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Capricorn’s Portfolio Approach to Climate Change Mitigation

Capricorn has been a leading investor in climate change mitigation for 20+ years. Over this time, we have developed a portfolio approach to address climate change across all major asset classes and invested in funds and companies providing new transformational solutions or establishing infrastructure to scale available existing solutions. We firmly believe that this approach requires a long-term commitment and stable framework for investing – and that investors who are both consistent and patient may earn outsized returns in the long run. 

Why we invest in climate change mitigation 

Climate change is a complex issue which requires multi-faceted solutions.  

To keep global warming to no more than 1.5°C, as called for in the Paris Agreement, we must slash ~50b tons of global annual GHG emissions by 50% by 2030 and by 100% by 2050. We believe this is only possible if all economic sectors and their supply chains rapidly decarbonize. We need to develop new and innovative technologies which have the potential to commercialize over the next few years. Similarly, large sums of capital are needed to scale available solutions to replace existing high-emitting infrastructure and build new capacity to fuel economic expansion in a sustainable manner. High-quality forestry and other forms of carbon sequestration also play an important role in reducing the impact of existing and future emissions.   

We believe that outsized investment returns are possible for long-term investors who seek to address the most pressing global challenge of this generation. On the other hand, investors who ignore climate change in portfolio construction may face financial risk resulting from regulatory changes and related deterioration of returns from high-emitting assets.   

How we invest in climate change mitigation 

Major asset classes in long-term portfolios can have a role in either directly or indirectly tackling climate change. At Capricorn, all investment decisions are weighed for their role in addressing climate change as well as investment risk due to climate change. 

Venture Capital: Venture capital has a crucial role in funding innovative teams to build and demonstrate pathbreaking technologies which can accelerate the transition to a low carbon future. These companies can disrupt high-emitting sectors such as transportation, power generation, and manufacturing, which contribute the lion’s share of global emissions.  Capricorn, through our Technology Impact Funds and Technology Impact Growth Funds, has been actively investing in such companies since our early days. We have a history of backing transformational companies in areas such as EV, next gen energy storage, renewable energy, fusion energy, and earth monitoring. Several companies in the portfolio are now in the market-leading position in their respective fields – companies such as Tesla, QuantumScape, Joby, Planet Labs, Electric Hydrogen, Helion, and many others. 

Outcomes in this sector are often binary and return potential high for the best companies. Our team’s strong network and technical expertise allows us to invest in high-quality teams and guide them through company building, fundraising and successful commercialization.  

Venture capital intervention is required as new solutions are needed to fully bridge the climate gap in a cost-efficient manner. However, this must be combined with scaling of existing solutions which have a near-term and measurable impact by mitigating GHG emissions immediately.  

Private Equity, Credit, Infrastructure, Forestry: Proven technologies such as solar energy, wind energy, waste-to-energy and EV charging infrastructure must be deployed at unprecedented scale and speed to achieve climate targets. These projects collectively require trillions of dollars of capital and are usually lower risk than funding new or unproven venture-stage technologies.  Private equity, infrastructure and credit funds are uniquely positioned to attract capital at the scale needed for global transformation to low-emitting energy production, transportation and industry.  

Capricorn was an early investor in innovative PE and infrastructure investment firms such as TrueGreen, Renewable Resources Group (RRG), and Sustainable Asset Fund (SAF). In some instances, we helped co-create the firms and spun them off as independent entities structured to attract external capital, to amplify the impact of their investment strategies and business models. 

We also fund high-quality forestry projects which can have a lasting impact on carbon sequestration and quality of life for local communities.  

Listed Securities: An estimated 25%-40% of global GHG emissions can be attributed to publicly traded companies. Their business operations have an outsized impact on the global carbon trajectory. Investment firms, through their ownership and voting rights, can influence the energy transition pathway for publicly traded companies. We seek out investment managers who either align their capital with industry transition leaders or actively engage companies on sustainability and resource efficiency. Corporate engagement is a powerful tool even if it may not result in near-term emissions reductions in many cases. Large publicly traded companies have complex operational structures which require significant capital investment and highly aligned board and leadership to affect change. We believe that persistent and constructive engagement contributes to long term change.  

Groups such as Generation Investment Management, Inherent, Ownership Capital and TCI have been our partners in this journey. We also support non-profit projects and advocacy groups such as MethaneSAT, BankFWD, CERES, CDP and SBTi to advance this mission.  

How we approach climate risk 

As climate change-related extreme weather events become more frequent and more severe, governments across the world are accelerating regulatory action to incentivize the transition to lower-emitting economies. Penalties for emissions have already led to high costs of carbon in regulatory carbon markets in some parts of the world. As such, investment portfolios are exposed to carbon transition risk as the global economy transitions away from fossil fuels to renewable sources. 

At Capricorn, we measure GHG emissions attributable to client portfolios and the financial risk associated with portfolio emissions. All new and existing investments are carefully considered for their current and future carbon exposure, role in enabling the low-carbon transition, and carbon-related financial risks and opportunities.  

We developed a carbon risk assessment framework to inform our investment decisions and engagement priorities. This model helps us identify the primary sources of carbon risk in manager portfolios, emissions relative to industry peers, and climate-risk adjusted returns.  Investments which fall short of the mark on climate risk-adjusted returns are usually not included in client portfolios. 

Investing for climate change mitigation has been critical to Capricorn’s investment strategy and in the construction of our client’s multi-asset class portfolios. We firmly believe a focused and consistent approach to both climate opportunities and risk may reward long-term investors with a desire to align their portfolios with solutions to pervasive global issues.