A conversation with Matt Schmitt, founder of Structure Climate, about how to get institutional investors invest in the regenerative food and agriculture transitions. These are big terms we use regularly, but what do they actually mean and, more importantly, how do we get there? How do we get novel climate technologies- like biochar machinery, chestnut agroforestry systems, biofertilizer plants, or weeding robots- bankable? Novel technologies often start as luxury goods with a clear customer demand, even if they don’t yet have many existing transactions, just very clear customer interest.
How do we make these technologies investable, or at least recognisable, by major financial institutions (like the big, “boring” banks, insurance companies, and pension funds). We need billions and trillions to flow to the soil. So, how do we get these asset managers over time to start financing this seriously, in the same way they do solar projects or sustainable real estate?
How does a capital stack for a novel technology look like, and how do we financially engineer it with creativity—the good kind, not the kind that caused financial crises in the past decades? To roll these technologies out across farms and landscapes, we need scalable solutions. While commodification in food and agriculture has a bad reputation, turning enabling technologies into bankable commodities can be a good thing. It helps farmers adopt systems that hold more complexity and resilience on their land.
MAKING THINGS BANKABLE IS SO IMPORTANT
Matt discusses the importance of making new climate infrastructure and solutions bankable.
”No one looked at clean water and said, Is this bankable? But we have water quality standards. No one looked at food quality early on and said, Is this bankable? But now in many places of the world, you can walk into a store and take something off the shelf and then eat it without thinking twice about the food safety standards that went into it. I think the environmental impact of a given product will become part of that background sense, but it doesn’t happen overnight, and it doesn’t happen by itself.” Matt Schmitt
”I think some of the factors at play right now are the sudden change in interest rates. I mean, there was a particular interest rate environment for a long time that led to a lot of really grandiose thinking, and then that suddenly snapped back, and that’s caused a significant change in the investability appetite, the perception of these kinds of products or services as being in demand; it waxes and wanes. Banks and these conventional pools of capital have grown to be quite deep, but that means that they have to look for projects that are quite large to make it sort of worth while to sharpen their pencils at the same time.” Matt Schmitt
HOW TO MAKE NEW CLIMATE TECHNOLOGIES BANKABLE
In order to make climate solution bankable they need to be tangible and immediately valuable to communities.
”We see this multi-generational tech adoption curve for so many of our larger pieces of critical infrastructure, and we’re just seeing, like utility-scale solar, it’s coming to the end of a 50-year time cycle, and projects are just getting big enough now where it’s relatively straightforward to get hundreds of millions of dollars from teacher pension funds and big institutional investors because the projects have been de-risked, and that’s great. Again, I don’t know that we have 50 years for every bit of climate technology to make that same kind of journey.” Matt Schmitt
”I believe the fastest technological adoption in agriculture was auto-steering tractors, in part because as soon as you had that, your rows looked crisp and straight […] There is such a tangibility to what we experience in our everyday lives that can drive us to act. And it’s unlocking that in pursuit of climate solutions, where I think there’s a big opportunity and where conventional financial structures are not well suited for that.” Matt Schmitt
CLEAR CUSTOMER DEMAND IS SO CRUCIAL TO GETTING FINANCING
Advisory and financial services in supporting early-stage climate companies as needed as well as clear customer demand.
”What we are starting to see now is an emerging and increasingly clear need for smaller, more flexible, more resilient systems, and that’s a hard change. And so that’s the kind of mechanism where we are focused on a clear customer demand signal. It might be small, and it often is. We often find projects, and our clients think, Oh, I’m not big enough for this yet. But it’s not that there needs to be a massive market opportunity; there needs to be a clear market opportunity. And with that, that becomes one of the ways that we can start to activate this pool of charitable capital into supporting these kinds of projects, and then we do it in a way that makes the projects recognisable to bankers and project finance groups as the projects grow. And so, stuff like establishing special purpose vehicles to house the project activities and receive the financing, often at non-recourse terms. So, we are not threatening equity holders at the parent company. And this is often kind of a new area of discussion for startups. But this is how real assets have been financed, in commercial real estate, in energy projects, and in all sorts of large industries for decades.” Matt Schmitt
HOW PROJECT FINANCE WORKS
The need for specialised financial structures to support the growth of climate technologies.
”This is how real assets have been financed: in commercial real estate, in energy projects, and in all sorts of large industries for decades. There is a long-established set of commercial hygiene standards that we aim to bring to as early a stage as possible, which is certainly doable. It’s just not conventional, right? And so, by doing that, we make the projects recognisable to conventional financing much earlier. But because we’re bringing in this tax- advantaged, thematic, or charitable capital, we can come in at a much smaller and earlier stage. And so, then it’s our belief as structured climate that by being able to access this tool to engage with companies earlier and at a smaller stage, but in a way that sets them up to grow, that we then earn the opportunity to be that partner as they grow.” Matt Schmitt
OTHER POINTS DISCUSSED
Koen and Matt also talked about:
- Why many great climate projects face difficulties in fund raising: they offer debt like returns and equity like risks and investors don’t like that
LINKS:
- Structure Climate
- Focal Technologies
- How Agri PV can boost the transition to regenerative agriculture in Europe
- ‘Walkie-Talkie’ skyscraper melts Jaguar car parts
LINKED INTERVIEWS
- Brett Hundley – From Tyson Foods equity analyst to financing millions of trees
- Ethan Steinberg and Jeremy Kaufman, ready to invest over 15M into agroforestry systems in the US
- Brandon Welch and Phil Taylor – Updates with Mad Capital on how to enable billions to flow to regen organic farmers
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The above references an opinion and is for information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.