Photo: Foundation Recruitment
Cars account for around 20% of climate-causing emissions in the world. The real culprits are coal-fired power plants along with other leaky sources which waste large amounts of energy. Can you think of one such large source? How about shopping malls and office buildings?
In the following interview, Venture Capitalist Greg Smithies of the firm Fifth Wall discusses the investment side of the firm and how those investments combat climate change:
What do you actually do? I don't quite understand what Fifth Wall does and what the 'built world' is.
It's the world's largest venture capital fund for the built environment. Think real estate, construction, infrastructure like roads and bridges, and then energy because buildings consume about 40 percent of the world's power. We're a specialist fund that focuses on these areas. A lot of people think that's kind of niche, like you've got blinders on. It just turns out that this is the largest asset class on the planet and it's 10 to 20 percent of the GDP of any country. It's $326 trillion of buildings out there.
About half of our $3 billion under management comes from a very large consortium of corporates around the space — people who build, own, operate buildings and infrastructure. We find technology companies that are relevant to this industry. We get them in front of these corporate partners who are some of their largest buyers out there.
Buildings and construction account for 40 percent of the world's CO2 emissions. It's roughly twice as much as transportation. The other thing we do is technologies for climate resiliency, because you can't move buildings — and you should check my math on this — but buildings are worth less if they're underwater or on fire. So we're investing in those two buckets of technologies: Things to make the CO2 impact or energy impact of this industry better, and things to protect this industry from the ravages of climate change.
So you're investing on behalf of big real estate companies, and then the solutions are also being adopted by those same investors.
One example: We invest in a company called Turntide Motors. They have high efficiency electric motors that you replace in your HVAC systems. They save 30 to 60 percent energy. We invested equity into that company and then at the same time, turned around and got that company into a bunch of our corporate partners like Kimco and Ivanhoé Cambridge, who are big building owners and operators, to retrofit those motors into their buildings.
So it sounds like you're doing pretty well then?
Right now, yes. We're early. This entire strategy was sort of a twinkle in our eye 18 months ago when the corporate partners came to us and started asking, 'Hey, can you give us some help decarbonizing?' We've made and publicly announced only seven investments to date. We've closed 11 deals in the last 60 days. So we're moving quickly. But it is early days here. We are by far the largest venture fund that's focused on this thesis and this strategy.
You're saying that your clients want to decarbonize because they're under pressure to do that, but also that these are good investments on their own.
I come out of the Elon Musk school of sustainability, which is basically like, it doesn't matter how good for the planet your widget is if no one wants to buy your widget, right? The reason why the car industry is now electrifying all of their vehicles isn't because there was a $5,000 tax credit in California to buy electric vehicles. It's because the Tesla Model 3 was eating everybody's lunch.
We're taking a pretty similar view here that we're looking for technologies that you could sell to an active climate change-denying CFO. Maybe they're going to take some venture capital and growth equity to get them down the cost curve to get there. But ultimately, many of these technologies should just in the long run end up being cheaper than their incumbents.
You started this fund 18 months ago, in the middle of the pandemic. How has that affected your customers and your investors, all these commercial real estate companies that don't have people in their offices?
Typically what we're hearing from those folks is that the average per square foot amount of office space that any company will need will probably go down slightly, but it's more that it's going to get rejiggered. So if people are only going to be in the office because you want them to collaborate, that means you're not going to have a cubicle farm, you're probably going to have more sort of collaboration-type spaces. I think what we're going to see over the next few years is a big recalibration of what the expectations are for what's inside the office, but not necessarily a massive change on the total square foot of that office space.
Are policies driving any of your investments? What do you think about the proposed SEC rule requiring climate risk disclosure?
This is an interesting blanket policy that we do think is going to have massive tailwinds. Because anytime you put something into an SEC filing, all of a sudden that means the market can track it more efficiently and that means it's going to drive your stock price. And what is every CEO's bonus tied to? It's the stock price.
Let's take a step back. The science tells us that having more women inside companies means those companies are typically better-operated and better-run and actually have higher profit margins and over time, they typically grow longer. They're more sustainable businesses. There's a lot of research on this. However, historically, there has not been standardized data sets for people to, say, build this into their algorithmic hedge fund trading algorithms.
Ultimately, you'll see this sort of open efficiency of information driving straight through to stock prices. And what do CEOs care mostly about, typically? It's stock prices. So a massive, huge tailwind. We're very excited about it.
Is your fund an ESG fund? Would you put that label on what you're offering to investors?
There are a number of regulations, especially in Europe, around how you define what it is that your fund's doing, and we are officially an impact fund in that regard. I will say out of the E, the S and the G, we are capital E, and less focused on S and G. We are very much a carbon-focused fund.
That said, we as Fifth Wall also were one of the first venture capital funds in the world to put diversity and inclusion riders into all of our term sheets. So if we go and invest in a company, we're telling them in the term sheet that they really better get their act together in terms of diversity, inclusion and who they're hiring, and also in the other funds that they get to invest in them down the line.
