Last month, after a meeting with the G20 financing ministers, U.S. Treasury Secretary Janet Yellen announced that US$3 trillion of additive capital investment will be necessary each year (above and beyond business as usual) to adequately combat climate change. She also deemed the global transition to a low-carbon economy "the single greatest opportunity of the 21st century." With her statement, Secretary Yellen perfectly captured the zeitgeist of the present climate moment by simultaneously articulating a daunting call for such a massive capital influx, while recognizing what a unique set of transformative economic opportunities could abound if we meet the challenge.
To those who have been involved in or tracking the climate sector over time, the $3 trillion number may be surprising. A decade ago the International Energy Agency (IEA) estimated that, to address catastrophic climate change, the global economy would need to allocate an additional $1 trillion more per year - a number that seemed unfathomable to many at the time - through 2050 compared to a "business as usual" scenario. Having said that, in 2024 the $1 trillion per year number will be met and exceeded by the IEA's own estimates which peg the expected investment in clean energy technologies and infrastructure at $2 trillion this year. Of course, none of these estimates represent exact science, but they are a scientifically grounded and rigorous attempt to quantify the problem, and suggest that big solutions are needed.
Government policy has played and will continue to play a central role in the mobilization of the necessary capital to address the climate crisis. The passage of the Inflation Reduction Act just over two years ago was a heroic step by the United States to take a leadership role in the necessary transition. In Europe, the passage of the European Green Deal and other key legislation has played a similarly important role. But government policy alone is not enough.
That's where creative private investment known as catalytic capital comes in. Catalytic capital is an essential element in the array of interventions needed to address climate change by filling the funding gaps and de-risking investments that traditional capital might avoid. Catalytic capital refers to capital that is patient, flexible, and risk-tolerant, often coming from impact investors, foundations, or development finance institutions. Without private catalytic capital in the mix, it is very challenging to imagine how sufficient capital will be mobilized to mitigate the climate crisis.
Catalytic capital can be effective in the climate space in a variety of ways, including de-risking early-stage innovations, scaling proven solutions, leveraging additional capital (including additional flavors of catalytic capital), and enabling long-term climate solutions. The common theme of these applications, however, is filling capital gaps – in other words, providing capital to the energy transition lifecycle that the private, traditional capital markets are not providing in sufficient quantity at any given point in time.
De-risking early-stage innovations is necessary because many climate solutions, particularly in ClimateTech and renewable energy, are high-risk and require significant upfront investment. Catalytic capital can absorb some of this risk, making it more attractive for private investors to enter the space. By funding early-stage innovations, it can help bring groundbreaking technologies to market that might otherwise struggle to secure financing. Catalytic capital is also a good match for this capital gap because the required check sizes can be smaller, and therefore the investment decision hurdles lower.
Our team at Foley Hoag has supported many leading organizations and investors in the climate sector deploying catalytic capital to support early-stage innovation. One such leading light, Prime Coalition, in its own words, has "been catalyzing climate solutions for over a decade, enabling innovation that holds the potential of mitigating gigaton scale greenhouse gas emissions."
Founded as a nonprofit organization in 2014 by Sarah Kearney, Prime's initial role was as a guide and an ecosystem creator, sourcing and vetting the most promising breakthrough ClimateTech solutions, which the private venture capital market was not prepared to fund due to the early development stage and/or high-risk nature of the solutions.
At the time, there was also a dearth of capital being deployed into the early stage CleanTech/ClimateTech sector, in part due to the failure of many "CleanTech 1.0" startups. Consequently, Prime was able to play a vital role in the ecosystem, recruiting foundations and philanthropists to fund a wide variety of risky, but high potential impact startup ventures.
As time went on, Prime evolved its model, deciding to raise a pooled vehicle to scale its impact, and forming the Prime Impact Fund. Prime ultimately raised over $50 million in philanthropic and mission-oriented capital for the fund, via a mix of program-related investments (PRIs), recoverable grants, as well as traditional grants, to deploy into a broad range of innovative and impactful ventures.
The Prime model was innovative in many respects, but pooling these types of philanthropically-oriented investments stood out in particular, and represents one of the more creative ways in which the private sector can play a role in reducing early-stage risk for ClimateTech ventures.
Catalytic capital is a powerful tool for driving innovation, scaling solutions, and fostering collaboration in the fight against climate change. By providing the necessary risk-tolerant and patient capital, it can unlock new opportunities and accelerate the transition to a sustainable, low-carbon future. In future pieces, look for us to explore the legal aspects of other catalytic capital innovations to provide insights and roadmaps for other looking to deploy capital in this critically important manner.
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