Adapting to a new reality (1): Why climate resilience?
Building on our eight-year track record investing in climate resilience and our Resilient Future Thesis, we’re leveraging our expertise to embed a climate resilience lens across all of our work at MCV.
Introduction
Since 2015, climate resilience has been a central part of our investment thesis at Mercy Corps Ventures. Today, the majority of the 48 companies in our portfolio have direct or indirect climate resilience impacts and are impacting end users in 30 of the 50 most climate-vulnerable countries in the world.
Early on, we backed companies such as Vasham (in 2016) and Pula (in 2017), helping to improve livelihoods and build resilience to climate change for smallholder farmers through supply chain integration and agricultural insurance products. Since then, we’ve invested in a number of other companies providing direct climate resilience benefits, like credit to encourage regenerative agricultural practices, much-needed irrigation for smallholder farmers, and infrastructural data layers that will inform supply chains in an increasingly precarious global food system.
After years of investing in climate resilience solutions, we made the decision to continue to push the boundary by expanding the focus on climate resilience into other parts of our approach — our Venture Lab, our Venture Platform, and our Impact Measurement and Management work.
This decision was driven by a few important observations:
- We are optimistic and hopeful about the increasing emergence of funds focused on investments in climate resilience and adaptation. However, we see little focus on climate resilience in adjacent and essential functions such as post-investment support, even among peers who focus exclusively on climate resilience investing.
- There is increasing momentum in the ecosystem to collaborate so that we can answer questions around how we define climate resilience, and what should be included in a climate resilience investment thesis. The climate resilience work done in our Venture Lab, Venture Platform, and Impact Measurement and Management approach is an important contribution to this collaboration, and we will continue to evolve our answers to these questions as new technologies and solutions emerge.
- There is growing interest among funders, donors, and investors to understand how to measure climate resilience and adaptation. Unlike climate mitigation, for which there are standard Key Performance Indicators (or KPIs, such as reduction or offsetting of greenhouse gas emissions), measuring the progress toward climate adaptation is more complex. Our work with early-stage startups — specifically, our focus on right-sizing impact evaluation methodology to the earliest, riskiest stages of innovation in emerging markets — brings a unique lens to these ongoing discussions.
In this blog series, we share our approach and learnings from our journey incorporating a climate resilience lens across these three areas of our work.
How we understand climate change
Before we dive into the details of our climate resilience work, we want to start by sharing our approach to understanding what climate change means to underserved users, and how we view its impact on innovation and startups operating in emerging markets.
As we’ve invested more into this space, we’ve gained a deeper understanding of what climate resilience really means for underserved users in the emerging markets where we operate. There is still a significant lack of consensus around how climate change is relevant in sectors we invest in, so it has been important for us to ensure we have a continued shared understanding of climate change itself, and of the different ways that it affects our portfolio companies. This work has led us to identify two important lenses that we can apply across our climate work.
Firstly, we see an important distinction between the impacts of climate change on our portfolio companies as businesses and the impacts of climate change on their users or customers. The two are closely linked, but the specific risks and challenges for each level are distinct.
Climate change can pose a serious challenge to businesses by affecting supply chains, resources, or physical properties — effects that ultimately threaten business growth and their ability to scale sustainably. Customers are also at risk of sudden climate events and short-term catastrophe, as well as longer-term changes in climate patterns, which can affect their personal lives and health as well as their ability to harvest, generate income, or pay for services. And of course, the two are intertwined, since businesses are at risk of losing income if their customers can no longer participate in the product or service offered.
In the graphic below we articulate our understanding of climate change, with its direct and indirect impacts, and how it poses risks at both the business and customer level.
Secondly, we feel that one of the things constraining existing approaches to climate resilience is the limited attention being paid to the potential opportunities that climate disruption can provide, alongside the risk of harm and disruption. In our approach, we look at climate change from the perspective of both risk and opportunity. For example, we want to support startups to ensure their end users can withstand natural disasters, short-term extreme weather events, or longer-term changes in climate patterns. At the same time, we also want to support our startups to tap into new market opportunities that the changing climate presents, such as pivoting to respond to new consumer preferences around sustainability, offering new products to capture revenue from the fast-growing carbon markets, and so on.
Below we show how these two perspectives interplay with both businesses and customers.
Within our portfolio, we see resilience through a broad lens, with climate change as one of many shocks that can destabilize a family or community.
The growth and scale of solutions to enable resilience to all types of shocks, including health or financial, is essential to building thriving, resilient communities and complementary to our focus on climate resilience. Our portfolio includes many such solutions, which are not explicitly tackling a climate issue but instead providing other, broader resilience-building solutions in the same communities or for the same end user. For example, a holistic digital financial services platform for employers and their workforce to increase financial health and resilience, or simple, quality health and life insurance coverage for groups living on less than $5 a day.
What we’re developing
Using this framework, we applied a climate resilience lens across other areas of our approach.
Venture Lab
Our experience running pilots in breakthrough technologies, from data transparency around carbon credits to DeFi lending models for informal street vendors, has shown us that providing catalytic capital for tech-enabled, cutting-edge pilots can shed light on the important use cases and real-world impacts of these technologies. The climate resilience tech space is still nascent in emerging markets, and we see multiple opportunities to explore the use, viability, and barriers to scale for groundbreaking technologies and encourage innovation that can scale to impact millions of users.
To that end, this year we launched our new Climate Tech Facility that seeks to test and build the evidence base for innovative technologies for climate resilience in emerging markets through a series of pilots. By partnering with impactful, early-stage ventures working on climate tech, we aim to prove the scalability and viability of innovative technological solutions to combat the climate crisis.
Venture Platform
Our objective as Venture Platform is to help companies grow and scale with impact at their core, thinking ahead about risks and opportunities on the horizon. Climate change is posing increasing risks to our portfolio companies, as well as offering many nuanced opportunities. We hypothesized that we could build a more right-fit post-investment offering for our companies that would enable them to successfully navigate these risks and opportunities, and build more sustainable businesses over the long run.
To understand the potential value of a post-investment support offering related to climate resilience, we undertook multiple interviews with portfolio companies and ecosystem partners to explore how we might apply a climate resilience lens to our Venture Platform work.
We’re excited to share more on this research, and the practical Climate Assessment toolkit that has emerged from it, as part of this blog series.
Impact Measurement + Management
There is still limited consensus in the impact investing space around climate resilience. Lots of questions remain unanswered around definitions and metrics that can help to guide climate investments, and the longer-term outcomes in particular often remain undefined. Every year we attend a number of conferences, events, and working groups (such as the GIIN’s IRIS+ working group on Climate Adaptation & Resilience) to help build more consensus on these questions.
Alongside this, we are taking our own steps to understand how to measure climate resilience impact within our own approach and investments through the development of a Climate Adaptation & Resilience (CAR) IMM framework. This framework is our unique perspective on measuring climate resilience at the earliest and riskiest stages of innovation, where Mercy Corps Ventures operates. The framework attempts to adapt larger and more complex frameworks, such as those articulated by USAID or the UN Disaster Risk Reduction teams, to the early stage, high-impact businesses that are part of our portfolio and investment strategy.
As we are active investors in this space, we are able to directly apply this framework to new investments, get feedback from portfolio companies, and rapidly iterate.
We’re looking forward to sharing the first draft of our early-stage investing CAR framework in a later blog in this series.
What’s next
We are really excited to see so much momentum around climate resilience investing, with many other investors, funders, and exciting startups coming onto the scene.
We’re proud to be part of this nascent ecosystem and at the forefront of climate resilience investing.
Now, as we explore how to think about embedding climate into other areas of our work, we hope what we have learned through this process will continue to accelerate our ecosystem toward smarter, more impactful climate investments and solutions that provide right-fit solutions for millions of users around the world.
