The Manhattan Project for Sustainability — A Master Plan to build the next Berkshire Hathaway
Humanity’s Hardest Problem — Climate Change
We are entering a major crossroads in human history: As the concentration of greenhouse gases (GHG) in the atmosphere rises, the impacts of global warming are becoming more evident: Extreme weather conditions, groundwater crisis, glacier melts, and sea-level rise. The climate crisis poses challenges to energy security, food and water security, and public health. The window to solve global warming is rapidly closing.
One solution to the urgent climate crisis is forming a holding company similar to Berkshire Hathaway to allocate the necessary resources towards solving this ultimate challenge. In the following, I will present a framework to help with strategic decisions for identifying, buying, and building technologies, companies, and products. As a result, this holding company should more meaningfully advance the decarbonization, climate change, and sustainability efforts.
1. Action: Define a strong mission & strategy around sustainability
Any successful organization needs to follow a higher purpose and define its mission. Concerning climate change, the mission should be “accelerating the progress to a carbon-negative future”. The statement describes the urgency to decelerate the rising rate of GHG emissions reaching faster “drawdown” — the future point when GHG levels in the atmosphere stop climbing and start to decline steadily. What kind of strategy can the holding company follow to achieve this critical mission?
The notion of a “silver bullet” for solving global warming has persistent appeal: “What’s the one big thing we can do?”. However, there is no one-size-fits-all solution to a multi-layered problem, such as global warming. Still, there are three known decarbonization strategies:
- Replace existing fossil fuel-based energy generation with clean, renewable sources
- Reduce wasteful consumption through technological efficiency and behavior change
- Remove carbon by sequestering it out of the atmosphere or source of creation
With this in mind, the investment company should focus its efforts on the most impactful opportunities. According to Project Drawdown, a non-profit organization, there are already 100 existing climate solutions that need to be scaled to achieve a carbon-negative future by 2050. The investment company should mainly focus on disruptive technology platforms as they enable us to multiply critical resources and drive the necessary societal change. The best solutions can provide a substantial difference far more than the marginal contribution of the next hundred.
Entrepreneurs armed with sufficient technology, capital, and talent can change the world’s direction towards sustainability. For example, Elon Musk’s Tesla has commenced the inevitable shift towards electric cars and lithium-ion batteries as electrical storage systems. This concept is getting widely adopted and accelerating positive change. The world needs hundreds of other Teslas to start a Manhattan Project for our climate now!
2. Action: Establish an investment thesis
Investing is about asking the right questions and coming up with compelling answers. Peter Ducker famously stated: “If you can’t measure it, you can’t improve it.” Therefore, the focus should be on analyzing data and deriving an investment thesis that can guide critical decision-making. Additionally, qualitative data should support the thesis.
2.1 Quantitative model — Bloomberg for climate
The investment company should use either public or proprietary data models to understand the root causes of global warming. Aclima’s environmental intelligence platform or Al Gore’s initiated “Climate Trace” provide promising starting points. Both models enable monitoring GHG emissions in real-time using satellite-image processing, machine learning, and sensors to help investment decisions around climate impact. The final developed platform could act as Bloomberg for environment data.
A primary assumption should be that technologies or solutions that disrupt any of the largest GHG contributors will have the most significant impact. According to the EPA, around three-fourths of global GHG emissions can be contributed to energy (25%), agriculture (24%), and industrial activities (21%). The other fourth is transportation (14%), buildings (6%), and other sources (10%). When comparing the GHG contribution towards the distribution of $20.5 billion in climate-related finance from the World Bank in 2018, there is no positive correlation. This circumstance offers a compelling investment opportunity for the holding company to drive the necessary change.
The investor needs to refine the model by assessing every climate solution by scale, impact, and ROI. A tool similar to the online-available carbon reduction assessment tool CRANE could help understanding the saved emission and cost associated with implementing a solution. The holding company should consider mainly technologies with the potential to reduce at least one percent of projected 2050 global emissions. This requirement would put a threshold of half a gigaton of greenhouse gases per year on any solution.
2.2 Qualitative model — Overton window & Doughnut economy
Not only quantitative data but also qualitative data should influence the development of the investment thesis. With the concept of the Overton window and other sentiment analysis, the company can identify socially acceptable investing themes. In the face of uncertainty caused by the COVID-19 pandemic and the rapid climate change, resilience is becoming a leading investment theme of this decade. The investment thesis could state: “Society is striving for higher resilience in energy, nutrition, and technology (incl. healthcare, housing, and transport)”.
Finally, the investment firm needs to acknowledge that investing is an endless game. Short-term gains should not jeopardize the planet’s finite natural resources. Therefore, resourcefulness will need to be one of the guiding principles. Otherwise, we might end up like Mickey Mouse in “The Sorcerer’s Apprentice”: For every broomstick broken in half, two more take place. We need to solve climate change while not sacrificing any other limited natural resources e.g. land, water, and minerals. Some solutions might be just an illusion that we are becoming more sustainable and could present potential value traps.
One concept that could act as a compass for decision-making is Kate Raworth’s developed “doughnut” economics. It incorporates essential planetary boundaries (e.g. climate change, biodiversity loss, and freshwater) and social boundaries (e.g. food security, income, and healthcare) to reframe economic problems and set new goals to achieve a safe and just space for humanity. Sustainable prosperity can only be reached when social foundations are met without overshooting any of the planetary ceilings.
3. Action: Evaluate innovation platforms based on decarbonization strategies
Separate climate solutions will not have the advantages of complete innovation platforms. Promising innovation platforms emerge when costs decline steadily, demand rises, and further products and services are added. Most associate platforms with software (e.g. AWS, Google, and Microsoft), but there are also many physical platforms. Two platforms and one application can be directly mapped to the main decarbonization strategies. Renewable electricity (3.1) can replace the current fossil-based infrastructure (Strategy 1), synthetic biology (3.2) can reduce wasteful consumption (Strategy 2) and carbon capturing (3.3) can lower carbon concentrations in the atmosphere (Strategy 3). As the physical and digital world further converge, artificial intelligence (3.4) will support all of those solutions.
3.1 Electricity (platform around electrons)
Electrification allows us to replace fossil energies using renewable energies such as solar, wind, hydro, fission, and geothermal energy. The technology platform can be divided into three separate fields: Sustainable energy generation (e.g. solar panels and wind turbines), energy storage (e.g. batteries), and usage (e.g. EVs, drones, and home appliances).
Due to the growth in electric vehicle sales, battery costs are dropping to a point where utility-scale energy storage becomes attractive. This cost decline is enabling a multitude of new applications and investment opportunities. The investor will need to look into the different fields and identify the key drivers that will transform sustainable energy generation, storage, and consumption. Another key driver is materials that enable the revolution in electrification.
- Energy generation: A potential long-term disruptor for nuclear power generation is TerraPower. Its Traveling Wave Reactor is designed to use depleted uranium as fuel, making the operations safer and more sustainable.
- Energy storage: A potential near-term disruptor for energy storage is Northvolt, which is developing lithium-ion batteries for EVs and utilities. Another more long-term contender is Quantumscape that is developing a solid-state battery promising a 100% jump in performance in comparison to lithium-ion batteries. Lastly, ESS tries to produce a long-duration iron flow battery. The most efficient battery chemistry will drive further adoption.
- Energy usage: Industrial production is also being electrified, such as steel by Boston Metal. The company has developed a molten oxide electrolysis process, which uses electricity to transform metals from their raw oxide form into molten metal products.
- Materials: Every energy-producing system must be fabricated from elements extracted from the earth. With the increased adoption, the demand for many materials, especially rare earth materials, will rise significantly. For example, the world currently mines about 7,000 tons per year of neodymium. This element is essential for powering wind turbines and EV motors. The World Bank estimates a 10–40x increase in neodymium demand for wind turbines until 2050. The emergence of new materials will accelerate the market adoption of many e-technologies. Materials like graphene and silicon carbide can improve energy conversion, transmission, storage, and energy usage. They can make EVs and semiconductors more efficient and speed up the time to market and adoption. Therefore the holding company needs to develop in-depth knowledge around materials and critical components for electrification.
3.2 Biology (platform around genes)
Synthetic biology offers many solutions for reversing global warming. While computers can turn information into processed information, synthetic biology enables redesigning organisms for useful purposes: “Cells are programmable similar to computers because they run on digital code in the form of DNA” (Jason Kelly, CEO of Ginkgo Bioworks).
Biology as a technology platform enables the engineering of living organisms by inserting, deleting, and editing genes, manufacturing proteins, and designing all new enzymes (the critical catalysts for all cellular activity). It allows us to create new sustainable, higher-performing, and cost-competitive products at scale for our needs to replace inefficient and wasteful processes like petrochemical or agricultural means of production.
For example, Impossible Foods and Beyond Meat offer a sustainable alternative to the whole animal husbandry, which uses 30–50% of the world’s land area and has adverse effects on water and pollution. In fact, if cattle were measured as a country, they would rank third in GHG emissions. Impossible Foods can produce plant-based protein products with a 90% lower GHG and water footprint while providing even better nutritional profiles.
The rapid price fall in DNA sequencing is enabling this revolution. As the cost to sequence a whole genome falls fiercely, DNA-sequencing, a test once limited to research labs, will experience widespread adoption and volume growth. Synthetic biology will be one of the driving forces behind solving global warming in producing sustainable materials (e.g. proteins, energy-density biofuels, and bioplastics) and methods (e.g. fermentation) that enable better use of our limited resources to make society more resilient.
Potential disruptors that are designing general-purpose platforms for organisms are Ginkgo Bioworks and Zymergen. Besides, Twist Bioscience is one of the leaders in manufacturing synthetic DNA for others due to its unique semiconductor-based manufacturing process.
3.3 Carbon Capture (carbon sequestration application)
Next to natural carbon sinks such as forests and coastal wetlands, one group of technologies known as carbon management, such as carbon capture, use, and storage (CCUS) and carbon dioxide removal (CDR), can help us to reduce the carbon concentration in the atmosphere.
CCUS is becoming common practice to reduce or eliminate greenhouse gas right at the source from fossil-based power plants and industrial facilities. The company LanzaTech can capture carbon and turn it into ethanol, which can be used for chemicals and fuel. The waste gasses are directed into a fermenter, where genetically modified yeast uses carbon dioxide to produce ethanol. Another solution offered by Fortera and CarbonCure mineralizes CO2 into calcium carbonate from industrial facilities to create concrete that has CO2 permanently embedded.
CDR enables one to pull CO2 directly out of the air. The company Carbon Engineering has developed a technological way to take CO2 out of the atmosphere and turn it into gasoline, diesel, or jet fuel. Their technical feasibility was proven at their pilot plant in Squamish, British Columbia. This new approach enables them to drive down the cost from $600 to $100 for each ton of CO2 removed from the atmosphere. Commercial feasibility should be reached at a capture price of $30–50/ton. That would mean that it would cost around $1–2 trillion to capture the current global annual emissions of 40 gigatons, comparable to Apple’s market cap. The technology is still early-stage but could play a vital role in becoming carbon-negative.
3.4 Artificial Intelligence (platform around data)
Due to the increasing computational capabilities of modern computer chips and significant improvements in artificial intelligence models e.g. deep learning, AI is becoming capable of solving or improving many climate challenges. For example, it can enhance the electric grid by forecasting the energy output of wind farms, as demonstrated by Google’s DeepMind, or it can help scientists discover new materials by allowing them to model the properties of never-before-seen chemical compounds.
It will be essential to incorporate AI in most processes to improve efficiencies but keep the carbon footprint in mind as they use a great deal of computational power. The holding company should focus on the four core building blocks of AI: Applications, algorithms, infrastructure, and computing. Next to Amazon, Google, and Tesla, which are building their own AI chips, Groq and Graphcore could be potential disruptors in this category.
4. Action: Identify market potential by TAM and market adoption
After identifying an impactful innovation platform, the investment firm needs to determine the potential total addressable market (TAM) for a specific solution to estimate the opportunity’s size. Next to it, the investor needs to study the market adoption carefully as the best opportunity provides a market that has reached a critical inflection point in adoption. Early-stage market adoption removes market risk and leaves a more manageable element of execution risk.
Market adoption is still highly motivated by affordability. If consumers were driven primarily by moral or environmental issues, they already would have adopted many sustainable technologies like EVs, solar panels, and plant-based food earlier. With the introduction of disruptive technology, the cost can decline substantially and create a new market. Wright’s Law can describe most of the cost declines caused by technological iterations: For every cumulative doubling in production, costs tend to decline by a fixed percentage. For example, the rapid decline in battery cost, which accounts for roughly 20–30% of an EV’s cost, enables the transformation towards sustainable transportation.
You want to invest in the company before its so-called “zero-to-one”-moment before the adoption accelerates. In such a scenario, the demand will quickly outstrip supply, and the company can grow in a sizable market for decades. For example, the demand for Tesla’s EVs cannot be met by the current manufacturing rate. That is why Tesla is further investing in building more gigafactories to scale its production.
5. Action: Select the climate category winner
When investing, you should focus mainly on the category winner. This particular business will capture the most value of the market opportunity and receive a significant valuation premium as investors start to realize it as the safest and most obvious bet on the future. It will also provide a margin of safety because category winners possess something that already has significant financial value e.g. intellectual property, production facility, or talent. This situation should offer an asymmetrical risk opportunity for the investor.
When assessing a category winner, financial data can be a lagging indicator of a company’s prospects, whereas technical and product excellence are leading indicators. The investor will need to look into the company products and processes and determine its technical and commercial feasibility and analyze where it has a sustainable competitive advantage. The higher the barriers to entry for the newly created market, the better the company’s future financial prospects.
Successful technology companies are built around R&D. Therefore, one has to ask, “how effective are the company’s research and development efforts in relation to its size?” (Philip Fisher). In most cases, successful companies are already working closely with government agencies or Fortune 500 companies. They can validate the solution and help to scale the business.
Additionally, the holding company will need to understand the management team’s vision and whether they have “determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited” (Philip Fisher). The investor needs to understand how the management team thinks about critical problems and how fast they can adapt and learn.
6. Action: Manage and govern portfolio companies
The invested capital should fund the portfolio company’s growth strategy and be mainly used to commercialize its products or services. The holding company should collaborate with the portfolio company to establish and implement a three-phase plan focused on commercialization, expansion, and disruption, as following:
6.1 Execute on a three-phase plan for commercialization and disruption
- Phase I (Commercialization): Establish a new commercial market by capturing demand from the innovators and early adopters.
- Phase II (Expansion): Capture efficiencies of economies of scale to reduce price meaningfully to grow demand exponentially towards the majority.
- Phase III (Disruption): Use earnings to provide the capital for the next-stage disruption.
6.2 Establish ESG & Environmental Responsibility Reporting
The portfolio companies should set high ESG-standards not only for their products and services but also for their operations and the entire life cycle of all their products (e.g. waste management, water, and energy usage). Keeping track of their operational impacts should allow them to achieve efficiency improvements that simultaneously reduce their impact on the environment and lower operational costs. It should be the goal to establish circular economy business models.
The portfolio companies should embrace full transparency by publishing annual environmental responsibility reports disclosing the impact of their products and operations to the public. They should set targets and track their accomplishments. Suppliers and partners should participate by joining their own established “supplier clean energy programs”.
6.3 Create a shared corporate platform for the environment and innovation
Sustainability should be at the heart of everything a company does. Portfolio companies should become stewards for the environment and inspire other organizations to join. They should pledge essential resources (e.g. product, time, and capital) to support integrating sustainability into their business model and create a pledge to become carbon-neutral similar to Amazon and Apple.
The holding company should recognize that it cannot achieve its mission alone. It should open-source its patents like Tesla to enable others to implement its solutions and make a higher climate impact. Creating a common, rapidly evolving technology platform is more important than lawsuits. These two corporate actions could build the foundation for the next Manhattan project.
7. Action: Initiate the next Manhattan Project
If necessity is the motherhood of invention, you may ask why the deployment of low carbon energy technologies is still so far behind in the face of the inevitable climate threat?
In 1939, the US and its allies faced a different kind of necessity for invention: The threat of a secretive German weapon. Under the direction of Oppenheimer, 130,000 scientists worked on the secretive Manhattan Project. Six years and $26 billion (in today’s money) later, they uncovered the secrets of nuclear fission that changed the curse of the war and redefined the geopolitics of the past seventy years.
We will need to overcome the generational dilemma of the climate crisis, where the threat is long-term, but the action required is short-term. We will need to overcome the inconvenient truths of our affluent lifestyles and industries that profit from burning fossil fuels. And lastly, we will need to create and support the inventors and founders of our low carbon time. But unlike the Manhattan Project, which was secretive and destructive, this mission should be transparent and sustainable, forcing change on politics and capitalism: Low carbon transformation that remediates the environmental side effects of the last industrial revolution.
8. Action: Embrace public discourse, government funding, and climate policies
The holding company needs to be a strong advocate for policy change towards a net-negative carbon society and work closely with industry partners and governmental entities to ensure the shift in public discourse, funding, and incentives.
Individual actions will not stop climate change. Only systemic change will be sufficient. Therefore, the company will need to work closely with regulators to set stringent goals, like achieving net-zero emissions by 2050. International agreements such as the “The Paris Agreement” can set a common long-term temperature goal limiting global temperature increase to well below 2 degrees Celsius (Art. 2). The United States needs to be a leading part of it. While congressional resolutions like the “Green New Deal” and Joe Biden’s proposed $2 trillion climate plan are the first steps in the right direction, the holding company needs to ensure that the government will support innovation via funding, incentives, and taxation.
Federal investments in renewable energies will need to be accelerated as the DOE’s current structure is still more driven by fuel than innovation potential. Government investment can spur the drive for further innovation, and thus, the holding company should align its portfolio with DOE’s energy innovation criteria.
Policies accelerate the progress of technologies and foster the right path to reducing GHG emissions. With activism in the form of Greta Thunberg’s protest, the holding company can multiply the cultural change in values in society and affect policies. Many technologies will need to receive subsidies in the form of tax credits to be implemented and commercialized.
Furthermore, understanding the international carbon emissions market is critical since it sets incentives for companies to change their long-term decisions on whether to invest in achieving more sustainability or buy further allowances. With the higher cost of carbon, innovative sustainable companies are benefiting. Moreover, introducing a federal carbon emissions tax in the United States would be one of the most effective ways to reduce emissions. It would allow the industries to self-regulate and consumers to change their habits faster.
9. Action: Develop capitalism as a platform for positive change
While capitalism in its nature demands expansion and puts tremendous pressure on our planet, the holding organization needs to play an integral part in it to change the current stream of capital. Massive capital is being invested in zero-yielding bonds and sales and marketing. This capital should be allocated to R&D-driven entrepreneurs who want to change the world.
The company will need to raise substantial capital from institutional and retail investors to fulfill its mission. In the beginning, the most effective way to raise capital is by launching multiple special-purpose acquisition companies (SPACs) with a size of approx. $500 million to $1 billion. The company should launch around 2–3 SPACs annually to target high potential climate change tech companies. It allows the sponsor company (holding company) to efficiently raise the necessary capital from long-term investors and invest in climate tech companies.
After building a successful track record of many successful SPACs, the company should go public. The IPO will enable it to raise even more capital and make its unique investment strategy and philosophy investable for everybody like Warren Buffett’s Berkshire Hathaway. The public company should share its master plan (framework) online to enable full transparency and accountability to its shareholders and stakeholders.
Portfolio companies should retain earnings and reinvest them into the business to support further innovation and growth. Retained earnings will work as an element of compound interest and can lead to further capital appreciation.
Conclusion — The power of reflection
Immense commitment, collaboration, and ingenuity will be necessary to depart the dangerous path we are on. The holding company will always need to reframe the question of what really matters and why it exists. It will need to refine its framework to support better its ultimate purpose. Here is the framework in summary:
- Define mission as “accelerating the progress towards a carbon-negative future” and acknowledge the replacement, reducing and removing strategies
- Establish an investment thesis based on quantitative and qualitative models
- Evaluate innovation platforms measured by positive climate impact
- Identify high-potential markets by TAM and market adoption (price, demand, innovation)
- Select the category winner (sustainable competitive advantage and management team)
- Manage/govern portfolio companies (three-stage plan, ESG reporting, corporate platform)
- Initiate the next Manhattan Project
- Embrace sustainable public discourse, government funding, and climate policies
- Develop capitalism as a platform for positive change (Next Berkshire Hathaway)
Despite the current uncertainties, the organization has to look forward to the future. The tactics may change slightly over time, but its goals should remain the same: Accelerate the transition to a carbon-negative future while generating compounding returns, economically and socially, for the long term: Let’s compound sustainability!