Our investment in Emmi — making carbon risk a financial metric
Excited to announce we have backed Emmi — the business leading the way for carbon to be measured and calculated as a financial risk — in a A$3.5m early stage investment round. Sustainable finance and ESG remain core themes of interest for Illuminate and we see Emmi’s Global Carbon Efficiency Rating (GCER) and suite of products as critical for financial markets participants as they transition to net-zero.
Read press coverage in the AFR including a founder interview here.
It is no longer a question of ‘if’ we will transition to net-zero but when
Say what you will about the relative success of COP26, it is clear that even the most polluting nations and companies are recognising the imperative of net-zero and beginning to take steps along the road to get there. The requisite pace and extent of these changes is still a matter of hot debate but we have reached a clear global consensus that it’s a case of when not if.
In the world of finance, as soon as a future event becomes inevitable it gets ‘priced in’ to existing asset valuations. This is where we find ourselves today — attempting to put a price on carbon risk and reposition portfolios for this eventuality.
We need to price and weigh carbon in the same way we do other costs and risks
When making decisions, entrepreneurs, investors, and their respective stakeholders look at the blue sky picture of what outcomes are possible and their respective likelihoods. Business and finance are underpinned by this risk-reward balance.
That probability weighted outcome, discounted back to the present day value, dictates both business decision making (should we build that new factory, launch that product, or expand into that new market) and investment (what are the future returns of this business likely to be for shareholders). Those who get this calculation right consistently over the long run, come out on top.
As financial markets have matured, additional metrics have been added to this equation. Failure to factor in these considerations runs the risk of mispricing investments and making bad business decisions. As we have written in the past, it is our long held thesis that markets are pricing carbon risk into asset valuations.
This isn’t a soft ‘nice to have’ afterthought. Ignoring carbon risk would be akin to ignoring regulatory or credit risk. It represents an enormously lucrative opportunity for those who get it right, and a huge risk for those who don’t.
The challenge is that there are scarce few providers who help the various stakeholders calculate and manage their carbon exposures as a financial metric.
Emmi — leading the way for financial markets participants to calculate carbon risk
This is the cavernous gap Emmi is filling — providing the tools that reposition capital markets so the transition to net-zero emissions can occur. By viewing carbon risk as a financial metric, and offering a suite of data and analytics-based solutions that allow investors and corporates to understand and solve for this risk, their clients are able to see what lies ahead in a range of scenarios for their portfolios.
This kind of portfolio climate stress testing, while not yet mandated by regulators, is being demanded by clients who recognise how many industries and businesses are exposed in a net-zero world. In fact, Emmi’s data-driven system — created over a decade by a team of investment experts, fund managers, and climate scientists — has identified $43 trillion of manageable assets at risk, and only 28% of the world’s companies as net-zero compatible. This is a vast sum of pension fund dollars hanging in the balance and makes even the total cost of the GFC pale in comparison.
Finding the right team to tackle this challenge
As big as this opportunity is, not every team that sets out to solve the problem will be successful. While the market is desperate for solutions to address this time critical issue, they want to rely on teams with expertise who understand the landscape. As climate and carbon are both nascent financial metrics, there are only a small handful of individuals and teams who will be trusted to build solutions.
We believe Michael Lebbon , founder, CEO and carbon market veteran , Ben McNeil, co-founder and climate scientist, and the team at Emmi fit the bill. This was a consistent piece of feedback we received from the company’s clients throughout — that the team not only had the climate science expertise, but they also understood the financial markets use case and problem statement intimately. This marriage of skillset has been further strengthened by the support of Chairman Tim Samway, founder of one of Australia’s most successful fund management businesses, Catherine Brenner, seasoned director and former chair of AMP, and Patrick Sieb, ex-Macquarie and prominent start-up mentor.
Supporting the team as they take their proven solution global
Emmi have proven the market demand for their Alpha product by signing some of the biggest names in Australia — including JANA, Aware Super, Energy Super, Hesta, Aurora FM, Perennial, Melior, and Hyperion — and worked with several of these as early design partners.
We look forward to helping them build on this success as they expand the business globally — leveraging our network of financial markets stakeholders and participants to find champions, channel partners, talent, and new clients.
