Climate Performance Potential, or variants thereof, is the “in” term for measuring the investability of a climate startup. Although there is no standard or agreed upon way of measuring this almost every climate tech investor has some version of this metric at play in making investment decisions.
The measure is supposed to show the effect (performance) of a startup and its technology on improving our climate or mitigating its breakdown.
A simplistic example is to compare a piece of hardware side-by-side with the ‘dirtier’ version, say an electric car compared to petrol car. In the best case scenario where the electric car is charged using the cleanest energy, its emissions will be significantly less than the petrol-powered car. Of course its not always best case scenario and you need to also consider the climate impact of mining and industrial production but for the purposes of illustrating the point let’s keep it simple.
The difference between the two gives you the Climate Performance Potential (CPP). You can then compare the CPP with the CPP of other startups pitching for your money and if you’ve done your math right and other factors line up, by picking the best CPP you get the most (climate) bang for your buck.
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The logic behind this works like this.
First we have the underlying assumption that decarbonisation is important. Climate science tells us that we need to cut emissions and increased activism and awareness is demanding that this happens.
From this we jump to the idea that in the future, through regulation and consumer behaviour, any product or service that is emission-free (or captures emissions) will be the preferred choice in the market.
Therefore, a high Climate Performance Potential not only predicts the best environmental outcome. It also predicts the best financial outcome. To quote WorldFund:
Climate performance is a predictor of financial performance.
This is the thesis under which most impact and climate tech investment operates.
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It’s not bad logic as far as it goes.
Where it falls apart is that somewhere along the way from founding to scaling the thesis gets inverted to the following:
Financial performance is a predictor of climate performance.
Essentially, having done the CPP work early on to raise money, the startup switches to full-on growth mode because scale is the only way to deliver those predicted financial returns. The underlying assumption then switches to “if my [product] delivers better CPP, then selling more must be a good thing.” And because scale has to happen at speed, thinking has to be put to one side.
To bring the electric car example back into play. In the scenario where your zero-emissions vehicle is replacing a diesel van doing tens of kilometers of daily essential deliveries, I’m with you all the way. But the best transportation solutions in terms of emissions are always public transport, cycling, and walking so if the financial performance thesis is now taking you in the direction of incentivising people away from these solutions you are undermining any genuine real climate performance.
This is how we end up with these dissonant situations where companies strike up ridiculous, greenwashing partnerships and accept dirty money. Examples abound. We have BeyondMeat striking a partnership with MacDonalds, Airbus commissioning wind-powered ships to ‘reduce’ emissions from airplane part transportation, InnovationZero accepting money from BP, COP accepting money from Coca-Cola, and Barclays, the UK’s dirtiest bank, sponsors a variety of sustainable business initiatives.
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The solution lies in how companies are structured and built in the first place. Despite platitudes, VC funded companies are organised around the profit motive, and when the profit motive kicks in it trumps everything.
To be meaningful, the Climate Performance Potential approach needs to be built into a company’s constitution and used to guide decision-making across the board.
Instead of being discarded after funding, it needs to be turned into the RCP — Real Climate Performance — and instead of guessing at the potential future performance it should be used to measure the actual, or real, climate performance of every campaign, project, and partnership.
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Photo by Erik Eastman on Unsplash
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