COP President Alok Sharma is getting behind First Loss Capital. But what is First Loss Capital, what’s its potential and can it help power net zero?
For the uninitiated, Mission Investors explains that “catalytic first loss capital” refers to socially and environmentally driven credit enhancement, provided by an investor or grant-maker who agrees to bear first losses in an investment in order to catalyse the participation of co-investors that would not have otherwise entered the deal.
When it comes to sustainability and business, this is a pretty vital concept. Much nascency exists within the products and services which corporates are bringing to bear to solve the world’s environmental problems.
It’s a young market, and it’s only late in the day we’ve realised a transition to more sustainable business forms has to happen. And investors don’t like risk. Any ways that can help them come on board to support the green transition and manage the risk of doing so should be very welcome.
The International Monetary Fund reminds us that the global business community has to align finance with climate objectives. And further, it must manage financial stability risks posed by climate change; aligning social and private returns with green investment; mobilising resources for investment, including a major boost to international climate finance; and making monetary and supervisory policies consistent
with Net Zero objectives.
First loss capital appears to hit all these buttons squarely on the head. What’s there to learn about recent developments in this important space?
First Loss Vision
It appears that ‘first loss’ is gaining traction. Lightsmith Group is a global sustainable private equity firm. It has at the end of January 2022 closed its Lightsmith Climate Resilience Fund with $186 million of commitments.
It claims to be the first private equity fund to have focused on climate resilience and adaptation, investing in growth-stage technology companies that address the effects of climate change.
There are some heavy hitters involved. In the fund, Lightsmith has brought together leading investors from around the world, including PNC Insurance Group, The Rockefeller Foundation, Kinneret Group, and Caprock Impact Partners, as well as the Green Climate Fund (“GCF”), European Investment Bank, Asian Infrastructure Investment Bank, KfW on behalf of the German Ministry for Economic Cooperation and Development (BMZ), Nordic Development Fund, the Government of Luxembourg and other investors.
That’s quite a list and Lightsmith says growth stage companies whose technologies can address the growing physical impacts of climate change represent an estimated total addressable market of over $170 billion today.
The fund will focus on six initial technology areas: water efficiency and smart water management, resilient food systems, agricultural analytics, geospatial intelligence, supply chain analytics, and catastrophe risk modelling and risk transfer.
As you might expect, it will help companies scale up by applying their technologies to help businesses and communities adapt to climate change, by expanding internationally, particularly in emerging markets, and by partnering with Lightsmith’s global network of companies and governments.
To date, Lightsmith has made investments in SOURCE Global, a water harvesting technology company with an off grid solution to produce affordable drinking water from sunlight and air, and WayCool Foods, an India-based agriculture and food supply chain services company applying physical automation and digital technology to reduce food wastage and improve farm output.
Jay Koh, Lightsmith Partner, says climate resilience technologies are an overlooked, multi-billion dollar investment opportunity that will just keep growing. “Increasing drought, agriculture stress, and supply chain disruption linked to climate change will drive demand for data and analytics to understand those risks and for the solutions to manage them.”
“As investors, we know very little about the future with any certainty,” said Sanjay Wagle, Co-Founder. “One thing we do know is that companies that have smart solutions to respond to climate change will be increasingly in demand.
“Investing in climate resilience solutions can deliver both financial returns and real benefits to companies and communities. Climate resilience technology is an opportunity for investors and for us all.”
Should First Loss be Needed?
First loss evidently has uses, and indeed has plenty of traction. But there is an interesting question surrounding its viability.
At some stage, there’s a necessity that sustainable companies, products and services stand on their own two feet. A global business transition towards greener practice can’t come overnight, but equally if green products and markets are truly as revolutionary as we are often told, then oughtn’t they to swiftly reach profit, rather than requiring constant propping up?
Then again, even conventional business models rely heavily on initial lends. At which point nascency in green markets evolves into true sustainability, and at which point competitive forces drive the best products upwards and onwards without support remains a challenge. It’s one with which the world’s financial markets must, at some point, grapple.