have no idea what to do with it. Yeah, that would be a great example. And I think just if we are to wrap up, which I think is about time, and we are looking at cooling.
Cooling is a fascinating space because it’s so well established that we need cooling for human comfort or for maintaining our supply chains. And right now, two comparable price AC units that are deployed in the US market cost the same thing. They can have 45% difference in their efficiency.
Meaning that one of them could run with 45% more power deficiency, [00:31:00] delivering the same amount of cooling, using a lot more power, but costing the same for the consumer. So it’s also a matter of figuring out how might we actually deploy the technologies that are the most efficient in the cooling space?
Because there’s a technology to market gap here where the best technology is not chosen by the consumer for one reason or another. I think that’s a
Joachim: great point then, and you could double that with distributed cooling as well, where it seems at least in the more social democratic countries, we have agreed that making heating centralized and distributing it works quite well.
And it’s more or less the same in reverse that we need to do with cooling, whereas constantly there are little AC units, or even if it’s industrial cooling is not created centrally and then [00:32:00] distributed. Or I think we can already see the outline here, that this was an overview episode where we have 10 different episodes.
Frederik: running out from you. I want to give one final shout out. And this is, I oftentimes fall in love with technology. And this time it’s kind of an embarrassing love story because I forgot the name. I think the company’s called No Decor or something like that.
It’s a Danish fan manufacturer. And they do high volume fans.
Joachim: Oh, those guys.
Frederik: Yeah. So they basically figured out that by just changing the airflow, you’re drastically reducing the high spectrum temperatures. So they developed a massive fan that’s just moving a lot of air very slowly.
But it means that they’re doing incredibly energy efficient cooling of very large rooms and they’re creating ventilation and air flows. [00:33:00] So you don’t have a buildup around something that gets really warm, like a piece of machinery in a manufacturing plant that accumulates heat around it.
But by circulating that air, you’re basically reducing the demand for cooling locally on that device. And I just think that that technology, that concept is so cool when we flip the switch in an innovative way of achieving more with less. And that’s basically what the green transition is all about.
We need to achieve more, utilizing less.
Joachim: And it goes back to that a lot of the solutions are quite simple, sometimes not necessarily super high tech, and most of the solutions are already here. It’s a deployment issue and sometimes a financing issue.
Frederik: Definitely.
Joachim: That’s a really good note to stop on.
Frederik: I think it was a brilliant wrap up, Fred.
Joachim: If you want to learn more, what should I do?
Frederik: You should go to green innovation group.com and then you should click downloads, and then you should download the report [00:34:00] with the book. If you speak Danish, you should start reading. If you don’t speak Danish or read Danish, you should learn because it’s a very useful language. We recommend learning Danish. But then we have some other interesting stuff you can read in there. And please feel very free to reach out to both of us on LinkedIn, both me, Frederik, and Joachim. We’re always quite happy to chat and share experiences. Cool. Have a good weekend. Same to you.