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Institutional Research Group

Analysis

PitchBook Data, Inc.

John Gabbert Founder, CEO

Nizar Tarhuni Vice President, Institutional

Research and Editorial

Daniel Cook, CFA Head of Quantitative Research

PitchBook is a Morningstar company providing the most comprehensive, most

accurate, and hard-to-find data for professionals doing business in the private markets.

Emerging Sustainable

Investing Opportunities:

Carbon Utilization

How carbon utilization can create a double bottom

line of financial returns and positive social and

environmental Impact

Key takeaways

• As usage of carbon capture technologies continues to rise, the question of what

to do with captured carbon has grown more urgent, and carbon utilization is part

of the answer.

• The financial return potential of this opportunity is dictated in large part

by carbon capture’s proliferation, government funding and regulatory

support, challenges faced by its main alternative, and corporate

sustainability commitments.

• Carbon utilization has the potential to create positive environmental Impacts

by enabling a more sustainable lifecycle for captured carbon, providing lower-

carbon substitutes for traditional products, and reducing reliance on an

alternative that presents environmental risks in addition to social ones, creating

a minor social Impact potential as well.

Anikka Villegas

Analyst, Fund Strategies &

Sustainable Investing

anikka.villegas@pitchbook.com

Insights developed in collaboration with

John MacDonagh, Senior Analyst, Emerging

Technology at PitchBook Data.

Key takeaways 1

Introduction 2

Financial return potential 3

Environmental and social Impact

potential

Contents

Published on December 11, 2023

Publishing

Daa

Alyssa Williams

Senior Data Analyst

pbinstitutionalresearch @pitchbook.com

Emerging Sustainable Investing Opportunities: Carbon Utilization

Introduction

Venture capital, often serving as the incubator of emerging technologies, is well

positioned to invest with positive social and environmental Impact goals in mind.

VCs can draw on their expertise and resources to foster the businesses that have

the greatest potential for both Impact and returns, especially when keeping an eye

toward companies for which success necessarily marries the two. This fact has not

gone unnoticed by VCs, which represent 42.7% of the total count of Impact funds

raised since 2007.1 Yet, the landscape of prospective opportunities is expansive and

rapidly evolving, making it difficult to keep track of which ones have the greatest

financial—and Impact—return potential.

Emerging opportunities often go beyond the investment areas traditionally

associated with sustainability, such as solar energy or electric vehicles,

encompassing a host of lesser-known technologies. Even within the familiar themes,

there are niche investment opportunities developing. In this analyst note series, we

surface opportunities across emerging technology verticals such as agtech, mobility

tech, and carbon & emissions tech that we believe are poised to perform well within

the next decade, from both financial-return and Impact-return perspectives. In

doing so, we hope to help guide VCs pursuing the “double bottom line” through the

complex landscape to the most fruitful opportunities.

For each analyst note in the series, insights are developed in collaboration with a

PitchBook Emerging Technology Analyst covering the relevant vertical, using their

subject matter expertise and previous research, as well as some external resources,

to inform our perspective on the space. We discuss the opportunity’s major drivers

of return potential as well as the investment risks and obstacles it faces. We also

explore its social and environmental Impact potential, how the opportunity fits

into various IRIS+ Impact themes,2 and potential metrics to help quantify those

Impacts. Ultimately, the aim of this research is to give VCs and their LPs a better

understanding of how the opportunities align to their return and sustainability goals

and provide companies operating in these spaces a sense of how to optimize and

communicate their social and environmental Impact.

This analyst note focuses on carbon utilization, which encompasses a wide range of

developing approaches to making use of captured carbon dioxide (CO2) and is the

main alternative to carbon sequestration. Historically, CO2 was largely used in urea

production and enhanced oil recovery, the latter of which involved pumping CO2 into

oil fields to increase the extraction of oil and extend the lifetime of the oil fields.3

However, the end products of up-and-coming carbon-utilization companies fit into

three major categories: industrial chemicals, fuels, and construction materials. With

decarbonization now a major investment theme in both PE and VC, carbon capture

capacity is growing, and the question of what to do with carbon once it has been

trapped is more pressing. Since 2013, 46 VC-backed companies have entered the

carbon-utilization space with $1.1 billion in investment.

1: For more Impact fundraising data, read our Q4 2022 PitchBook Analyst Note: Impact Investing Update.

2: The Impact Reporting and Investing Standards (IRIS+) framework, created by the Global Impact Investing Network (GIIN), is an industry-leading

methodology aiding investors in sorting Impact investments by the different types of Impact they are targeting. You can learn more about the IRIS+

categories, what they include, and what they do not in “IRIS+ Thematic Taxonomy,” Global Impact Investing Network, April 2023.

3: For more detail on carbon utilization approaches, read our Q1 2023 PitchBook Analyst Note: Carbon Dioxide as a Source of Value.

Emerging Sustainable Investing Opportunities: Carbon Utilization

4: “Overview of Greenhouse Gases,” US Environmental Protection Agency, October 10, 2023.

5: “Climate Change 2022: Mitigation of Climate Change,” IPCC, 2022, accessed November 29, 2023.

6: “CO2 Removal Is Essential, Along With Emissions Cuts, to Limit Global Warming—Report,” University of Oxford, January 19, 2023.

7: “What Is Carbon Capture and Storage and How Does It Work?” Global CCS Institute, accessed November 29, 2023.

Source: PitchBook • Geography: Global

*As of November 22, 2023

$16.6

$13.8

$70.5

$12.8

$2.7

$33.7

$88.2

$68.8

$338.9

$284.1

$203.7

10 12

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023*

Deal value ($M) Deal count

Carbon utilization VC deal activity

Financial return potential

Atmospheric carbon dioxide is the primary contributor to anthropogenic global

warming,4 which has far-reaching effects on the welfare and continuity of the

environment and society. In order to halt, let alone reverse, climate change, it will

be necessary to prevent continued emissions of carbon into the atmosphere in

addition to removing a portion of what has already been released.5, 6 Carbon capture

technologies are an imperfect solution to these monumental problems. Although

they have a ways to go to reach the efficiency levels necessary to justify widespread

implementation, there has been significant investment in their development and

use, with broad support from the fossil fuels industry, which stands to benefit

enormously from proof of their feasibility. As usage increases, the need for a place

to put captured carbon will as well, and carbon utilization can help meet this need,

reaping the rewards of heightened and growing demand.

Despite often being grouped as one, carbon capture, utilization, and storage

(CCUS) involve different technologies and business models. Carbon capture is the

technology that traps CO2, either through point-source capture at the location of

emissions, such as an industrial facility, or direct air capture from the atmosphere.7

Once carbon is captured, the capturer must find something to do with it, and there

are two options: carbon storage or carbon utilization. The capturer can either do

these itself or—more frequently—outsource to another company. Carbon storage

involves the transportation of carbon to sites where it is injected into underground

rock formations for permanent storage. As these sites require a certain geology

and economic viability, which may not exist at or near the location of capture,

transportation costs can be substantial. The main source of revenue for carbon-

storage-focused companies is the payment they receive from carbon capturers to

take their captured carbon, although government incentives such as tax credits per

metric ton stored can also play a role in the business model.

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PitchBookData,Inc.EmergingSustainableInvestingOpportunities:JohnGabbertFounder,CEOCarbonUtilizationNizarTarhuniVicePresident,InstitutionalResearchandEditorialHowcarbonutilizationcancreateadoublebottomDanielCook,CFAHeadofQuantitativeResearchlineoffinancialreturnsandpositivesocialandenvironmentalImpactInstitutionalResearchGroupPitchBookisaMorningstarcompanyprovidingthemostcomprehensive,mostAnalysisaccurate,andhard-to-finddataforprofessionalsdoingbusinessintheprivatemarkets.AnikkaVillegasKeytakeawaysAnalyst,FundStrategies&SustainableInvesting•Asusageofcarboncapturetechnologiescontinuestorise,thequestionofwhatanikka.villegas@pitchbook.comtodowithcapturedcarbonhasgrownmoreurgent,andcarbonutilizationispartoftheanswer.InsightsdevelopedincollaborationwithJohnMacDonagh,SeniorAnalyst,Emerging•ThefinancialreturnpotentialofthisopportunityisdictatedinlargepartTechnologyatPitchBookData.bycarboncapture’sproliferation,governmentfundingandregulatorysupport,challengesfacedbyitsmainalternative,andcorporateDatasustainabilitycommitments.AlyssaWilliamsSeniorDataAnalyst•CarbonutilizationhasthepotentialtocreatepositiveenvironmentalImpactsbyenablingamoresustainablelifecycleforcapturedcarbon,providinglower-pbinstitutionalresearch@pitchbook.comcarbonsubstitutesfortraditionalproducts,andreducingrelianceonanalternativethatpresentsenvironmentalrisksinadditiontosocialones,creatingPublishingaminorsocialImpactpotentialaswell.DesignedbyCarolineSuttiePublishedonDecember11,2023ContentsKeytakeaways1Introduction2Financialreturnpotential3EnvironmentalandsocialImpact7potential1EmergingSustainableInvestingOpportunities:CarbonUtilizationIntroductionVenturecapital,oftenservingastheincubatorofemergingtechnologies,iswellpositionedtoinvestwithpositivesocialandenvironmentalImpactgoalsinmind.VCscandrawontheirexpertiseandresourcestofosterthebusinessesthathavethegreatestpotentialforbothImpactandreturns,especiallywhenkeepinganeyetowardcompaniesforwhichsuccessnecessarilymarriesthetwo.ThisfacthasnotgoneunnoticedbyVCs,whichrepresent42.7%ofthetotalcountofImpactfundsraisedsince2007.1Yet,thelandscapeofprospectiveopportunitiesisexpansiveandrapidlyevolving,makingitdifficulttokeeptrackofwhichoneshavethegreatestfinancial—andImpact—returnpotential.Emergingopportunitiesoftengobeyondtheinvestmentareastraditionallyassociatedwithsustainability,suchassolarenergyorelectricvehicles,encompassingahostoflesser-knowntechnologies.Evenwithinthefamiliarthemes,therearenicheinvestmentopportunitiesdeveloping.Inthisanalystnoteseries,wesurfaceopportunitiesacrossemergingtechnologyverticalssuchasagtech,mobilitytech,andcarbon&emissionstechthatwebelievearepoisedtoperformwellwithinthenextdecade,frombothfinancial-returnandImpact-returnperspectives.Indoingso,wehopetohelpguideVCspursuingthe“doublebottomline”throughthecomplexlandscapetothemostfruitfulopportunities.Foreachanalystnoteintheseries,insightsaredevelopedincollaborationwithaPitchBookEmergingTechnologyAnalystcoveringtherelevantvertical,usingtheirsubjectmatterexpertiseandpreviousresearch,aswellassomeexternalresources,toinformourperspectiveonthespace.Wediscusstheopportunity’smajordriversofreturnpotentialaswellastheinvestmentrisksandobstaclesitfaces.WealsoexploreitssocialandenvironmentalImpactpotential,howtheopportunityfitsintovariousIRIS+Impactthemes,2andpotentialmetricstohelpquantifythoseImpacts.Ultimately,theaimofthisresearchistogiveVCsandtheirLPsabetterunderstandingofhowtheopportunitiesaligntotheirreturnandsustainabilitygoalsandprovidecompaniesoperatinginthesespacesasenseofhowtooptimizeandcommunicatetheirsocialandenvironmentalImpact.Thisanalystnotefocusesoncarbonutilization,whichencompassesawiderangeofdevelopingapproachestomakinguseofcapturedcarbondioxide(CO2)andisthemainalternativetocarbonsequestration.Historically,CO2waslargelyusedinureaproductionandenhancedoilrecovery,thelatterofwhichinvolvedpumpingCO2intooilfieldstoincreasetheextractionofoilandextendthelifetimeoftheoilfields.3However,theendproductsofup-and-comingcarbon-utilizationcompaniesfitintothreemajorcategories:industrialchemicals,fuels,andconstructionmaterials.WithdecarbonizationnowamajorinvestmentthemeinbothPEandVC,carboncapturecapacityisgrowing,andthequestionofwhattodowithcarbononceithasbeentrappedismorepressing.Since2013,46VC-backedcompanieshaveenteredthecarbon-utilizationspacewith$1.1billionininvestment.1:FormoreImpactfundraisingdata,readourQ42022PitchBookAnalystNote:ImpactInvestingUpdate.2:TheImpactReportingandInvestingStandards(IRIS+)framework,createdbytheGlobalImpactInvestingNetwork(GIIN),isanindustry-leadingmethodologyaidinginvestorsinsortingImpactinvestmentsbythedifferenttypesofImpacttheyaretargeting.YoucanlearnmoreabouttheIRIS+categories,whattheyinclude,andwhattheydonotin“IRIS+ThematicTaxonomy,”GlobalImpactInvestingNetwork,April2023.3:Formoredetailoncarbonutilizationapproaches,readourQ12023PitchBookAnalystNote:CarbonDioxideasaSourceofValue.2EmergingSustainableInvestingOpportunities:CarbonUtilizationCarbonutilizationVCdealactivity21251914125410$16.6233$13.8$70.5$12.8$2.7$33.7$88.2$68.8$338.9$284.1$203.720132014201520162017201820192020202120222023Dealvalue($M)DealcountSource:PitchBook•Geography:GlobalAsofNovember22,2023FinancialreturnpotentialAtmosphericcarbondioxideistheprimarycontributortoanthropogenicglobalwarming,4whichhasfar-reachingeffectsonthewelfareandcontinuityoftheenvironmentandsociety.Inordertohalt,letalonereverse,climatechange,itwillbenecessarytopreventcontinuedemissionsofcarbonintotheatmosphereinadditiontoremovingaportionofwhathasalreadybeenreleased.5,6Carboncapturetechnologiesareanimperfectsolutiontothesemonumentalproblems.Althoughtheyhaveawaystogotoreachtheefficiencylevelsnecessarytojustifywidespreadimplementation,therehasbeensignificantinvestmentintheirdevelopmentanduse,withbroadsupportfromthefossilfuelsindustry,whichstandstobenefitenormouslyfromproofoftheirfeasibility.Asusageincreases,theneedforaplacetoputcapturedcarbonwillaswell,andcarbonutilizationcanhelpmeetthisneed,reapingtherewardsofheightenedandgrowingdemand.Despiteoftenbeinggroupedasone,carboncapture,utilization,andstorage(CCUS)involvedifferenttechnologiesandbusinessmodels.CarboncaptureisthetechnologythattrapsCO2,eitherthroughpoint-sourcecaptureatthelocationofemissions,suchasanindustrialfacility,ordirectaircapturefromtheatmosphere.7Oncecarboniscaptured,thecapturermustfindsomethingtodowithit,andtherearetwooptions:carbonstorageorcarbonutilization.Thecapturercaneitherdotheseitselfor—morefrequently—outsourcetoanothercompany.Carbonstorageinvolvesthetransportationofcarbontositeswhereitisinjectedintoundergroundrockformationsforpermanentstorage.Asthesesitesrequireacertaingeologyandeconomicviability,whichmaynotexistatornearthelocationofcapture,transportationcostscanbesubstantial.Themainsourceofrevenueforcarbon-storage-focusedcompaniesisthepaymenttheyreceivefromcarboncapturerstotaketheircapturedcarbon,althoughgovernmentincentivessuchastaxcreditspermetrictonstoredcanalsoplayaroleinthebusinessmodel.4:“OverviewofGreenhouseGases,”USEnvironmentalProtectionAgency,October10,2023.5:“ClimateChange2022:MitigationofClimateChange,”IPCC,2022,accessedNovember29,2023.6:“CO2RemovalIsEssential,AlongWithEmissionsCuts,toLimitGlobalWarming—Report,”UniversityofOxford,January19,2023.7:“WhatIsCarbonCaptureandStorageandHowDoesItWork?”GlobalCCSInstitute,accessedNovember29,2023.3EmergingSustainableInvestingOpportunities:CarbonUtilizationWithmorecapturedCarbonutilization,whichinvolvescreatingandsellingproductsusingcapturedcarbon,demandforcarboncarbon,oftenrequireslesscarbontransportation,asutilizerscanlocalizetheirutilizationandstorageoperationsclosetothesourceofthecapturedcarbon.Themainrevenuesourcewillincrease,andcarbon-forcarbonutilizersisthesaleoftheirendproducts,butaswithcarbonstorage,utilizationcompaniesmaygovernmentincentivesmayalsobeacomponent.Whilechargingcarboncapturersbeabletoearnmorethroughforcarbonofftakemaynotbetheprimaryrevenuesourceformanycarbon-governmentincentivesorutilizationbusinessestoday,thisdoesnotmeanthatitwillnotbecomeamorebychargingtotakeitoffthecommonpracticeinthefuture.Itisalsoworthnotingthatcarbonutilizersmustcapturer’shands,positivelycompetewithotherproducersofthesameorsimilarendproductsastheirs.Forimpactingthebottomline.example,intheconstructionmaterialscategory,acement-producingcarbon-utilizationcompanymustcompetewithothercementproducers,carbon-utilizingornot.Similarly,afuel-producingcarbon-utilizationcompanywillhavetocompetewithotherfuelproducers.Assuch,carbon-utilizationcompanieswithendproductsindifferentcategoriesexperiencevarying,market-specificreturndrivers.Thecompanieswiththestrongestreturnpotentialarethosethatcancompeteonpriceandqualityinadditiontobenefitingfromtheothertailwindsdiscussedinthisreportandpositivemarketdynamics.Therearefourcentralfactorsinfluencingthereturnpotentialofthecarbon-utilizationspaceasawhole:carboncapture’sproliferation,governmentfundingandregulatorysupport,challengesfacedbyitsmainalternative,andcorporatesustainabilitycommitments.Onthefirstpoint,carboncaptureisontherise.Atpresent,carboncaptureandremoval-relatedtechisresponsiblefor0.1%oftheroughly2billiontonsofCO2removedfromtheatmosphereeachyear.8However,limitingglobaltemperatureincreasesto1.5to2.0degreesCelsiuswilllikelyrequiremoresubstantialimplementationofthesetechnologies.Usageisanticipatedtogrowdramaticallyinthecomingyears,potentiallysixfoldby2030.9Withmorecapturedcarbon,demandforcarbonutilizationandstoragewillincrease,andcarbon-utilizationcompaniesmaybeabletoearnmorethroughgovernmentincentivesorbychargingtotakeitoffthecapturer’shands,positivelyimpactingthebottomline.Ofcourse,thecostofotherinputsinproductionwillalsoinfluenceprofitability,butascarbon-utilizationtechnologiesgrowmoresophisticatedandefficient,morecarbonwilllikelybeabletobeutilizedrelativetothecostsoftheseotherinputs,atleastforsometypesofcarbonutilization.Second,governmentfundingandregulatorysupportforCCUShasbeenrobustandexpanding.Thisfundingprovidesanedgeforcarbonutilizersincompetitionwithproducersofthesametypeofproductwithoutthecarbon-utilizationcomponent,asitcanallowutilizerstochargelessfortheirproductorreinvestinoperationalimprovements.IntheUS,theInfrastructureInvestmentandJobsActallocated$12.0billiontoCCUStechnology,10andtheInflationReductionActprovidedforadditionaltaxcreditsforcarbonstorageandutilization,extendingthedeadlineforqualificationforthecreditsandlooseningthecapacityrequirementsforeligibleprojects.11TheUKalsorecentlyannounced£20billioninfundingforaCCUSprogram,andChinahasaround80CCUS-relatedplans,standards,roadmaps,and8:“GuestPost:TheStateof‘CarbonDioxideRemoval’inSevenCharts,”CarbonBrief,January19,2023.9:“GlobalCarbonCaptureCapacityDuetoRiseSixfoldby2030,”BloombergNEF,October18,2022.10:“InfrastructureandJobsAct:CarbonCapture,UtilizationandStorageInvestment,”IEA,May25,2023.11:“InflationReductionAct2022:Sec.13104ExtensionandModificationofCreditforCarbonOxideSequestration,”IEA,November17,2022.4EmergingSustainableInvestingOpportunities:CarbonUtilizationCorporatecommitmentsotherpolicies,aportionofwhichhaveinvestmentandfinancingprovisions.12,13tosustainabilityandtheOthergeographies,suchastheEU,arealsotakingstepstoacceleratepermittingtransitiontonetzerohelpanddefinegoalsaroundCCUS.14promotedemandfortheendproductsofcarbon-Thethirdkeyfactorincarbonutilization’sreturnpotentialisthatcarbonstorageutilizationcompaniesandfacesseriouschallengesthatcreateopportunitiesforalternatives.Carbonmayallowthemtochargeatransportandstorageiscapital-intensive,necessitatingcomplexinfrastructureand“greenpremium.”ongoingmeasuring,monitoring,andmanagement,andfurtherrequireshuman-capitalexpertisethatisfairlylimitedtoday.15Shouldtheseaspectschangeduetotechnologicaldevelopments,labormarketshifts,orsupplementalgovernmentsupport,theneedforcarbonutilizationmaydecrease.However,itisprobablethatbothcarbonstorageandcarbonutilizationwillbeneededtoaccommodatethelargeamountsofcarbonprojectedtobecapturedinthecomingyears.Regardless,carbonstoragewillnotbeviableforallgeographiesandlocations,andthelandinwhichitcanbestoredisalimitedresource.Rockmusthavesufficientporousspaceforliquefiedcarbontobeinjected,buttoomanyvoids,suchascavernsorholes,increasethelikelihoodofaleak.Thefurtherthecarbonmustbetransportedtobestored,themoreexpensiveitis,andasthenumberofsuitablesitesbecomesmorelimited,itwillhavetobemovedgreaterdistances,increasingcosts.Althoughtheglobalpotentialcapacityforstoragefarexceedswhatisnecessarytoachievenetzero,16accessibilityandcommercialviabilitywillcreateconstraints.Lastly,corporatecommitmentstosustainabilityandthetransitiontonetzerohelppromotedemandfortheendproductsofcarbon-utilizationcompaniesandmayallowthemtochargea“greenpremium.”Makingtheshifttoutilizingmoresustainableproductsisaconcretestepthatcompaniescantaketoreducenegativeenvironmentalimpact,aidingtheminavoidinggreenwashingclaims.Forexample,capturedcarboncanbeusedtocreateaviationfuel,providingalower-carbonenergysolutioninasectorthatisnotoriouslydifficulttodecarbonize.Airlinesutilizingthisfuelcanbrandaroundthesustainabilityoftheiroperations,whichmayimprovetheirstandingamongpotentialpassengers,asconsumersincreasinglycareabouttheclimateimpactofthecompaniesfromwhichtheymaketheirpurchases.Theabilitytochargeagreenpremiumwillbepresentonlyforsomeproductsusedinsomeindustries,though,soitwillnotbenefitalltypesofcarbonutilizationuniformly.Fromariskviewpoint,carbonutilizationhasafewvulnerabilities.First,itissubjecttopoliticalandregulatoryrisks,whichtakeseveralforms.Lossofgovernmentfundingorharshregulationofcarboncapturecouldconstrainthesupplyofcarbonfeedstocks,eliminatingamajortailwindforthespace.Additionally,materiallydisproportionategovernmentsupportforcarbonstorageovercarbonutilization,thusimprovingthecostofcarbonstoragecomparedtoitsalternative,wouldlikelydrivedowndemandforcarbonutilization.Similarly,lossoffundingandregulatorysupportforcarbonutilizationwouldhaveanegativeimpactonreturnsinthespace,12:“GovernmentProvidesaSpringboardtoUKCCUSIndustryWith£20BillionforEarlyDeployment,”CCSA,March15,2023.13:“GlobalCarbonCaptureandStorageRegulations:ADriverorBarriertoCCSProjectDevelopment?”NortonRoseFulbright,AlistairBlack,etal.,September2023.14:“NetZeroIndustryAct:CCUS,”IEA,June12,2023.15:“ScalingtheCCUSIndustrytoAchieveNet-ZeroEmissions,”McKinsey&Company,KrystaBiniek,etal.,October28,2022.16:“TheWorldHasVastCapacitytoStoreCO2:NetZeroMeansWe’llNeedIt,”IEA,RaimundMalischekandSamanthaMcCulloch,April1,2021.5EmergingSustainableInvestingOpportunities:CarbonUtilizationGivenitpossessesthegiventheaforementionedadvantagesitconfers.Theseoutcomesareunlikely,approvalofthefossilthough.Givenitpossessestheapprovalofthefossilfuelindustry,CCUShasmorefuelindustry,CCUSbuy-infromconservativesthanmostothersustainability-relatedinvestments,andhasmorebuy-infromveryfewgovernmentsaretakingan“either-or”approachwhenitcomestocarbonconservativesthanmostutilizationversuscarbonstorage.Italsobearsreiteratingthatcarbon-utilizationothersustainability-relatedcompaniesproducingdifferentendproductsaresubjecttosomedistinctrisks,investments,andveryfewincludingregulatoryones.Forexample,whilesomeconstructionmaterialssuchgovernmentsaretakinganasconcretearethoughttobenefitfromtheinjectionofcarbonduringthemixing“either-or”approachwhenitprocess,creatingatheoreticallystrongerproduct,thesetypesofmaterialsarecomestocarbonutilizationsubjecttogreaterregulatoryscrutiny,particularlyifloadbearing.Thiscanmeanversuscarbonstorage.yearsofwaitingforapprovalandpermitting,animportantconsiderationforinvestorswithlesspatientcapital.Thesecondmajorriskiscompetition.Inadditiontothechallengeofgoinghead-to-headagainstincumbents,ifcarbon-utilizationbusinessesproveprofitable,morewillenterthemarket,creatingmoreintensecompetitionontwofronts.First,shouldcarbonutilizersbeabletochargeforcarbonofftake,moreentrantswilllikelyresultinincreaseddemandforcapturedcarbon,decreasingtheamounttheycancharge.Itcouldalsoeventuallyresultinscarcityofcapturedcarbon,whichisacoreandcriticalinputforcarbon-utilizationcompanies,thushamperingproduction.Nevertheless,thisisunlikelytomanifestinthenearfutureduetothesmallamountofcarbonusedbymostendproducts,whichissomethingthatproducersareactivelyattemptingtoscale.Second,marketentrantswillincreasethesupplyofproductscreatedwithcarbon,alsoforcingdownthepricesatwhichtheycanbesold.Totheextentthatsustainability-relatedbrandingofcarbon-utilizationcompaniesoffersanupperhandagainstnon-carbon-utilizingcompetitors,thiswillalsobedilutedwithmorecompetitorsbrandingaroundthesame.Third,carbon-utilizationcompaniesaresubjecttomacroeconomicandmarketforcesinfluencingdemandfortheirendproducts.Regardlessofwhethercement-producingcarbon-utilizingcompaniescancompetewithincumbentsornewentrants,ifthereisarecessionresultinginthewidespreadcessationofconstruction,thosecompaniesmaynotbeabletogeneraterobustreturns.Thesamegoesforbusinessesinthecarbon-utilizingindustrialchemicalsandfuelsspaces,andanyothercarbon-utilizationtechnologiesthatemerge.Idiosyncraticandmacroeconomicdemand-sideriskswillevolveandfluctuateovertimeandcanbeidentifiedandevaluatedthroughresearch.Whilesomeoftheseriskscanbemanaged,otherscannot,soaswithanyotherinvestment,assetmanagersmustmakeajudgmentcallregardingwhetherrisk-adjustedreturnpotentialisattractive,bearinginmindthecurrentmacroeconomicenvironmentandmarketconditions.Thefinalriskrelatestooneoftheotherkeyinputsinproductionformanycarbon-utilizationcompanies,whichisenergy.CO2isalow-energymolecule,soproducersoffuelsand,toalesserextent,certainchemicals,mayrequiresubstantialenergyconsumptiontoconvertittoahigh-energymoleculesuitabletothoseenduses.Incontrast,constructionmaterialsrequirelittletonone,withCO2typicallyconvertedintolow-energycarbonates.Forcompaniesthatuselargequantitiesofenergy,fluctuationsinenergypricescangreatlyimpactprofitability,particularlyifmargins6EmergingSustainableInvestingOpportunities:CarbonUtilizationarealreadythin.Furthermore,asignificantcomponentofcarbonutilization’sgreencredentialsisdependentontheenergyusedinproductionbeinglowcarbon,whichwillaffectcarbonutilizers’abilitytoscaleifcostsarehighandthesupplyislimited.RecenteventssuchastheEuropeanenergycrisis,whichhadaglobalrippleeffectonenergyprices,demonstratethemagnitudeoftheimpacttheseriskscanhaveoncertainindustries.17Withtechnologicaldevelopmentfocusedonmakingconversionofcarbonintoahigh-energymoleculemoreefficient,thisriskmaycometohavelessweightastimegoeson.Nonetheless,whenexaminingreturnpotential,thecostoftheseotherinputsinproductionmustalsobeconsidered.EnvironmentalandsocialImpactpotentialRelevantIRIS+categories18ClimateEnergyLandRealestateCarbonutilizationcurrentlyhasamoderateenvironmentalImpactpotentialthatisanticipatedtoscalewithinthenext10yearsastechnologicaldevelopmentandadoptionincrease.TherearethreemajorchannelsthroughwhichthespacecangeneratetheseImpacts,withthesecondbeingamoreminoropportunitythantheothertwo.Thefirstmajoravenueisbyenablingamoresustainablelifecycleforcapturedcarbon.Whileopinionsontheefficacyandinvestment-worthinessofcarboncapturevary,itisbeingimplementedonaglobalscale,anditspopularizationwillcomewithitsownramifications.Iftheonlyoptionformanagingcapturedcarbonispumpingitbackintoafinitenumberofsuitable,accessible,andcommerciallyviablesites,carboncapturewillnotbealong-termsolutiontotheproblemofanthropogenicclimatechange.Byofferingotherpathwaysforcapturedcarbon,carbonutilizationcandecreasepressureoncarbonstorageandhelpextendtheavailabilityofsitesintothefuture.Relatedly,carbonstoragedoespresentsomeenvironmentalrisksandcoststhatcarbonutilizationdoesnot.Forone,carbonstorageofteninvolvesmoreextensivetransportationthancarbonutilization,usinglandandwatervehiclesorpipelines.Ifthevehiclesarenotelectricorusingcarbon-neutraltechnologies,theycontributetoCO2emissions,attenuatingthecarbon-reducingeffectsoftheentireprocess.Buildingpipelinescandisruptecosystems,contributingtobiodiversityloss,andtheleakorruptureofpipelinescancontaminateaquifers.19Thesamegoesforcarbonstoredunderground,whichcanadditionallystimulateseismicactivity.Someoftheseenvironmentaldamagescanbeprevented,butwithlesstransportationinvolvedincarbonutilization,itisthelower-riskoption.Thesetrade-offsare17:“‘Crippling’EnergyBillsForceEurope’sFactoriestoGoDark,”TheNewYorkTimes,LizAlderman,September19,2022.18:“IRIS+ThematicTaxonomy,”GlobalImpactInvestingNetwork,April2023.19:“CarbonCaptureandStorage,”CIEL,2022,accessedNovember29,2023.7EmergingSustainableInvestingOpportunities:CarbonUtilizationdifficulttoquantifybutarerelevantregardless.Beyondtherisksalreadydiscussedinthereturnpotentialsection,whichaffecttheviabilityofthebusinessesandthustheirabilitytogeneratepositiveImpact,oneofthemostsignificantthreatstoachievingnet-positivesocialandenvironmentaloutcomesisthepotentialharmproductscouldcreateinotherways.Carbon-utilizationcompaniesthatminimizethetransportdistancefromthesiteofcapturetotheproductionfacility,minimizecarbonleaks,andcreateproductsthatdonotcontributetoenvironmentaldamagearemostlikelytocreatethistypeofpositiveImpactinpractice.AnotherdimensionofpotentialenvironmentalImpactisthattheproductscreatedusingcapturedcarbonareoften,overall,lesscarbon-intensivethanthesameproductscreatedwithoutcapturedcarbon.TheproductsareoftenfunctionallyrecyclingCO2,withsomeadditionalenergyusedtoconvertthemtoausableproduct.Skepticsarguethattheclimatebenefitofcapturingthecarbonisdiminishedwhenitisreleasedbackintotheatmospherethroughasecondaryuse,butthisargumentappliesmoretocarbon-to-fuelsthanitdoestocarbon-to-construction-materials,asmostconstructionmaterialsholdcarbonindefinitely.Thismakescarbon-utilizingconstructionmaterialsagoodfitforthedevelopmentofgreenbuildings.Evenforfuelsandchemicalsproducedthroughcarbonutilization,productsarelowercarbonthantraditionalalternativesandusefulinthetransitiontonetzerountiltrulycarbon-neutralvariantsarepossible.ToamplifythisImpact,renewableenergycanbeusedinproduction.Continuedtechnologicaladvancementsmayalsoreducetheamountofenergyrequiredinthefuture,aswellasexpandthelistofproductsthatcapturedcarboncanbeusedtocreate,heighteningtheopportunity’sfutureImpactpotential.ThesocialImpactpotentialofcarbonutilizationislowandlikelywillremainso,astheImpactsaretiedpredominantlytoavoidingthepossibleharmsofcarbontransportationandstorage.Beyondtheenvironmentaldamagethatisriskedthroughadditionaltransportviapipelineandgroundstorage,releasesofcompressedCO2canresultintheasphyxiationofhumansandanimalsaroundthesite.20ReducingtheriskofthesepublichealthoutcomescouldbeviewedasonedimensionofpotentialImpactforcarbonutilization,butthestrengthofthisImpactisboundedbecausethesereleaseeventsareinfrequentandrarelyresultinmortality.Fromanotherperspective,carbonutilizationcanenablemoresustainablelandusagebyreducingthequantityandlengthofcarbonpipelines.Thesociallenstothisissueisthattherearecompetingneedsthatrequireland,suchasgrowingfoodandprovidingshelter.Thus,pipelinescanbedisruptivenotonlytolocalecosystemsbutalsotothecommunitiesthroughwhichtheyarebuiltiftheyrepurposelandgeneratingothersocialbenefits,particularlyifcompletedusingeminentdomain.Ascarboncapture’spopularitycontinuestorise,theseissueswillscale,sothebenefitofcarbonutilizationasanalternativewillaswell.20:“CarbonCaptureandStorage,”CIEL,2022,accessedNovember29,2023.8OthernotesintheEmergingSustainableEmergingSustainableInvestingOpportunities:CarbonUtilizationInvestingOpportunitiesseriesPotentialImpactmetricsEmergingSustainableInvestingOpportunities:AsdiscussedinouranalystnoteESG,Impact,andGreenwashinginPEandCultivatedProteinVC,manyGPsandLPsconsidermeasurementanecessarycomponentofanImpactinvestmentprogram.ThefollowingmetricscanbeusedtoquantifytheDownloadthereportherepositivesocialandenvironmentalImpactsdiscussedinthereport,includingbycompaniespitchingtheirpositiveImpactstosustainability-orientedGPsandGPsEmergingSustainablecollectingImpactmetricsontheirportfoliosforinternaltrackingandmonitoring,InvestingOpportunities:amongothers.21TransitTech•TonsofCO2utilizedinproductionofgoodsDownloadthereporthere•TonsofCO2utilizedinproductionofgoodsallowingforlong-termstorage(suchasinconcrete)•Percentageofenergyusedforproductionthatisderivedfromrenewablesources(suchassolarandwind)•Averagedistanceofcarbontransportationtoproductionfacility•Numberofinadvertentcarbon-releaseincidentsEmergingSustainableInvestingOpportunities:Waste-to-FuelDownloadthereporthere21:Thesemetricsaretailoredtothespecificopportunitydiscussed,andassuch,someofthemwillnotaggregatemeaningfullyattheLPportfoliolevel.Youcanreadmoreabouttheuseofcustomizedversusstandardizedmetricsin“AssessingComparability:TheIndicatorsDilemma,”EVPA,GianlucaGaggiotti,etal.,September12,2022.COPYRIGHT©2023byPitchBookData,Inc.Allrightsreserved.Nopartofthispublicationmaybereproducedinanyformorbyanymeans—graphic,electronic,ormechanical,includingphotocopying,recording,taping,andinformationstorageandretrievalsystems—withouttheexpresswrittenpermissionofPitchBookData,Inc.Contentsarebasedoninformationfromsourcesbelievedtobereliable,butaccuracyandcompletenesscannotbeguaranteed.Nothinghereinshouldbeconstruedasinvestmentadvice,apast,currentorfuturerecommendationtobuyorsellanysecurityoranoffertosell,orasolicitationofanoffertobuyanysecurity.Thismaterialdoesnotpurporttocontainalloftheinformationthataprospectiveinvestormaywishtoconsiderandisnottoberelieduponassuchorusedinsubstitutionfortheexerciseofindependentjudgment.9

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