Impact Measurement in Alternative Proteins

by Steven Molino, Principal at Clear Current Capital

Executive Summary

• Impact measurement in alternative proteins (and the overall impact space) is important.
• Impact measurement is hard and subjective.
• Clear Current Capital is looking to measure impact across our portfolio of plant-based, cultivated meat, and fermentation companies in four areas:

1. Greenhouse gas reduction
2. Land use reduction
3. Water use reduction
4. Animal lives saved

• Any approach must be practical — the top priority at the early stage is for our entrepreneurs to be focused on growing their businesses (there will be no impact generated if the companies fail).
• Even with a high-level approach, there is key information missing:

1. We don’t truly know the percent of alt protein purchases that are replacing animal product purchases (“displacement %”) — aka, purchases by vegans and vegetarians do not generate impact
2. Each company will have a different impact on the four areas we’d like to measure and it’s unlikely they’ll have the resources to quantify that impact until they’re later stage — so we must use best guess estimates.
3. Some categories (e.g., cultivated meat) have yet to go to market but have progressed rapidly — is there any impact to measure, or is it just future potential impact?
4. Enabling technologies (e.g., scaffolding) will contribute to the impact of downstream products like a cultivated steak, but what’s the appropriate percentage of impact coming from these technologies (“contribution %”)?

• We will be continuing our work to identify an appropriate impact measurement approach and collaborate with industry leaders like The Good Food Institute.
• We don’t think we know everything, and we would love to hear from anyone who thinks they can push things forward!

Background

Before impact investing existed as an idea, the traditional thought process was that financial returns and positive impact were mutually exclusive. You could either invest with the intent of generating financial returns or you could donate your money to charitable causes to generate positive impact.

We now know it doesn’t have to be one or the other, especially with the rapid growth in PE/VC investment strategies focused on producing above-market-rate returns alongside positive impact. This shift to applying traditional private market investment strategies to businesses generating positive impact has led to an estimated two-thirds of all impact investments meeting, or exceeding market-rate returns while also targeting impact goals, according to the Global Impact Investing Network’s 2020 Annual Impact Investor Survey.

Measuring Two Kinds of Returns

As with any investment, investors must be able to measure their returns in order to understand how their investments are performing both on a standalone basis and in comparison to other potential investment options available. On the financial returns side, return measurement is simple. Investors can continue to utilize measurements that have been developed and standardized across the financial services space for decades focused on the metrics that matter most to them (e.g., ROI, ROA, CAGR, IRR, FCF, etc.). This standardization allows anyone to compare the financial returns of an impact investment to any other potential investment opportunity in an apples-to-apples manner.

The same ease does not exist on the impact returns side of impact investing. To put it lightly, impact measurement is hard and subjective. To start, there are many different impact areas on which investors focus, such as education, healthcare, poverty alleviation, housing affordability, financial inclusion, — the list goes on and on. At Clear Current Capital, our focuses are primarily in the areas of environmental sustainability and animal welfare.

As it can be seen, impact investors may have various differences in the impact areas on which they are looking to generate positive impact, so it quickly becomes difficult to understand how it’s possible to measure and compare impact returns for two investments. For example, let’s say we were trying to compare an impact investment focused on education to one focused on environmental sustainability.

For the education investment, the investor may care about measuring the impact on items such as

1. increased child access to educational resources
2. short-term improvement in test scores
3. a reduction in the student dropout rate / increase in graduation rate

I’m sure there are many other areas of interest for education

For the environmental sustainability investment, the investor may care about measuring the impact on

1. the reduction in greenhouse gas emissions (CO2, methane, etc.)
2. reduction in land usage
3. the reduction in water usage

With those measurement items in mind, how then are we able to compare the impact returns of an impact investment in education versus environmental sustainability? Is it possible to compare the impact of a 10% improvement in graduation rate to the reduction of 2 tonnes of CO2 or 1k acres of land being used? Even more importantly, does comparing the impact between these investments even matter, or is it a waste of time?

I’m in the camp of “it’s a waste of time.”

The waste does not come from the idea that one impact area is more or less important than the other. Instead, I believe that at this stage in the impact investing industry’s life, investors are still analyzing opportunities by first choosing an impact area of interest and then comparing investment options within that impact area. I am sure there are some investors open to investments across any impact area, but I’d be surprised if someone intrinsically motivated to improve our environmental sustainability would be interested in an education investment just because of a metric that compared the two. Instead, I see investors saying “I want to help shift the world toward sustainable practices” and then choosing between investment options that target sustainability. Maybe I’m wrong (it happens all the time), so feel free to disagree.

This then brings us to the idea of standardization of impact measurement within the same impact area (e.g., comparing two investment opportunities that both target environmental sustainability). At first glance, this seems like it should be easier, since it would require the measurement of the same underlying metrics (e.g., tonnes of greenhouse gases reduced). The issue here lies in how investors define “success” on this impact area and what would be needed to measure it. For Clear Current Capital, we feel that focusing on (i) greenhouse gas reduction, (ii) a reduction in land use, and (iii) a reduction in water use is a great way to highlight the benefits of alternative proteins on environmental sustainability. However, another investor who focuses on sustainability may want to measure things like food waste, elimination of plastics from in the oceans, soil health improvements, etc. — the list goes on and on. We’re now faced with the same issue that arises from trying to compare the impact of an investment in education to one in sustainability. This time, is it possible to compare the impact of saving 100k gallons of water to a 1% improvement in soil health? Even more importantly, does comparing the impact between these investments even matter, or is it a waste of time?

I would argue that when comparing impact within the same impact area (e.g., sustainability) it does matter and it is not a “waste of time.” However, it is still very difficult to find a solution that keeps everyone happy.

So where do we go from here?

Start From the Inside Out

We know the holy grail of impact measurement is an approach that can be standardized across any impact area and encompasses metrics that apply throughout. Despite the tremendous efforts to create such standardization from organizations like GIIN (IRIS+) and various firms out there, we at Clear Current feel it would be the most beneficial for us to first try to focus on achieving an impact measurement approach that works for us and then figure out how to expand that into a standardized approach across the alternative protein space.

So, what matters to us?

At the high level, we are laser-focused on generating positive impact in the areas of environmental sustainability and animal welfare. We look to achieve this impact by investing in the most innovative early-stage alternative protein companies offering alternatives to animal-based products (e.g., meat, dairy, eggs, etc.). Since we only invest in companies whose business models are directly aligned with our mission, we know that as our portfolio companies grow, the mission impact grows.

As it relates to impact metrics, we feel that there are four key metrics that speak most to what we’re trying to achieve across environmental sustainability and animal welfare:

1. Greenhouse gas reduction (sustainability)
2. Land use reduction (sustainability)
3. Water use reduction (sustainability)
4. Lives saved (animal welfare)

There are various other metrics we could add, but we think these are key.

Practicality

Now that we know on which metrics we want to focus, we need to make sure there’s a practical approach to measuring this impact.

Since we invest in alternative protein companies at the earliest stages of their lifecycles, resources are about as limited as they can be. Teams may be made up of as little as one to two individuals, money must be spent only on things that are worthwhile, and time is a precious commodity. As an investor and partner with these companies, the last thing we’d want is for them to spend hours of time each week/month/quarter trying to provide different metrics and reports on the various areas of impact. For growth stage and larger companies, they may have the resources and staff to put this type of effort into impact measurement work, but this cannot be expected of early-stage startups. Some may disagree and say it should be fully expected of companies regardless of the stage, but as an investor who wants to optimize the chances of success for our portfolio companies, the last thing I would want to do is take their attention away from growing their businesses just so we could put a number on our website that shows how much CO2 we’ve saved. That’s in no ones’ best interest.

Realistically, one number that should be readily available should be topline revenue (for now, let’s exclude the pre-revenue companies in the cultivated meat and fermentation spaces).

The Approach

Using topline revenue as the basis for all impact measurement, the general approach would be to say that for every dollar of sales of an alternative protein product a certain amount of impact would be generated across (i) greenhouse gas reduction, (ii) land use reduction, (iii) water use reduction, and (iv) animal lives saved.

If we start with plant-based meat as the example, the below visual highlights how we could go from topline revenue to an impact measurement across the four impact categories as follow:

Step 1.) Identify the type of plant-based business/product (e.g., meat, dairy, seafood, eggs)

Step 2.) Calculate the number of pounds of product sold from this amount of topline revenue

Note: This does not have to be pounds, it just has to be a standard unit of measurement to compare to animal products (e.g., kilograms)

Step 3.) Determine what the difference is in each impact area between the production of one pound of plant-based meat versus one pound of animal based meat

• For example, the University of Michigan Center for Sustainable Systems estimates that for every pound of traditional beef produced, ~27lbs of CO2 are created. According to Beyond Meat, their burgers produce 12.7x less CO2 than traditional beef products, which would represent about 2.13lbs of CO2. This would mean that the difference in CO2 produced between one pound of Beyond and a traditional beef burger would be 24.9lbs of CO2
• In a perfect world, each startup in the space would be able to provide high-level numbers of the amount of emissions, land, and water are produced/used to create their products; however, in reality, there’s a good chance we would need to start with industry averages (e.g., The Good Food Institute suggests that plant-based meat emits 30–90% less GH gases, uses 47–99% less land, and uses 72–99% less water than conventional meat)

The final, and most important, step to measuring impact is understanding what we’re calling the displacement percentage. This percentage is supposed to represent the estimated percent of all sales of this plant-based product that displaced the purchase of an animal-based product. This is key to understanding the impact generated from a sale, as the purchase of a plant-based product does not generate positive impact if it’s simply replacing the purchase of another plant-based product.

To put it more clearly, the purchase of alternative protein products from vegans/vegetarians does not generate positive impact.

Plant-based consumers have already chosen to eliminate animal products from their diets, so while we at Clear Current absolutely love their support of our portfolio companies (and we’re also plant-based ourselves), we have no interest in creating more products geared towards these consumers. It’s the carnivores/omnivores of the world that we’re after — that’s where the potential impact lies.

So how do we get this displacement percentage? The answer is unclear.

Some companies like Beyond and Impossible have touted displacement percentages of over 90%; however, they are calculating that by saying 90%+ of shopping carts of purchasers buying their products have animal products/meat in the cart, as well. Knowing this, they’re implying these shopping carts would be full of 100% animal products if it weren’t for their plant-based offerings, but I find this incredibly hard to believe. In reality, I’d expect these carts include purchases for various members of a household, with one (or some) of those members being plant-based, thus generating no positive impact.

The real displacement percentage for any plant-based product is likely far below these 90%+ metrics being advertised, but understanding a true percentage will take a lot of time and consumer research. Knowing this, we then have to ask what an appropriate displacement percentage estimate should be. I feel it should absolutely be below 90%, but how far below?

The answer is that I don’t have an answer. Until I do, the most critical piece of impact measurement information is missing, so absolutely reach out if you think you’ve figured it out!

Expanding Beyond Plant-Based

Despite the unknown of the displacement percentage, it is possible for us to choose a percentage that feels more reasonable/conservative (e.g., 25%). With that number in-hand, we can apply that percentage to the numbers calculated in step 3 to determine an impact metric for any plant-based company using only topline revenue from the company as the input.

Knowing the alternative protein space also includes companies in the cultivated meat and fermentation spaces, as well as companies offering enabling technologies to these spaces (e.g., scaffolding), we also need to think about measuring impact in those areas.

As shown in the below visual, if we once again use topline revenue as the starting point for cultivated meat and fermentation companies, we can take the same approach as we did for plant-based, but now there’s an added component: the go-to-market status of each company (i.e., already selling product versus pre-revenue).

For the cultivated meat and/or fermentation companies that have launched and are selling product to customers (currently not many of them), we can take the same approach as we did for plant-based businesses. With this approach, let’s not forget we would be estimating the displacement percentage, which is the major input needed for an accurate impact metric.

For the cultivated meat and/or fermentation companies that are pre-revenue, the question then becomes, “is there any impact to measure?” It’s true that many of these companies have pushed their respective spaces, and the alternative protein markets, forward a tremendous amount over recent years, and they’re even generating impact by working alongside governments/regulatory bodies to ensure there’s a path forward toward commercialization. One great example of this is The Alliance for Meat, Poultry, and Seafood Innovation, which is a coalition of leading companies in the cultivated meat space, including BlueNalu, Artemys Foods, Finless Foods, Fork&Goode, JUST, New Age Meats, Orbillion, and Upside, focused on working with policy makers, industry stakeholders, and consumers to advance the cultivated meat space.

Despite all of this progress and impact on the space, I would say that it would not be appropriate to try to measure this impact against the four impact metrics, as these metrics are not “potential future impact” metrics. I’m sure we could take a DCF approach to expected revenue to come up with a present value that could flow into current impact, but I don’t feel this is appropriate, easy, or transparent for those looking to understand how impactful a company has been across specific metrics as of a certain date.

Finally for the enabling technology companies such as those working on cell lines, cell culture media, bioprocess design, and scaffolding, we would first have to understand the impact generated from their customers (cultivated meat producers) and then apply a contribution percentage to that impact. The contribution percentage is another major unknown and it’s supposed to represent our best guess as to how much the enabling technology contributed to the final end product. For instance, a scaffolding company may be an enabling technology to a cultivated steak, but it may only make up a portion of that steak. So, should the contribution percentage be the percent of the entire steak’s mass that is cells and fat versus scaffolding (likely a very low percentage)? Or, should the percentage be a higher percentage, since it would be impossible to create a whole-cut steak without the scaffolding?

Similar to the displacement percentage, the answer is that I don’t have an answer.

So, What Now?

As we can see, there is no simple approach to this. The more we dig in to a certain approach to impact measurement in the alternative protein space, the faster we can find different holes and challenges that need to be overcome.

Regardless, we feel that continuing to work on building an imperfect impact measurement approach that’s based on practicality for the startups and hits on the key impact areas is better than doing nothing at all. That is why we continue to discuss this space both internally and with other leaders in the space, as creating a standardized approach to impact measurement will be better accomplished collectively. Externally, we regularly speak with other investors and entrepreneurs, and we continue to work closely with The Good Food Institute, who has dedicated various personnel and resources to this area.

This also means we’re open to discussing this topic with anyone who feels they can contribute to the progress of impact measurement in alternative proteins. So, if you would like to connect on this, we’d love to hear from you and how you may be able to help us push the space forward for the greater good!