Talking Heads – Tapping private markets for the ecological transition and impact

This is an edited transcript of the audio recording of this Talking heads podcast

Daniel Morris: Hello, and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing private asset solutions to the challenges we face with climate change. I’m Daniel Morris, Chief Market Strategist, and I’m joined by Yann Lagalaye, Head of Ecological Transition and Impact within our private assets team. Welcome, Yann, and thanks for joining me.

Yann Lagalaye: Thanks, Daniel. Thank you for having me.

DM: Can you tell us what it means to be head of ecological transition and impact within private assets?

YL: We started seven years ago around the time of the [UN climate change conference] COP21 in Paris by building an investment activity mainly focused on the energy transition. The idea was to invest in technologies and solutions that could help fight climate change. This is still our mandate, but we have broadened it towards ecological transition. That means we are also tackling issues beyond energy, including agriculture, food, and the circular economy in general – whatever provides solutions that can help our economy to transition.

We do not invest in early-stage start-ups, but rather in companies that already have a demonstrated product that can be scaled up. We provide capital resources and networks with our funds to help them grow. We do that in Europe as well as North America and Israel.

The solutions we invest in are mature in the sense that there are already commercial revenues. This is typically when the company begins to burn cash, so they need more capital and the risk is still high. But we believe we are choosing companies that have already shown they can grow, so this area of investment is more like venture growth.

You also have seed ventures, where there’s just an idea and a management team. You need to nurture this idea to get to the product stage, and we believe there are not so many players in that universe. A lot of private funds have been doing that. For an asset manager such as BNP Paribas, it’s unusual to have that kind of team. We are a team of about 10 people doing the venture segment. In my team, there are also people doing pure impact [investing]. This is more about project development, for instance, helping companies that buy land for regenerative agriculture.

We have a company [in our portfolio] that recycles plastic for construction materials. Within our venture fund, we’ve been investing in the ability to measure biodiversity because it’s important to understand which companies are doing good or bad things in this area and how they can improve. We have ways to measure the impact on biodiversity of real estate players or industries in general.

We also invest in companies that help to limit food and non-food wastage, products that are coming up to their expiry date. We are now looking at companies that help increase the speed of building renovations and reducing energy usage. Supply chain transparency is a hot topic these days, so we are looking into that, too. In short, we are covering a wide range of solutions that can help change the way things are done [in support of the energy transition and preserving biodiversity].

DM: Let’s focus on the venture side, the market that you’re looking at specifically around climate tech[nology]. What is your vision for the development of that market?

YL: This market has been growing steadily in recent decades and even more so over the past five years. Globally, there was probably EUR 5 billion being invested five years ago and now it is closer to EUR 100 billion.

Since the early 2000s, we’ve been thinking about climate tech. The first companies invented photovoltaic panels, energy storage solutions and wind farms – elements that now are more of an infrastructure investment play. These first players were about hardware.

That’s now become much more digital, services-led, with a wider sweep in terms of changing habits, with companies helping, for example, to make our buildings have net zero emissions by installing heat pumps and solar panels.

It’s a more mature market, one that is huge and that we believe is more resilient to valuation downgrades, especially in the private market, because it’s essential to finance climate solutions – industry and end-customers are now asking for products that do something for the planet.

This is not a gimmick, it’s for real. A lot of regulation is pushing towards this solution. Politicians, regulators, customers and industries – everybody is moving in the right direction. It will take money, but it’s a huge and growing market.

DM: If you look across this opportunity set at all the markets you have to address, what are the trends you see and which do you find the most interesting?

YL: What is important to us is to know what the time to market is for any given solution, because if you invest in a company to grow, but eventually there are no clients, the company is going to die. A young company needs to clients to achieve growth, so that it can sustain its activity and research and development. It’s vital for this timing to be precise.

The market trends we find the most appealing are all about services and digitalisation. These can accelerate the transformation of existing businesses or provide solutions to speed up their energy efficiency or use fewer resources. You need innovation and you need services to install [the technology]. Think about easy charging of electric vehicles. You have [energy] storage issues, so we are closely monitoring solutions for making batteries less impactful on the planet. We know that the raw materials being used for batteries – lithium, cobalt, nickel – are highly controversial. We are working hard on [finding companies that can] recycle batteries or limit the usage of these metals while maintaining battery performance.

Elsewhere, we are looking at agriculture and food because these are responsible for about 25% of our greenhouse gas emissions. There’s a lot of waste – we throw away 30% of the food we produce, so there is a lot of inefficiency that we need to find solutions to. For instance, we invest in companies producing insects to reduce resource usage. Such protein that ends up on your plate taxes our natural capital much less than what we currently eat. How we manage biodiversity goes along with the use of phytosanitary products such as organic stimulants and fertilisers that have less detrimental effects on the soil.

Last but not least is the circular economy, whether it be fast-moving consumer goods or specific products such as fashion or cosmetics. All these areas are being challenged today by the end-consumer not wanting products that are destroying resources. We need to think about being more circular by design.

We are working hard on these key topics. With most brands today, we don’t really know where the raw product or raw material came from, so we are applying ourselves to supply chain transparency because companies need to understand what they have to change. That’s the first step, because you might say “I want [my business model to] be a circular one”. But if you don’t know who your supplier is at 10 steps removed, nor what he’s doing, that makes it difficult.

One final important thing to say is that we are always conscious of the effects of the solutions we invest in and ask ourselves whether they harm the planet. So we have key performance indicators, so that we are sure we are not doing more harm than good.

DM: Yann, thank you very much for joining me.

YL: Thank you, Daniel.

This presentation includes a discussion on current market events and is not intended as investment advice or an offer of products or services by BNP Paribas Asset Management. Please keep in mind that the information and analysis in this presentation is only current as of the publication date.