Resources

• Featured organization:
  • The Lightsmith Group
  • Portfolio companies: Source, WayCool, SOLINFTE, CADMUS
• Industry resources and news:
  • Lightsmith Group Closes Inaugural $186 Million Growth Equity Climate Fund, the First to Focus on Climate Resilience and Adaptation
  • Adaptation Solutions Taxonomy (July 2020)

Guests

Climate Rising Host: Professor Mike Toffel, Faculty Chair, Business & Environment Initiative

Guests: Spencer Glendon, Founder of Probable Futures and Harvard Business School Executive Fellow
Jay Koh,Co-Founder and Managing Director of the Lightsmith Group

Transcript

Editor’s Note: The following was prepared by a machine algorithm, and may not perfectly reflect the audio file of the interview.

Mike Toffel:

This is Climate Rising, a podcast from Harvard Business School. And I'm your host, Mike Toffel, a professor here at HBS.

Today's episode is part of our series on climate adaption.

In this episode, I'm joined by Jay Koh, co-founder and Managing Director of The Lightsmith Group. The Lightsmith Group is one of the first growth private equity firms focused on climate adaptation. We’ll discuss the sectors that Jay’s firm invests in and learn about some of his portfolio companies. Here's my interview with Jay Koh from the Lightsmith Group.

Jay, thank you so much for joining us here on Climate Rising.

Jay Koh:

Thanks for having me.

Mike Toffel:

So why don't we start with an introduction of Lightsmith and your role there and a bit about how you got there.

Jay Koh:

Lightsmith is a sustainable private equity firm that is focused on this idea of adaptation or climate resilience. So we have a global growth equity fund strategy and are focusing on the effects in addition to the causes of climate change.

So Lightsmith was founded back in the 2017, '18 period. Myself and my partner, Sanjay Wagle are actually old college classmates from Harvard. We've known each other for over 30 years, and really decided to focus on this idea of what happens when climate change actually happens. Both of us come from backgrounds in traditional growth and expansion capital investing.

Sanjay was at VantagePoint Capital, which was one of the first investors after Elon Musk, for example, into Tesla Motors, and served as an observer on the board there. And I spent my career since about 1993 in private equity, starting at the Carlyle Group back in the early '90s, when the firm was only about 24 people and $100 million.

So we both have this kind of traditional private equity, growth equity background, and then also served in the Obama administration, Sanjay at the US Department of Energy, and myself at what's now known as US Development Finance Corporation.

And through that government engagement, really had a bird's-eye view on what was happening in the energy transition, the broader climate set of challenges. And that led us to not looking just at what are the causes of climate change, but what are the effects? And then what investments can be made as a result of understanding what the risk and impact of climate change is likely to be.

Mike Toffel:

So let's dive a little deeper into this idea of adaptation versus mitigation. So you mentioned your colleague was an investor in Tesla. We hear lots of energy around climate solutions like the transition of transportation to electric or to biofuels or E-fuels. We hear much less about the adaptation or the responses that companies, governments, communities will have to make to the physical manifestations of climate change, whether it be drought or storms or sea level rise. First, why do you think the discourse is so much more focused on mitigation than adaptation?

Jay Koh:

I think there are probably two or three reasons for that. The first is adaptation is kind of a UN policy word. No one wakes up in the morning and says, "You know what I'm going to do today? I'm going to go get myself a loaf of adaptation. I'm going to fill my car with a tank of adaptation. And then, gosh darn it, maybe I should upgrade my housing into living in a better adaptation."

What you have is food, transportation, shelter, and healthcare that's adapted to the effects of climate change. Just like we're going to have to decarbonize everything in our economy and society, we're going to have to make it resilient to the effects of climate change as it now unfolds.

Now as of last year, IPCC Sixth, the global consortium of scientists has said basically one and a half degrees of warming is table stakes, it's basically inevitable at this point by 2100. And so in that environment, certainly we should try to reduce the chances that we'll exceed that dramatically. But between now and 2030, a certain amount of climate impact is basically inevitable. It's baked into the atmosphere.

And so the question is, what do we do about that and how do we prepare society for that? And then as investors, how do we think about what the opportunities to invest are created by that inevitable trend line? So adaptation in part, I think is not been as focused on as mitigation or reducing greenhouse gas emissions for several reasons.

The first is, hey, if we solve climate change, no need to adapt to the effects of climate change. Now, I think as of last year, the scientific consensus is that we're not going to solve all of it. We're trying to keep the one and a half degrees Celsius target alive.

That's a major activity of the UN and many other government entities and lots of folks in the private sector as well. But even with a one and a half degree set of changes, we'll now have to deal with the effects of climate change. So one is if we could solve it, we wouldn't need to have to worry about it.

The second piece is I think adaptation requires a little bit of a psychological journey. You have to accept that unfortunately we have geo-engineered our planet, if you will, and we'll now be living with an expanding set of different changes to society and the economy and the overall environment in which we live kind of forever. So the rate of climate change is going to continue to accelerate. We want to try to bend the curve towards a different trajectory. But from now till 2100, if you believe the science, things are going to continue to get more challenging and complicated over time.

And so that requires you to, at the one time, try to fight as hard against that change as possible through things like reducing greenhouse gas emissions, this mitigation idea. But also at the same time, to begin to prepare to adapt to, or even transcend the impact that we're going to see out there unfold as we're seeing right now, unfortunately with many humanitarian disasters and impacts on the rural economy.

Mike Toffel:

That's a great intro to the focus on adaptation. Let's talk a bit about the basics of your firm, The Lightsmith Group. For those listeners who aren't familiar with the different types of financing help set the groundwork of some of this vocabulary for us.

Jay Koh:

You can divide the universe in equity land into public companies, which are listed on stock exchanges. You can buy their stock. They're listed. You can tell how much their prices are every single second of the tradable day. You can easily sell and buy those stocks. They're what's in your 401k or your pension fund. And then there's a whole universe, much larger actually, of not publicly traded companies, of private companies. And so private equity has evolved since the 1970s and '80s, effectively as a way to invest systematically in those privately held companies.

So there are several different flavors that run across the range of growth stages of private companies from early stage seed capital or venture capital. These are startups, classically two folks in a garage with an idea or a technology, but it could be mom and pop starting a store on a street corner or something along those lines. And that's a massive engine of US growth and global growth.

But then moves into growth stage investing, including what would be called growth equity classically, which is minority investments in growth stage companies, or growth control investments where you're investing in taking a control position, over 50% of the ownership of a company.

And then traditional private equity, which has gone from small to medium-sized companies now to big large cap or even mega cap companies where large scale public companies can be taken private by folks that are called private equity or alternative investment managers.

Lightsmith is a global growth equity fund. So we're focused on companies that are beyond the venture capital stage. So we'd say that they don't have technology risk, they have a commercial product that you can buy and somebody else is buying, and they're beyond initial customer adoption. So we would typically at Lightsmith describe that as between 5 million and $100 million of revenue.

That's a pretty broad range in companies where we can really help to work with the company actively at the board level to help scale it up and bring it international and to really focus on the fact and measure the impact on this impact of, or risk, or adaptation to climate change phenomena.

Mike Toffel:

Great. Well, that actually was already foreshadowing my next question, which was beyond funding, how else does your firm help the companies that you're investing in?

Jay Koh:

Lightsmith is an active growth equity fund. So at Lightsmith, we serve on boards of companies. We invest typically 15 to $25 million out of our fund. Right now we're on our first fund at $185 million. And in addition to that, and through the mechanism of being a board participant, we work with the companies to help them go international.

So we have a large number of strategic investors and partners, particularly in the emerging markets context, including investments that we're making in relationships that we have in the United States and Europe. So that's one way that we work with companies.

The second is really helping those companies to identify what they do as related to sustainability or climate change itself. So many of the companies that we first approach in this area don't call what they do climate change anything. They're risk management companies or supply chain analytics companies or agricultural productivity companies or water efficiency companies or even medical diagnostics companies that we think will end up being critical to how society adapts to, or builds resilience to the effects of climate change.

So we work with companies to help measure that impact in a systematic way and report it. And then finally, we work to help scale those companies up through strategic relationships as well as the provision of partnering strategies.

The fund is sort of unique in that it has alongside the growth equity strategy, what's called a technical assistance facility, which is a grant mechanism that we have set up together with the support of the US State Department and the Nordic Development Fund that is over $17.5 million dollars of grant funding, which helps bring those technologies and solutions to the poorest populations and most vulnerable populations in the world.

So small island countries, low income countries, and the vulnerable populations in other developing countries, which are really taking it on the chin right now and are not typically the first port of call for commercial investors or equity capital.

Mike Toffel:

This is the suite of activities that you offer companies when you are actually funding them. And so I imagine this is somewhat of a pitch like they're pitching to you, "Hey, would you like to invest in us?" And you, I think also have to pitch to them like, "Take our money rather than someone else's money." Is that right?

Jay Koh:

Yes. It's a little bit like the, "We're here from the government, we're here to help." But in this case, the experience that we've had over 20 plus years apiece as partners, Sanjay and myself, is really, I think, what informs that discussion.

So you're working with different boards of directors and senior management teams to say, "Listen, we can bring all the usual growth equity and private equity skills. We come from very traditional backgrounds in that respect, but we also bring this additional angle of really thinking about these drivers around climate change, around internationalization, particularly expansion into emerging markets, and then these unique additional value-added tools of engaging these companies with folks who are actively looking for these solutions."

So as you had said before, people don't think about what adaptation is as a product or a service like normal humans don't, but there are major long-term planners and asset owners like governments, development institutions, pension funds, insurance companies and the like that are really thinking about how climate change is going to start impacting the value of these long-term assets.

And so they're looking for solutions across major sectors, whether it's new ways to model insurance, different ways to build infrastructure or real estate that'll withstand now increasing floods, fires, storms, et cetera, how to make the supply chain more resilient to these types of shocks in addition to the shocks we're seeing from sanctions and from labor disputes and from other sets of issues related to post-COVID adjustments and the like.

And so we work actively with those partners who are in some cases strategic investors of the fund, and then try to connect the dots between them and the technologies and solutions provided by these companies.

Mike Toffel:

How much assets do you have invested so far?

Jay Koh:

We have $185 million fund. We're proud to say that we're north of 50% deployed. We've made four investments that we've announced publicly. We actually just approved an investment this past week that we're quite excited about and we're likely to make an announcement about soon. We'll probably do seven to eight transactions in this fund in total, which is a traditional growth equity fund, and then think about what happens next.

Mike Toffel:

What are the types of institutions or individuals who are providing you with the funding to deploy into these types of organizations? Are these pension funds? Are these angel investors?

Jay Koh:

It's an interesting mix. So Lightsmith's fund is described in some universes as a blended finance strategy. So that means it has different types of capital providers that are invested in the fund and a structure that enables some of the investors to incentivize other investors to participate.

So what that really boils down to is that we have some very traditional investors in the fund. Those include fund of funds and institutional asset managers, insurance companies, multifamily offices and family offices. But in addition to that, philanthropies like The Rockefeller Foundation, and major strategic government entities like the UN's Green Climate Fund itself, which is our single largest investor. Multilateral development banks like the European Investment Bank. Individual governments like the Luxembourg government. Other multilateral institutions like the Nordic Development Fund, the German government through KfW, and other investors.

And so these all actually have different sets of objectives with their capital and as well, different strategic objectives. So insurance companies are actively looking for new technologies that can help them understand how risk and impact are going to change as climate change unfolds across the economy. And in the case of people like the European Investment Bank, folks that have built much of the infrastructure of Europe and developing countries that are really now seeing the impact of climate change on these long-term assets.

Mike Toffel:

Interesting to hear that variety of investors who are giving you funds to invest on their behalf. Let's talk about how you think about where to invest. How do you go about the process of thinking about where are we going to focus?

Jay Koh:

When we started looking at this question of how do you invest against adaptation or climate resilience, what is investible about it, there is some debate. Some people would say, "There is no business model for adaptation. If you build a seawall, what is the model for that? What is the model for building domes over cities or dealing with the effects of climate change on childhood respiratory ailments or asthma impacted by the effects of wildfires in California or Canada or anywhere else?"

So my 12-year-old now 13-year-old son, it's his birthday today, took these pictures last year of the kind of orange Mars skies over New York City on a day when he was sent home from school because it was too dangerous to have school children walking around the streets of New York City.

So what people think about is the effects of climate change, just like people think about the effects on the decarbonization side of things of increasing greenhouse gas emissions. The flip side to that is that there are solutions and technologies that can help us anticipate, understand, manage, and deal with the effects of climate change, just like many other sets of challenges out there.

So for example, there's no business model for bad health either. You have it and it's a bad experience for you as an individual, and as a humanitarian concern it's a societal challenge, but there is a market for healthcare technology. There is a market for diagnostics of your health. There's a market for treatment of your health. There's technologies and solutions that are developed in a massive part of our economy, thank goodness, that has grown up to deal with the effects of bad health and health challenges and disease.

One way of thinking about dealing with the effects of climate change is to think about it in a similar sense, which is we need to understand, we need to diagnose what is going to happen to the planet and our society as a result of this self-created problem of climate impact and climate change. And then we need to scale up as rapidly as possible the solutions and technologies that can help us deal with the effects of that on our society, just as we do in the healthcare sector.

So when we started looking at this problem back in the 2015, '16 timeframe, even 2014, which was how do you adapt or how do you deal with the effects of climate change, we started to unpack it into its component parts. So there is no one thing called climate change risk. Climate change is not a risk and it is not like aliens landing on the Earth risk that no one has ever seen before.

What climate change is, is a global warming phenomenon that affects all other kinds of risk. So we've had fire risks since we discovered fire. We've had drought risk since we started growing crops. We've had flood risk since we lived near rivers or oceans or any body of water. What we're now going to have is much more complex versions of those risks moved around to different locations at an increasing frequency and severity.

So what you've basically done is scrambled all of the risks and the entire complexity of an environment that we've gotten used over the last 200,000 years of human civilization and we're now going to make it a lot more challenging to operate in.

And so when we looked at that phenomenon at Lightsmith, we said, "Well, where's a starting point to think about these kinds of risks and manage them, and then even potentially, we can talk about this later, transcend those risks?" And that is how we think about those risks and impacts today.

We have fire insurance, we need to figure out how that fire insurance is going to be adapted and how to deal with the facts that it may become much more complex, correlated, systemic, much more large scale. This is not a new phenomenon. We had fire risk when we lived in huts. Every single major city in the world has a great fire of, blank, monument because it turns out when you massively concentrate urban populations for the first time, you have a new kind of fire risk called urban conflagration risk.

And then we need to build fire companies. We need to build our houses out of different materials. We need to install fire alarms and smoke alarms. We need to think about zoning. We need to think about a whole range of different approaches because our civilization has changed the way it interacts with this increasingly complicated risk.

So that's the way we started thinking about it and thought, "Okay. Well, then how do you look at the economy and what technologies and solutions exist today that are out there that we manage and evaluate these risks and deal with these risks with, and then how can we scale them up to deal with the scale of the problem that we're going to see going forward?"

So Lightsmith's strategy in adaptation climate resilience is a tools strategy. It's the first fund for private investment in adaptation and climate resilience. And so we thought at this stage what we really need is A, a lot more data and analytics, and B, a lot more solutions and products at scale that can help us understand on the one hand and manage and potentially transcend the risk and impact that climate change is now going to amplify across the entire society and economy.

So when we did that back in the 2017 period, we looked at the existing economy and found about 20 sub-sectors of the economy related to the different sets of disaggregated effects of climate change. We read the science, we looked at the IPCC reports at the time, Germanwatch, other sources, which actually gives you a roadmap to what they think is going to happen.

Droughts will happen here, storms will happen here, fires will happen here. Coastal regions will be threatened here. Biodiversity will be impacted here. Human health will be impacted here in these time scales, in these specific geographies. All of that actually gives you a roadmap to where technologies and solutions, to more specifically understand how the risks will occur and how to manage and deal with them, are going to be in demand.

And so again, most of the companies and sectors that we looked at, at that time, didn't call what they did climate change anything. They were agricultural analytics, one of our areas, supply chain analytics and management, geospatial information and digital mapping, fundamental technologies to understand how risk plays out over an economy in a society, risk management, and starting with catastrophe risk modeling, the modeling of natural disasters in the insurance sector. And then two areas of physical products and services are ones that we selected as well, resilient food systems and water generation and management.

There are many other sectors that will have to be shifted and adjusted and scaled up to be more agile and to be able to deal with an increasingly complicated set of conditions that we'll be living under for the next hundred years plus. But those are the ones we decided to start with because they seemed like the most immediately impacted and also lend themselves to a growth equity investment strategy where you have capital-light investments, technology, technology related services, investments and the like.

Mike Toffel:

Let's dive into these. Now of the six that you just named. It seems to me you have some that are about gathering data, some that are analyzing data, and some that are using the data and the analysis to actually create physical products. So maybe that's a useful way to walk through this process.

Give us a sense of what's the boundaries of this space, what makes it attractive to you, and what are the types of companies that you're looking to invest in, in this area?

Jay Koh:

When you describe it that way, I think it falls very much into the two categories that we would describe adaptation and climate resilience investments in. One at Lightsmith is what we would describe as climate resilience intelligence, and the other is climate resilience solutions. So everybody likes intelligence and everybody likes solutions. Those are good categories to have as a starting point.

But the intelligence part of it is fundamentally understanding that we need to be driving looking through the windshield, not in the rearview mirror. So a lot of the way that society analyzes problems is looking forensically at prior data, what happened in the last 5 years, 10 years, 20 years, 50 years. And then unfortunately now that climate change has a directional shift on all of these risks, the last 5, 10 and 20 years of data are no longer going to be as able to tell you what's going to happen coming forward.

So these one in a hundred year events that are now happening much more frequently than that, the fact that we used to have occasional years where there were bad fires in California, now they have a fire season means that we're really looking at a different set of conditions.

So a critical factor in making that transition to a climate resilient society more successful is understanding where the path of risk and impact is going to go. So geospatial information and digital mapping we think is a fundamental area to focus on at Lightsmith that will help us understand how these risks and impacts will occur over the rest of the economy.

There's several different pieces to that. There are increasing amounts of data and imagery, geospatial information that's captured by drones or satellites, increasing resolution. There's a massive commercialization of space that's occurring right now. There was just a launch, for example, in the mitigation context of a methane tracking satellite that happened in the last couple of days here.

But you're also seeing increasing amounts of multispectral satellite analysis being generated by the constellations that are being launched out there, whether it's synthetic aperture radar looking at underground water leakage issues, for example, in addition to determining where there's potential flood risk or inundation risk.

We're actually on the verge of announcing some investments that we are making around wildfire risk analytics and biodiversity risk analytics that is generated by artificial intelligence approaches to satellite and other types of imagery and data.

And so we think that these areas are critical and will grow at an extra normal rate as the complexity of the environment changes. So there's a broader, I think, alignment with the software eats the world idea in order to deal with an increasingly complex environment, which has a first and second derivative problem, like the complexity of the environment will also accelerate in its complexity.

I think software data analytics that can be agile, that can be forward-looking, not just backward looking, will be critical ways for us to understand how climate change will affect the economy and society going forward. So these are areas that we've been focused on very much at Lightsmith.

We've made specific sectoral investments that relate to these themes in precision agriculture, for example, in management of the food and ag supply chain using data and analytics, in companies that have expertise in consulting and technical analysis around wildfire risk, around water, around communities that are affected by physical climate impact and so on.

Mike Toffel:

I just wonder at a higher level what the mental checklist is as you get pitched these different technologies in this geospatial mapping space.

Lots of things sound attractive, but how do you decide which of the very few that you're actually going to invest in?

Jay Koh:

So at Lightsmith, there are three basic criteria that we have when we select transactions. First, does a company fit our fundamental thesis around climate resilience and adaptation? So back in 2020 to make the definition or approach to identifying companies that do adaptation and climate resilience more concrete, we did a peer review development of what's called the Adaptation Solutions Taxonomy that was funded by the Global Environment Facility of the UN and the Inter-American Development Bank.

The second point is, is the company at the appropriate stage of development? So we are specifically in our growth equity fund at Lightsmith, not investing in venture capital technology risk companies. I think there's a great set of strategies that need to be created to do that. But we think there's also a vast universe of existing technologies and solutions that simply need to be scaled as rapidly as possible to deal with the problem as it accelerates. And there's a rich universe of those things.

So does the company have existing go-to-market strategy? Do they have at least $5 million of revenue? And then the third point being, can we be helpful? Can Lightsmith add value to this company by partnering with it, by helping to orient it towards more customers that are really looking for these types of solutions, by helping to expand internationally, particularly in the emerging markets context, and through the personal relationships that we have? So those are the three ways we go about selecting companies here.

Mike Toffel:

That's really helpful. So does it fit, is it the appropriate stage, can we add value, just to summarize your three high level criteria as you're thinking through all the pitches that I'm sure you receive.

So let's pivot and talk about the analytics dimensions. Now, you mentioned agricultural analytics and supply chain analytics. So this is taking data and using sophisticated models to figure out how to make sense of it. So can you talk us through why these areas and what are some examples of companies that you're either seeing or investing in?

Jay Koh:

In the agricultural analytics area, Lightsmith was focused on this category because of the clear increasing stress we're seeing on food production and then distribution as a result of climate change. We're going to increase the population of the planet at the same time as reducing the amount of easily arable land and really challenging a lot of traditional ways that we've developed agriculture over the last 200,000 years.

One of the investments that we made is in a company called Solinftec, which is a precision agriculture company in Brazil. We were looking globally for the best agricultural technology companies that addressed the effects of climate change. And it turned out that one of the most substantial is this company, Solinftec in Brazil.

And its technology really is to fundamentally network together farm production equipment and add sensors and analytics to increase the efficiency and the agility of food production starting in Brazil and then expanding into broader Latin America and then also into North America. And now we're considering whether the technology can actually be translated to places like Sub-Saharan Africa, or other geographies.

So the company's technology, at Solinftec is networking food production equipment, farm production equipment, and that enables you to dramatically reduce the amount of inputs that you're using in producing food. It increases fuel efficiency. It increases your precision application of water, of pesticides when necessary, if you're using fertilizer, all of which are critical to food production and all becoming more expensive in this inflationary environment, for example. At the same time as you're having increasing amounts of stress from now floods and droughts that you haven't seen before in the history of Brazil.

And so by deploying weather sensors, temperature sensors, humidity sensors, and other technologies along with this networking capability and overlaying the entire thing with software, Solinftec has been able to dramatically reduce all of the inputs that are required to produce food and now covers over 90% of sugarcane production in Brazil, which is a major sector for Brazil's moving into row crops and perennials.

And then has the twin outcomes, from a climate perspective, of reducing greenhouse gas emissions. Fuel, water, fertilizer, pesticide, are all very carbon intensive inputs. As well as increasing the resiliency of agriculture to increasing variability in temperature, humidity, and climate related effects.

And so we think this is a great example of a climate 2.0 output. So Solinftec both reduces greenhouse gas emissions, reducing the potential trajectory and the cause of climate change. At the same time, it increases resiliency and efficiency. And one important note to make here is it does that at the same time as reducing cost.

So one other issue that sometimes people talk about in the context of adaptation and have talked about also in the mitigation in the early days is, oh my goodness, the transition to a low carbon and resilient economy is going to be so expensive. Everything's going to be much more expensive, and how are we going to pay for all this?

There certainly will be a transition that's going to be required that may add some costs in the short term, but there are many examples of technologies and business models where the opposite is true, where you save money and reduce carbon, or you save money and increase resiliency. So water efficiency, just like energy efficiency reduces water usage and water costs and reduces energy usage, energy costs, and reduces greenhouse gas emissions at the same time as increases your resiliency to increasing drought.

So this is a perfect example of that, again, where technology is evolving to meet the increase in complexity and challenge that we're going to see in the environment all around us.

Mike Toffel:

That struck me as you were telling that story of this interesting intersection between adaptation and mitigation as you noted at the end, and the fact that despite some technology that you need, some sensors that you need to deploy, that net net, it actually reduces costs, I'm sure is a major attractiveness feature to growers who are contemplating picking this up. Brazil's farming industry, these are enormous farms as I understand.

Jay Koh:

It's an industrial scale agricultural sector in Brazil, but there's also small holders and outgrowers that are out there that are also being impacted by the technology. We're also using technical assistance to expand the reach of the analytics that we generate around weather, around pestilence, for example, around disease to be able to reach those farmers that are outside of the large scale farming community.

And we're also localizing their technology. They're deployed in about 20 countries globally, and I think it's a demonstration of a technology that can be applied to address these complicated environments, not just for the top of the agricultural industry, but also for small holders and other folks that are interested in dealing with the effects of climate change.

Mike Toffel:

So let's talk about the supply chain analytics, which I presume is outside of the ag sector or else you'd call it ag analytics. What are the sectors and applications you're thinking of here?

Jay Koh:

There's the broad supply chain, and then we also invested in a company at Lightsmith called WayCool Foods in India, which is a Chennai-based company that manages the food and agricultural supply chain in South India and is now expanding to other regions and other countries.

So one of the big challenges in a place like India and many developing and emerging markets is that food distribution is really disorganized. So in the United States and OECD countries, food takes about three steps to get from a farm to you. In a place like South India, the number of steps to get from a farm gate to a consumer can range from 11 to 13 steps through multiple sets of wholesalers, different handlers, different sets of consolidation and distribution points.

And the result of that is in the actual food and agriculture supply chain itself, there are losses of food that range anywhere from 15 to 34%. So food just rots in the supply chain or is spoiled in the supply chain. There's a lot of food waste in OECD countries like the United States, but most of it's post-consumer. You buy stuff and you throw it out or it's thrown out in restaurants or other distribution points. The supply chain itself is extremely efficient because we have technology, because we have modern distribution methods.

And so WayCool's founders came out of the automotive supply chain sector and applied techniques and software and analytics from that set of models to drop the amount of complexity in the supply chain from those 11 to 13 steps to three, and that's dropped food waste in their supply chain from 15 to 34%, depending on the type of perishable food, to less than 2%.

Jay Koh:

And again, that dramatically reduces your cost and your losses. It improves the income for the farmers generating food and people along the supply chain, improves the availability and reliability and security of food supply to consumers, and saves money.

At the same time, it reduces greenhouse gas emissions, food's an extremely energy-intensive thing to produce, and increases the resiliency of the supply chain through the deployment of that technology to shocks related to climate change.

So Chennai, India was flooded over the height of cars last December in 2023. We actually had one of our team members posted in Chennai and took pictures out of his window of cars floating down the street, but it also ran entirely out of water at the municipal level because of drought in 2019. So a multi-million population city experienced the day zero event that Cape Town avoided in 2018.

So these massive variations of floods and droughts impact food production, but they also impact distribution of food and WayCool during both of those sets of events, was able to distribute food without missing shipments or deliveries because of its use of technology and different approaches to anticipating these kinds of shocks.

In fact, during COVID, they were used by several municipalities to ensure security of food delivery because they had the ability through technology to have visibility on the food and ag supply chain. So again, it's an example of this kind of climate 2.0 approach where you reduce cost, increase efficiency, reduce greenhouse emissions and carbon intensity, but also increase resiliency and adaptation to climate change.

Mike Toffel:

What are some sectors beyond food and ag that you're focused on in the supply chain analytics space?

Jay Koh:

The broader supply chain visibility space has become increasingly important. COVID scrambled the supply chain and changed, dramatically, consumer behavior. There's increasing other shocks to the supply chain like labor strikes or sanctions events or events in the Middle East that we're seeing right now impact major transit lanes, for example.

But in addition to that, climate change is dramatically impacting the supply chain itself. The Mississippi River, the Panama Canal, the Rhine River, all are no longer fully passable to shipping traffic. It's impacted commodity pricing because people have to reroute ships through the Panama Canal.

And as a kid from Chicago, the fact that the Mississippi River is no longer fully passable to barge traffic, this incredibly important critical artery of transportation for the US economy and the US's own development is sort of shocking. We will not be able to rely on these sources of transportation logistics going forward.

At the same time, you can't deliver truck shipments and Amazon two-day Prime deliveries in the middle of giant wildfires in the Western United States or during the Texas freeze. There were enormous challenges in delivering COVID vaccine and PPE during the COVID crisis in 2021.

And so what we're now seeing is the emergence of supply chain analytics in management companies that actually incorporate weather analytics and predictive analysis to dynamically reroute or to recommend different modes of transport for critical temperature sensitive or perishable items, for example, that route you around these kinds of events or dynamically heal the supply chain in a way that a monolithic or linear strategy, that simply tries to harden the supply chain, will not successfully be able to manage in the same way.

So we're seeing new technologies evolve to deal with this across the entire supply chain, whether it's changes in efficiency and rerouting of container ships that incorporate weather. Weather's a big impact on container shipping, but also choices that are being made dynamically between rail and trucking and air transport, or looking at how to think about where to locate your tier one, tier two, tier three suppliers as you consider how physical risk and impact of climate change is affecting the economy.

Mike Toffel:

I can hear in your description of this vertical a lot of ties to the risk management dimension that you talked about and the catastrophic modeling, and so I imagine there's some synergies there.

Jay Koh:

Absolutely. And as well with the geospatial information and digital mapping context as well.

So in risk management, starting with catastrophe risk modeling, which is literally the modeling of natural disasters for the reinsurance and insurance-linked securities industry, these are technologies that really are very robust and are probably among the best starting points for analyzing the increasing severity and frequency of weather events that we're now seeing.

So I think last year, NOAA reported $30 billion plus weather disasters that are climate related, which is a massive record, which I think unfortunately we're going to continue to beat going forward. And understanding what that has as a practical impact on the real economy is something that the insurance sector is very good at doing.

There's also modeling of flood risk that's now become much more precise and a variety of strategies for risk underwriting and risk transfer like parametric insurance, which really depends on specific events being triggered as opposed to going and evaluating what damage specifically happened to your house or your property or your car, for example.

And so all of these types of risk models we think are really great starting points, not just for the insurance sector, but could be potentially applied to credit analysis in the lending and financial services sector that could inform how other decisions are made about supply chains and then the broader investing landscape because they're good starting points in how to analyze risk out there.

Mike Toffel:

Let's conclude this tour of the various verticals you're engaging in with the physical products that you mentioned, the physical solutions which are in resilient food systems and water harvesting, or you called it water generation and management. Can you give us an example from these areas that you're focused on and how you think through this physical piece as opposed to the data and analytics that we've been talking about so far?

Jay Koh:

These things work hand in hand. We invested in a company in the water harvesting area called SOURCE Global. So Lightsmith has known this company and its CEO, Cody Friesen, for many, many years. My partner, Sanjay Wagle, had run into Cody when he was at the US Department of Energy during the Obama administration.

SOURCE Global produces this unique technology called a solar hydro panel. So this looks like a solar PV panel, but instead of generating clean electricity, it generates pure drinking water, between six and nine liters of drinking water per panel per day under almost any set of atmospheric conditions. It's deployed in over 50 countries around the world and is racing down the cost curve just as solar electricity did in increasing volume of deployment.

So what this panel does is it adsorbs, which is a new word I had to learn, the water vapor that's been distilled by the sun everywhere on the planet. So there is ambient water vapor everywhere. This technology ends up attracting that water vapor out of the air and then condenses it. So it enables you to deploy, on a 100% sustainable renewable basis, these panels, either in larger arrays just like solar photovoltaic panels or individual rooftops or in remote communities, a local 100% renewable 15-year life cycle at least, source of drinking water anywhere on the planet.

And so this is, I think an example of transformative climate resilience and adaptation technology where we're not simply saying, "Look, we're going to increase the energy efficiency of desalination by 5%, just like we didn't reduce the greenhouse gas emissions from coal generated power by 5%."

We switched to an entirely different technology and architecture for water generation in this case as we did for electricity generation in the case of solar electricity. And the analogy is deliberate where we can take advantage of the entire ecosystem we've built for deploying solar electricity and apply it to the solar water sector, which is a massively energy intensive area as well.

And so by supporting SOURCE Global at Lightsmith, we've helped accelerate the company's expansion and deployment into developing countries and emerging markets. We announced with the support of the US State Department and the Nordic Development Fund about a year and a half ago now, the deployment of SOURCE Global panels in Papua New Guinea in two remote communities, a school that had as its only source of water in a remote island, boated-in water. And if the boat didn't arrive that day with the water, then the kids were not able to go to school.

And then in another remote peninsula, which has never had pipe drinking water and had to access water from sometimes a contaminated stream or other sources, a women-led NGO, which is deploying these panels and then managing for the first time, localized, 100% sustainable, pure drinking water for its community over a 15-year period.

So those are grant-supported deployments of these technologies in extremely vulnerable populations, which again may not be the number one first target for commercial deployment, but could be supported with this kind of grant funding.

The commercial opportunity obviously for the company is enormous. You're already seeing huge water scarcity issues in the Southwestern United States. One of the company's largest deployments is with the Navajo Nation in the Southwest of the US, but it's also deployed in remote manufacturing sites in parts of the Middle East, in communities like the areas outside of Chennai, which ran out of water at the municipal level in India and so on.

And so we think technologies like this, again, will be in accelerating amounts of demand, and again, both reduce greenhouse gas emissions and increasing your resilience to the effects of climate change. Climate change is not going to be a tale of two islands where there's adaptation island and mitigation island, you get to choose whether you want a decarbonized society or a resilient society.

We're going to have to live in one single future, which needs to be lower carbon and resilient to climate change, or we will compound both problems. If you adopt solutions in mitigation and reducing greenhouse gas emissions that are not resilient to the effects of climate change, they will be destroyed along with everything else. And if you adopt solutions to adapt to climate change that are not lower carbon, you'll compound the problem that you're trying to address the effects of.

I think these are the scale and types of technologies we're likely to see going forward, highly efficient, increasing technological adeptness, different architectures potentially just as we saw on the mitigation side of things, and this combination of dealing with the effects and the cause of climate change at the same time.

The point I wanted to make about this being related to the data and analytics and expertise side is we made an investment in December in a company called Cadmus, which is a leading strategic technical consultancy that has deep expertise in water, in the energy transition, and in wildfire risk, and other risks to utilities. A lot of their expertise around water and in the food and ag and food security area is now, I think potentially being partnered with some of the other companies.

If you can figure out where water scarcity is likely to happen or contamination of water is likely to be an impact and where food security will be an issue, then deploying technologies then like WayCool's to manage the supply chain of food better, or like SOURCE is, to actually provide much more robust, disaggregated technologies for water supplies will become a lot more effective. You need both of the sides of the equation, the data to know where to deploy these technologies and the technologies at scale to solve the challenge that we're going to be facing going forward.

Mike Toffel:

This has been a really interesting tour of the areas that you're focusing on and the connections between data and analytics, the connections between adaptation and mitigation, and also the for-profit versus the development angles where you have government clients and you have private sector clients coming down the pike. What are some of the key takeaways you'd like our listeners to come away from your experience in Lightsmith and adaptation and resilience investing, for whom many this might be a new area?

Jay Koh:

One of the most important is this idea of conviction or certainty. So my son just turned 13 today, I have an 8-year-old daughter and another 15-year-old son. And in 2030, he will be 19 years old, and she'll be 14, and the other one will be 21, which is sort of shocking. And that's just six years away.

And I would suggest that if you believe the science, which I do, that you actually have more certainty and conviction about the path and the increasing risk and impact of climate change than many other things that you actually make investment decisions around. You know more about how climate change is going to unfold than you do about the path of inflation, interest rates, consumer behavior, artificial intelligence, the likely next date for Taylor Swift.

And so in that context, there is an enormous amount that we can do to begin to invest around that conviction. I can't guess what the US election cycle is going to look like now or by 2030, but I can tell you that I have a high degree of conviction that climate change will continue to unfold at an accelerating rate and that demand for technologies and solutions to understand that and manage that, will be dramatically higher between now and 2030.

So that investment certainty or conviction is something that you should start to think about expressing. Your current 401k or your pension fund probably is set up to basically express the view that the delta is zero, that there is no change that's going to happen as a result of all this climate impact.

And if you begin to think about what could you invest in, in the private or public markets that anticipates this dramatic shift that we're going to see happen, this transition, just as we are trying to do in the decarbonization side of things, then you can see that the effects of climate change and climate adaptation resilience are not just a massive risk and humanitarian problem, which it is, but a huge opportunity for investors about which you have more certainty than many other factors that you're already making investment decisions around.

So that's the first thing that I would say. The second is really that climate change resilience and adaptation is not just this risk and impact but an opportunity. It's an opportunity for entrepreneurs and technologists and investors to understand that this is a major shift that's going to happen, an inevitable transition between now and 2030, and we're fighting for the trajectory after that.

And whoever figures out how to analyze these risks and impacts and how to manage them or even transcend them will build billion dollar plus companies, and you want them to build billion dollar companies. There will be a Tesla Motors of adaptation and climate resilience that'll help you have much more reliable, much more resilient water, food, transportation, energy, shelter, healthcare.

And that class of today entrepreneurs or today technologists that solves that problem will generate massive amounts of wealth, and you want them to. You want scalable solutions. You want multi-billion dollar size solutions to the multi-trillion dollar challenge that we're creating because of the effects of climate change.

Mike Toffel:

I'm fully with you that the risks that the physical manifestations of climate change are posing can also be viewed as an opportunity for firms, either data analytics firms or for product or service solution firms. But there's sometimes this tinge of this being an exploitative endeavor where you're profiting from the misery or preventing the misery of others. Is that something that you engage with as well?

Jay Koh:

First and foremost, let me say that climate change is a humanitarian tragedy. It's unfolding right now. You had Pakistan year and a half ago, one third flooded, 1,700 people were killed, half of them children. The result this year was an additional 2.1 million cases of malaria in places in Pakistan that have never had malaria before because the flooding's still there.

So before we talk about the opportunity side of things, we need to recognize that this is an existential problem, a humanitarian problem, a massive issue for biodiversity, and one that we've all created in a really inequitable way. The other side of it is that people that are suffering the most are the people least responsible for it, it's disadvantaged populations, developing countries who contribute very little to the carbon footprint of the planet that are really being impacted right now. So I think it's very important to recognize that first.

The second thing is just like in healthcare, we're not in favor of human disease, or as climate change, we're in favor of scaling up the solutions to deal with both of these sets of challenges. And I think the dominant strategy in our view is to scale those solutions as rapidly as possible to deal with the reality that we're facing of climate impact, just as we deal with the reality of human suffering through human disease.

No one's in favor of people getting sick or experiencing bad experiences, but we need to scale up the solutions and that is an opportunity. Until we frame it as such, I think the capital and technology that's needed to really deal with the scale of the problem won't be mobilized.

Mike Toffel:

So let's talk for a moment about public policy. How do you think about public policy as an accelerator or a threat to the technologies you're investing in?

Jay Koh:

I think the public policy is a critical element of how we face the overall transition that we're facing. You can see this right now in what we describe as the decarbonization or mitigation context where the IRA, the Inflation Reduction Act, and then the 2021 bipartisan infrastructure law really represent over $1 trillion of new investment that we're making in US infrastructure, rebuilding roads, bridges, toll roads, technology in energy and water everywhere, telecommunications, in a scale that we haven't seen since we built the interstate highway system.

And so that definitely has an effect in pushing, if it's directed appropriately, the transition on decarbonization towards more of a green economy, and I think we're seeing that play out. So it's a huge tailwind in that area. There are clearly elements of that that also support this resilience and adaptation thesis.

So upgrading the grid to deal with the fact that we're going to have more wind storms on the East Coast and more fires on the West Coast is a critical part of how we build the next 50 to 100 years of infrastructure out there. And then how we make choices about coastal regions, et cetera, are going to be very important.

That all being said, investments in adaptation and climate resilience are independent in a way of the driver of public policy because they're driven really by physics and time. So in the context of mitigation, decarbonization, there's sometimes a description of something called the inevitable policy response.

Someday all the governments are going to get together and tax carbon or ban coal or do something else. And someday in the future, we will all take this rational action and address this problem. And I'm absolutely in favor of that and strongly advocate for people to engage in public policy discussions to accelerate the process by which we make those choices in decarbonization.

And so some people would say that parts of the energy transition investment thesis are dependent on when that happens and you're seeing that start to happen now. Climate resilience and adaptation are not dependent on that as a driver. Fires, floods, storms are going to accelerate regardless of what the government chooses to do. The physical reality of climate change is going to unfold as a result of physics and time between now and 2030 in a way that is almost impossible to change at all.

We cannot physically take carbon dioxide or the greenhouse gases out of the atmosphere quick enough to do anything to the trajectory between now and 2030. We're really fighting for what happens after that, and that's very important. But that means that the conviction we have about what that pathway is going to look like is independent of political considerations.

Each of our companies, Solinftec, WayCool, Cadmus, and SOURCE Global all have the majority of their revenues generated by other companies that are really just out there looking for solutions to these challenges. And individuals and companies and communities will make those choices, and we hope that the government does as well. But unlike the parts of the mitigation and decarbonization landscape, resilience and adaptation is now just going to have to happen in a way that's a little bit different than requiring some kind of policy push for it.

Mike Toffel:

That's a very interesting contrast in how to think about public policy between the decarbonization, mitigation side of ledger and the adaptation side. So thanks for sharing that.

Mike Toffel:

The final question I have for you is the question I ask of all of our guests, which is what advice do you have for listeners who are interested in getting more engaged in their career in this area?

Jay Koh:

My advice for folks that are interested in climate resilience or adaptation as an investment area or an area to engage in entrepreneurship is get started. You have certainty about this. You have conviction about this, and it remains still quite a white space. There's a lot of opportunity. Over $95 billion has been raised for venture capital and private equity related to climate since 2021.

Almost none of it is in this adaptation and climate resilience area. Less than 2% of 5% of climate-tracked investment capital on the planet is focused on adapting or building resiliency to climate change. So Lightsmith is the first private investment fund for adaptation and climate resilience. We hope that there are hundreds or thousands more.

What you can do as a young person or a technologist or an entrepreneur or an investor is start to get involved, and not just in the policy side of things or the concerns that we all have about the effects of climate change and our role in it, but also from the technology side or in the investment side.

You can start by looking at all of the information that's out there about what the future really looks like. We have a road map between now and 2030, what happens to water and agriculture and healthcare and transportation and energy and coastal regions and biodiversity and infrastructure. And so all of the challenges that are identified by the IPCC and others are actually the other side of the opportunities for technologies and solutions that can scale to meet the challenge.

And I think the only piece of advice that I would leave everyone with is that I am a technological optimist. I think that our way out of this challenge, just like many other challenges, is to scale innovation and capital. Every year, 13 to $15 trillion of new fixed income is issued in the global economy. One month of that would probably go a long way towards solving this problem if the other 11 months weren't aimed at exacerbating the problem.

Capital is very powerful, technology is transformative, and if we can harness those two things, and I think we will and we can, at dealing with the effects as well as the cause of one of the most complicated and existentially difficult challenges of our time, climate change, then I think we have a real shot at this.

We have generations that are coming. I look at my 8-year-old daughter, and I wonder by 2030 what world she's going to grow up in when she's 14 years old. And I think we have a high degree of conviction about what that is going to look like. And the question is, what technologies did we find? What investments did we make? What choices did we catalyze that puts us in a better version of that world in 2030 than the one we're setting ourselves up for now?

I think it's a great opportunity for young folks, for entrepreneurs, for technologists, and particularly for investors. And I think you're going to see substantially scalable investment capital come into this space as a result.

Mike Toffel:

Jay, it's been a really interesting conversation to hear about your firm and the investment thesis and where you're aiming your dollars, and I really appreciate you sharing your story with us here on Climate Rising.

Jay Koh:

Thanks so much, Mike. It's been great to be here.