E469 | Christian Hernandez, 2150: The Real ROI of Adaptation (ImpactVC spotlight series)

0:00In the race to save our planet, venture capital is missing something critical. No mitigation that can mitigate the emissions of CO2, half by 2030, half again by 2040. Adaptation, you might not achieve those targets. Today, 94 % of venture capital dollars going into climate is going into mitigation. That blind spot is becoming dangerous as climate chaos accelerates around us. We will need to start adapting. I mean, the hurricane season in the U.S. being a great proof, right? The stakes couldn't be higher. This isn't just about sustainability. It's about survival. Billions of units of air conditioners to keep people alive.

0:33How do investors navigate this trillion-dollar frontier? 2150's Christian Hernandez offers a clear framework. So the different problems we've looked at across adaptation. What's the problem? What's going to get solved by infra? What areas of solutions still need innovation? And here's the twist. Doing good might be the smartest investment of all. Bill Gates and Ban Ki-moon wrote a paper. For one trillion yen to climate adaptation, we'll generate three trillion of economic value. The future demands we move beyond silos and solve this together. Come to us for a deep dive, and we share it quite openly.

1:06We might need to back a dozen different solutions for one of them to win, or maybe we need to deploy all 12 at the same time at scale. Join us for a crucial conversation about the most overlooked investment opportunity of our time, where survival meets returns and adaptation becomes the new frontier for climate capital.

1:29Welcome to the Impact Highlight Series powered by EUVC, Impact VC and Impact Supporters. I'm August Solow, your host of this series, and I'm a previous Impact VC investor, as well as the founder and also of Impact Supporters, which is a newsletter and podcast in the impact venture capital space. Today, I'm super excited that we have Christian Hernandez with us. He is a co-founder and GP of 21Fishbill, as well as a big systems thinker and has put a lot of reflection into this decision between climate mitigation and climate adaptation. I think I have really three things that stuck to me after the conversation.

2:09Firstly, an interesting fact that Christian brings to the table is that 94 % of climate VC dollars today go into mitigation. He believes that adaptation will grow and grow, and so that number will be reduced. Secondly, if you believe that climate adaptation is one of the next steps in climate VC, then we need to think about the success criteria around climate adaptation. For climate mitigation, they're clear. It's CO2. But for climate adaptation, it's more unclear. It could be reducing wildfires, reducing floodings, and other sort of climate change reactions. Thirdly, which is a fact that's super interesting for a fund like 2150 that's focused on the urban climate tech tech, is that if you look at the megacities of tomorrow, of the 22nd century, they're not even created today.

3:03So we can already adapt those before they're created to make them more sustainable, efficient, and resilient. So I hope these facts also sound interesting to you. At least this conversation was super, super interesting to me and our community. So please listen along and tell us if you have any questions. Here's a few words from our beloved sponsor. Impact VC is a global community of VCs accelerating impact within venture. Their purpose is to cultivate a community and resources to unlock venture capital's ability to tackle the world's most pressing challenges. The community is made up of over 900 VCs, including both pioneers and newcomers, including generalist VCs and impact specialists.

3:43Visit impactvc.co to join the community and explore their resources, including the VC Impact Playbook, the founder Impact Playbook, and the Impact Investing for VCs online training, which is designed to help VCs integrate impact practices into their investment strategies. That's a lot of information to get in 30 seconds.

4:05Tear down this wall. It's more than just an ally. This is a union of values. Let's start acting. This show is not investment advice, and the hosts of this episode may be invested in the funds and companies featured. Great. Welcome, everyone. I'm super excited for today's episode because we have Christian with us here today. Welcome, Christian. Thanks for having me. I'm thankful for the series. Super excited about it. Yeah, super nice. It's super cool that we're having this chat because I think the topic we're talking about today is super key in the transition. And maybe for the listeners out there today, we're talking about the difference between climate adaptation and mitigation and the process of where we are now in that split and how VC money is going into the different categories and where we should be putting VC money as well.

5:00I think we'll just start off right there, Christian. Maybe can you give us a little bit of a feeling of what's the two different groups, what's the definitions, and what's the status of where we are in the journey? Yeah, so mitigation is the belief that we can deploy solutions that can mitigate the emissions of CO2. And we have certain milestones on how much we need to reduce, why we need to cut our emissions in half by 2030, half again by 2040, that's zero by 2050, how to achieve 1.5 degrees. Adaptation is the unfortunate realization that we might not achieve those targets and the temperatures might continue to increase, the certain planetary boundaries might get crossed, and that the world wouldn't start being to adapt to climate risks to make it survival.

5:48Both need to happen in peril, but today, 94 % of venture capital dollars going into climate is going into mitigation or rosy glass belief that yes, we can fix this. My argument is that in parallel, we also need to start thinking about adaptation as more and more bad stuff starts happening more and more frequently. There's been a growing conversation around climate tech venture capitalists around what adaptation might actually look like and what type of solutions venture capital could back compared to other types of capital. I think that gives a good overview. And so what you're saying is that there's already some investments in the adaptation part as well.

6:26Is that sort of a trend that that will be growing from now on? Or how do you see that? Yeah, I think the challenge with adaptation is definition of success. So with mitigation, we've all agreed on a North Star. It's CO2 equivalent. So reducing greenhouse gas emissions and electrifying and transitioning to different types of energy sources to mitigate CO2. In adaptation, the definition of the North Star gets a bit harder. What is actual success? Is it less floods, less fires, less deaths, less economic damage? So coalescing around an agreement on what is actually success. By the way, if we succeed in mitigation, some people would argue we don't need adaptation.

7:07And I disagree with that. I think we already tipped certain parts of the planetary boundaries. We will need to start adapting. I mean, the hurricane season in the U.S. being a great proof, right? a hurricane that actually went into France just a couple weeks ago. So how do we start thinking about adaptation? And now the question then is, what is venture backable in adaptation versus what looks more like infrastructure? Sea barriers being built, Venice building this massive hydraulic system to actually block waters, London really being dependent on the Thames barrier already. It was a big infrastructure project.

7:40So on the adaptation front, I think that there is already some movement. We've actually had a couple of adaptation investments already we can talk about later. And there is an increasing belief that there's solutions that need to be identified back scale. But my argument is that we should be doing a lot more of that. 6 % of all venture capital dollars going into adaptation is not enough. Actually, overall,$1.5 trillion going into adaptation when certain analysts would say we need like$3.8 trillion being spent every single year on adaptation. Yeah, maybe just in that second, the last part you say here, Because I've also seen quite a lot of numbers about the financing gap.

8:17And I think the financing gap is there both for mitigation and probably adaptation as well. But is venture really the right solution then? Because, I mean, as you know, most funds are maybe in climate, I mean, 200, 300 million euro funds. We're far from the trillion dollar gap, right? Like, how do you match that? How is that going to work? Yeah, I mean, in mitigation or adaptation, you need to scale out solutions to the point where they actually, you know, different types of asset class, private equity infrastructure can come in and make and distribute them broadly. So let's go to the example that we've been, one of the examples of the investments that we made in adaptation.

8:52The planet has a massive cooling problem. As the world heats, the human body cannot survive in the combination of humidity and temperature that we're seeing in different parts of the world. So the human body cannot survive in Pakistan when the humidity does not allow the body to actually perspire. And therefore you can't cool yourself. You literally boil from the inside. So we're going to need to deploy billions of units of air conditioners to keep people alive, not just comfortable. The problem is that the cooling solution that we have today was invented by Mr. Carrier in, I believe, 1902. We haven't innovated on top of that architecture ever since.

9:29It's energy inefficient. It uses these really nasty refrigerants, 3 ,000 times worse than CO2. They last for a long time. So we need to innovate around cooling. So we did a deep dive on cooling, what, two years ago? Got freaked out by the enormity of the scale because if we ship the architecture that we have today, our current grid cannot support it. Like the IEA report that just came out talked about, everybody's talking about data centers. The biggest growth of demand driver in the coming years is actually cooling. Very few people actually start realizing that, realizing that we need to innovate.

10:02So we scoured the market for innovation around cooling. Honestly, not a lot out there. ended up finding a company in Florida in the U.S. called Blue Frontier that's 90 % more efficient than what it's replacing and is now shipping units into different facilities, commercial buildings primarily in the U.S. So our role was to find that, get it out of the lab, get it out into the market. The next stage will be for some financial partner to come in and actually finance a SPV so that they can deploy in a OPEX rather than CAPEX model at scale, right? Thousands and thousands of thousands of buildings, swapping out their existing cool infrastructure, putting in something more efficient.

10:41And by the way, getting the price point of that solution affordable enough so we can deploy it in Pakistan, India, all these mega cities of the world that are under intense threats of humidity and heat. We, venture capital, absolutely plays a role in actually scaling out the innovation and then making it bankable for others to step in. One of the issues in climate adaptation potentially is the difference between the global north and the global south and sort of where the money is to be able to pay for these solutions. How have you seen that? Because I think this is maybe one where you're able to get it so cheap that it's going to work in both parts of the world.

11:18But there's definitely some issues in the global south that maybe we're not able to solve, but that will be too expensive to solve. Correct. And we actually spend a lot of time thinking about that as well. Like what needs to happen for this to be better and cheaper than what it's replacing. The builder, the developer in Lagos, Nigeria is not going to choose lower embodied carbon concrete because it's great. He's going to choose it because it's better and cheaper. So as we evaluate technologies, we constantly think about that. Let me give you an example of a company that we invested in called CarbonCure.

11:54It injects CO2 into concrete as it's being mixed. It makes the concrete stronger, so you need less cement. So it's a double benefit. One, it sequesters the concrete. Two, you need less cement. What we loved about it is that it's a very low CapEx cost, and it's a cost saving. Their sale is an ROI basis. Use us, and you'll need less of your most expensive input cement. So you'll increase your very thin margins. Oh, and by the way, you're now selling green cement. Carbon Cure is now live at every single continent in the world, including Africa. So it's been driven by an economic choice. And by the way, it's just a strong, which in some cases is stronger.

12:29It's good, it's cheaper, and it's better. And it has sustainability effects. So we need to definitely identify solutions that at scale can actually be cost parity. Is that going to be achievable with everything? No. So what role could organizations like the IFC or the World Bank play in actually helping to deploy these solutions, absorbing the green premium, or it's 2150, it's focused on the urban environment. The urban centers of the future have yet to be built and many of them, the megacities, are going to be built in the global south. So we have this one chance to do a leapfrog to make sure those cities get built efficiently, resiliently, and sustainably.

13:09Super interesting, and I think maybe a question then, when we're moving more from mitigation to adaptation potentially, are there any things you need to think differently about in terms of sort of criteria of an investment, refinancing or other things, like do we move more deep tech or what's all of the changes in perspective? One of the challenges with adaptation is who the client might be. It might be a city, it might be a nation state. So you're now moving from B2B to B2G and that comes with other challenges, right? So the sales cycle, the funding. So that is, I think, a different sales motion that you have to consider when you're talking about adaptation.

13:49Let's talk about another area of concern around adaptation. Water. We know we have a global issue. We're consuming 40 % more water than we're replenishing. The problem is water is a mispriced asset. Where we have water, London today in its reign, is not where we need the water the most. There's a bunch of solutions out there already, desalination plants, et cetera, that look like infrastructure. And there's some massive companies that Israel leads in a lot of these solutions. to some massive companies already focused on water. The challenge that we've had is thinking about what type of solutions are venture-backable in the water space.

14:23There's technologies that actually suck humidity out of the air. They actually supposedly even work in the desert. Is that really venture-backable? There are solutions that actually monitor, acoustically monitor leaks in buildings. Pretty cool, but it feels fairly commoditized. So we've been going through all these different types of solutions around water to try to figure it out. One area that we've focused on quite a bit is actually being able to reuse our water, the water that's already available. And the realization that the water is already available is massively contaminated with these microplastics, PFAS.

14:56So an area that we're exploring is potentially PFAS monitoring or remediation to be able to have more reuse of the water that we do have. So it applies to all the different products we've looked at across adaptation. It's what's the problem? What's going to get solved by Infra? What areas of solutions still need innovation? Where can venture capital play? And then what can scale into large enough typical VC metrics? So TAM size, buyer, price, profitability long-term, and then why is it? Yeah, and then sort of the saying whether it's venture-boggable or not, is that then the, okay, we need a big enough TAM, we need to make sure clients average buyer, we need to make sure how do you sort of make sure that infra players will be able to take those solutions afterwards and actually make it work?

15:43What's the things you think about here? Yeah, so we spend a fair amount of time talking to industry to understand what would need to be true for you to adopt this, whether that's a company in the Middle East called Medito, who specializes in water, whether it's large owners of buildings, whether it's mayors, and evaluate, okay, today it's way too expensive, right? It's first of a kind, end of a kind, there's no way you're going to pay the full price for this thing. But what would the right price be for the right benefit? Oh, and by the way, we showed up with financing, so you didn't have to pay out of pocket, but instead you actually had an ability to lease it.

16:19What would the right price point be? And then multiply that one conversation times enough of them to understand that, yes, there is a willing buyer's market for the solution if this and this and this happened. Makes sense. And are there any sort of issues with climate adaptation as a whole, as sort of a new type of vertical within venture where you're seeing this doesn't really work or where it's harder to do than other types of investments? So I think the challenge is the framing of the problem where, yes, people realize that Miami is probably going to be underwater. Insurance is already priced into that because of hurricanes.

17:00and you can't get insurance in your home in Florida, right? So the government has to step in and solve that. The knock-on effects of adaptation and the financial risk still needs to be addressed. So for example, your factory is not in a floodplain. There's a bunch of software that can tell you that. That means you can get insurance. Great. However, the power plant that's five miles down the road that actually supplies the power to your factory is in the floodplain. If that gets flooded, it, your factory will not be able to run. That has quantifiable economic value that you need to take into account, that the insured needs to take into account.

17:37That linkage of interdependencies and supply chain energy and the implied financial risks are not being accounted for. And therefore, people can't compute why they need to drive these adaptation solutions. And by people, I mean the factory owner or the local government. So we've been looking at a couple of software providers that actually look at that interconnected adaptation risk. Yeah, and then climate risk and sort of the insurance part, is that part of adaptation or how does that actually fit into that category? Yeah, I think to take action, you need to measure it and figure out, are you doing something better?

18:19So starting with the climate risk, understanding your supply chains and your exposure to that climate risk. was it two summers ago? There was these pictures of like literally strawberries drying up on the vines and no strawberries making it to the UK. Like we are already massively exposed in our daily lives to the supply chain climate adaptation risk. That has economic value. So quantifying the economic value, that's the baseline. And then figure out the actions you can take to mitigate that. You at an individual level, you at a corporate level, you at a national level, even on an adaptation perspective, we've been thinking a lot about, I call it bringing proteins closer to humans.

18:59We need to feed a growing amount of urban population or supply chains are exposed. How do we start making food closer to cities? Is that alternative proteins? Is the head mycelium? Is that hyper-efficient robot-powered greenhouses like you see all over the Netherlands? I don't know, but I do think that is an adaptation area as well that we as venture capitalists are exploring. I think that sort of gives a good view on what's next in adaptation and what's happening already. Maybe because we're also saying that adaptation is potentially a next step after we've done a lot of mitigation. Maybe a question is, is it too late to do climate mitigation now or do we still have a lot of work to do there?

19:49Absolutely not. I think that needs to be the core message, right? We need to do both mitigation and adaptation. Unless we continue to mitigate CO2 emissions, more and more bad stuff will continue to happen. There's this framework called the planetary boundaries. It's done by a Swedish research institute. There's nine of them. Last year, we had already passed six. A couple of weeks ago, we passed the seventh. The problem with planetary boundaries is the assumption is that once we pass them, we can't come back. if you thought we were screwed, we are more screwed than you thought. So no, we need to continue our efforts around mitigation and doing it at scale, right?

20:26One giant CO2 sucking plant in Iceland is nice and it gets a lot of press. We need that at industrial scale, like literally industrial cities sucking down CO2, transition away from fossil fuels, acceleration of deployment of renewables, transitions to EVs. Yes, flying less. Yes, eating less meat, but really driving the transformation of our industries to mitigate the CO2 emissions. In parallel to that, we need to focus on adaptation. So nobody should walk away from this thinking that we're done on mitigation. We will likely, actually, I wouldn't even put money on it. We will not hit our 2030 targets on mitigation.

21:04There's no way, right? We need to reduce 20 something gigatons of CO2 emissions. Not going to happen. But every single 0.1 degree of increased temperature rise has these pretty bad effects. We published a report called Climate 101 last year. It's on our website. It has a whole section on what happens if we're at 1.6, 1.8, 2, 2.5. And so, yes, every single degree that we can help lower will have a positive effect. You're putting yourself a little bit out there saying we're not hitting the 20 vertical, but it's probably realistic enough. But actually, you're also talking to an interesting part of mitigation, which is sort of the, how much do we reduce consumption?

21:48You say fly less, eat less meat, et cetera. And how much do we sort of create solutions that allow us to live pretty much the same life we're doing today? Is that an approach you take into sort of your investments? And do you have a preference, something that gives us more towards one or the other? first of all i definitely don't do not want to be labeled as a a growther um actually the reason i the reason i do that what i do right is i'm a pure capitalist i believe that this transformation of our economy of our industries of our transportation is going to be one of the greatest wealth accumulation opportunities in history and i'm backing the tools for the battle ahead and the belief that those tools will need to be deployed scale.

22:32And that will generate financial returns and positive societal benefits. My point I was making on flying and meat, it's probably the two single actions that an individual can take that can have the greatest effect. I go talk to my kids' schools and I give a presentation on climate change and I ask them, what can you do to have an impact? And they all raise their hand, little kids, and they say, recycle. I can't try again. Eat less meat. Well, yeah, that matters. You know, everybody needs to eat less meat or at least not waste food. The garbage that you throw out actually has more of an effect from the methane perspective in the short term.

23:10The one thing you can do is build less with concrete. And they all are surprised. And I show them a graph that shows the emissions by different sectors. And they walk away realizing that, yes, buying less, yes, eating less meat matters. What really matters is a global addiction to cement, concrete, and steel. And the fact that that's not going to slow down as we continue to build. The embodied carbon is 15 % between steel and cement. It would be the third largest emitter if it was a country after the US and China. So it's actually making people realize what actually moves the needle. You can feel really good about driving your Tesla.

23:44But by the way, unless you drive it for six years, you're actually negative on the carbon before you start becoming positive. I think that's a good reminder. And it's something everybody forgets, right? Because it's also super hard to completely understand. So where do you reduce your emissions the most? So at least it's a process where you need to put yourself in there and understand things before you really get it. But maybe everybody should read Climate 101, then we would know. Put it on the podcast. Yeah, deal. But maybe a question as well, though, is that also when you read reports from IPCC, a lot of what some of the points that are made are also that most of the tech to reach our 2030 climate targets already exists.

24:26and then we'll be building more towards 2050 now. How do you see that? Yeah, so I wrote a blog post four years ago as I was going through my own climate voyage with exactly that point. For me, it was speed and scale. We're going to have the fastest impact as broadly as possible. And the IEA has a dashboard of solutions, potential impact in the gigaton level and readiness level, like what's ready to deploy. So if you sort by potential impact and readiness level, I eat ready to deploy now the top like 10 solutions were all in the built environment. Trust me, if you told me 10 years ago that I was gonna be focusing on lower embodied carbon concrete or, uh, you know, importance of, um, highly efficient windows.

25:09Those are not exactly sexy venture capital areas, right? But those are the ones that are ready to deploy today and can have the greatest possible impact and yes, they exist. So our job is to get them scaled out as fast as possible, which is why we invest in series A and B it's about deployment. It's about. getting into as many possible deployments as quickly as possible, started having the impact. And by the way, the impact is cumulative. That CO2 that that solution mitigates for the first year, then compounds with what mitigates second year, the third year, the fourth year. So the sooner you get it out, the greater value it has.