Way back in early 2020, Microsoft made some of the most ambitious climate pledges of any corporation on the planet. It pledged to be carbon negative by 2030 and by 2050 to remove from the atmosphere all the carbon the company has emitted either directly or by way of electricity consumption since its founding nearly 50 years ago. It also launched a $1 billion Climate Innovation Fund to accelerate the global development of technologies required to achieve these pledges. In this episode, Chad Reed chats with Brandon Middaugh – Senior Director of Microsoft’s Climate Innovation Fund. From direct air capture to sustainable aviation fuels to urban green buildings, the discussion spans several of the verticals into which Microsoft has invested a portion of the $500 million it has already deployed through its fund. In addition, Brandon touches on the value of industry coalitions, the role of climate philanthropy, and the importance of centering people at the heart of the climate movement.
Way back in early 2020, Microsoft made some of the most ambitious climate pledges of any corporation on the planet. It pledged to be carbon negative by 2030 and by 2050 to remove from the atmosphere all the carbon the company has emitted either directly or by way of electricity consumption since its founding nearly 50 years ago. It also launched a $1 billion Climate Innovation Fund to accelerate the global development of technologies required to achieve these pledges.
In this episode, Chad Reed chats with Brandon Middaugh – Senior Director of Microsoft’s Climate Innovation Fund. From direct air capture to sustainable aviation fuels to urban green buildings, the discussion spans several of the verticals into which Microsoft has invested a portion of the $500 million it has already deployed through its fund. In addition, Brandon touches on the value of industry coalitions, the role of climate philanthropy, and the importance of centering people at the heart of the climate movement.
Links:
Microsoft Climate Innovation Fund
Episode recorded: January 18, 2023
Email your feedback to Chad, Gil, and Hilary at climatepositive@hannonarmstrong.com or tweet them to @ClimatePosiPod.
Chad Reed: I'm Chad Reed.
Hillary Langer: I'm Hillary Langer.
Gil Jenkins: I'm Gil Jenkins.
Chad: This is Climate Positive.
Brandon Middaugh: We are first and foremost focused on how do we drive change in terms of improving the net zero trajectory of the market around us.
We're also looking for articulating a market of the future and having that match what Microsoft's market of the future is. It is important that we are bringing into reality the climate solutions that we believe are going to help the world achieve net zero on the timeframe that science tells us is necessary.
Chad: Way back in early 2020, Microsoft made some of the most ambitious climate pledges of any corporation on the planet. It pledged to be carbon negative by 2030 and by 2050 to remove from the atmosphere all the carbon the company has emitted either directly or by way of electricity consumption since its founding nearly 50 years ago. It also launched a $1 billion Climate Innovation Fund to accelerate the global development of technologies required to achieve these pledges.
In this episode, I sat down with Brandon Middaugh – Senior Director of Microsoft’s Climate Innovation Fund. From direct air capture to sustainable aviation fuels to urban green buildings, our discussion spans several of the verticals into which Microsoft has invested a portion of the $500 million it has already deployed through its fund. In addition, Brandon touches on the value of industry coalitions, the role of climate philanthropy, and the importance of centering people at the heart of the climate movement.
Chad: Brandon, thank you for joining us today. It's a pleasure to have you.
Brandon: Happy to be here, Chad.
Chad: First, I'd like to walk through your career path. You've worked with climate-driven developers, SunEdison, corporate buyers and investors, Microsoft, and the Climate Innovation Fund. At what point in your early life or career did you decide to devote your career to climate?
Brandon: There were a couple of milestones along the way for me in turning first towards sustainability and then towards climate. I grew up in Baltimore City and always appreciated every chance I got to get out of the city and to explore the natural world around me.
I grew up spending time in a historically Quaker community in Pennsylvania with my family and always really enjoyed learning about nature. When I was in my senior year of high school, having spent several years really focusing in on biology as a favorite subject, I realized, "Hey, wait a second, I could do this nature work as an actual career."
That was the first of a series of aha moments that had me turning first towards learning about the natural world through an ecosystem lens, through a lens of geosciences, and then realizing at that point that a lot of the conservation effort underway was going to be undone by the effects of climate change. That led me to focus in on where my efforts could have the biggest impact – energy, sustainable business, and so on.
Chad: Last year, we lost Madeleine Albright, an American diplomat and political scientist who was the first woman to serve as US Secretary of State. Before you went to business school, as part of your career, you spent a few years with the Albright Stonebridge Group, the consulting firm she co-founded. What did you learn from working with her and her firm, I guess, especially with regard to building a career as a woman in a traditionally male-dominated industry?
Brandon: My work at what was then the Albright Group and subsequently Albright Stonebridge Group after we went through a merger was a really formative time in my career. I was in my 20s, I was in Washington, DC. I was working for Secretary Albright, and I was also working for the team of partners she had assembled around her, Carol Browner, Suzy George, Jim O'Brien, Wendy Sherman.
These folks have been figures in Democratic administrations of the past and the current Democratic administration as well. Working with Secretary Albright was an incredible fortune for me in starting my career. Much has been said about the mentorship that Secretary Albright provided to the women around her, and there were both the things she said and then also the things she did, learning through observing her as well.
In terms of the things she said, she always said, "Sit at the table and interrupt." Both of those were about finding your voice and using it. That absolutely resonated with me, continues to resonate with me.
In terms of the things she did and the way that she brought her own lived experience to her work, it was really about standing for something, and in her life, she stood for freedom, she stood against authoritarianism. These are themes that are incredibly salient today, and for me, it was about really embracing the things I stand for and directing my career to have the type of impact I want to have.
I had the good fortune of traveling with her, experiencing time on the road, learning small tricks of the road warrior diplomacy that our State Department practices, and it was a really meaningful part of my career.
I went back to Washington, DC, for her funeral last spring and was able to reconnect with some of my mentors from that time period. I think that I've really sought to bring that broader lens of how the work that I do fits into the bigger picture at the global level.
Chad: Glad you got to return for her funeral. You've been running Microsoft's Climate Innovation Fund for about three years now. Can you tell us how the fund, first, I guess, fits into Microsoft's larger climate goals, the sustainability ecosystem, and why and how it was founded?
Brandon: Yes. In fall of 2019, we started to inventory the work we've been doing on sustainability and look ahead to the next decade. We set a goal to be carbon negative by 2030 and to be net zero water, net zero waste, to protect more land that we ourselves use for our own operations. This is really an intention to have a climate positive impact. The fund is a reflection of the fact that we can't do that alone and that what we do in our own operations is in many ways dependent on the market, on the technologies, and on the partners around us. The innovation fund that we launched is dedicated to driving climate impact by 2030 in underfunded markets, supporting climate equity, and investing in areas with shared alignment to our own decarbonization journey.
In terms of what we've done in this initial period of time with the fund, we took that mandate and translated it into a set of target technologies, an investment roadmap, and then we set about building our portfolio.
We now have nearly 50 investments in that portfolio. We've allocated more than half of the capital, and we've learned a lot along the way as well. I'm incredibly excited about what comes next. I think, for us, it was really about first setting a foundation for our own work and then also for the alliances and partnerships and co-investors we partner with. Now we're really in the phase of how do we scale that up from what we've done with that foundation setting.
Chad: I've actually been impressed with the alliances and co-investors that you've attracted. You typically, as I understand it, do not lead investment rounds, but you co-invest with other standalone VC firms or VC funds as part of larger institutional investors. How does the corporate VC approach differ from that of the more traditional standalone VC firms?
Brandon: There's a few dimensions to that, and our climate innovation fund invests separate from M12, which is Microsoft's corporate VC firm as well. Because we are a climate corporate VC, we have a pretty unique remit. Ours is an impact first remit. We are first and foremost focused on how do we drive change in terms of improving the net zero trajectory of the market around us. That is the north star to which we guide the fund strategy.
On a secondary basis, though, we're also looking for articulating a market of the future and having that match what Microsoft's market of the future is. It is important that we are not just aligned, but identifying and bringing into reality the climate solutions that we believe are going to help the world achieve net zero on the timeframe that science tells us is necessary.
To that end, we end up drawing on the engineering expertise across the company. One of the major differences, and I spend a lot of time speaking with standalone VCs who we invest with, but one of the major differences is that we lean upon the engineering expertise that's embedded throughout Microsoft's business, electrical engineering, mechanical engineering, devices expertise, energy IoT.
It's been incredible to see the way the company mobilizes around how do we build out the innovation ecosystem that we want to be operating in in 5, 10, 15 years. I think the major difference is that we have that expertise to draw on, and then we also have the mandate to really try to drive a market of the future that matches that vision of what the world will be at that point.
Chad: In terms of that impact mandate, how does that impact your investment horizon and the exit strategies that you look to achieve?
Brandon: We generally will have a longer investment horizon for certain of our investments. Our portfolio, though, it includes both fund manager investments, direct venture capital, and direct project finance, and some of those were really underwriting with an expectation of a market rate return. Then others were looking at through an impact lens of having identified a gap in the market, having identified that our capital is additional.
While we are not leading the rounds for the most part, certainly in the direct VC category where we're investing, it's really important to us that our capital is bringing more to the table than just a check. It's important that we're bringing some perspective on the end market and adding value in the sense of growing that end market.
Microsoft is an investor in climate solutions, but we're also a buyer. Our carbon-negative commitment means that we, through our supply chain and our suppliers, are potential early adopter of some of the solutions we're investing in. One of the realizations for me has been just how powerful those early contracts are for these emerging startups and how that procurement signal is what drives a lot of the growth and scale and then deployment-led innovation.
Chad: I want to touch on one of the companies that you're both an investor in and a procurer from. Before we get to that, I do want to talk about a lot of money, over $40 billion, by some estimates, have flowed into various climate tech funds over the last year or two. The sector, by some estimates, feels hot. Where are you still seeing gaps in the climate tech investing space? What parts of the ecosystem are still not receiving the attention or capital that they need?
Brandon: This is something that we initially mapped out in 2019, back before the relative flood of new capital in 2021 in particular. The gaps have evolved in that time period since we launched, and we've evolved our strategy with that. What we see today is that while capital flows, both private and public sector capital flows into climate have increased significantly. It's still nowhere near what the scientists and economists tell us is going to be necessary for the full net zero transition.
In particular, the areas that we see as underfunded include some of the specifically deep decarbonization sectors, hard-to-abate sectors, sustainable fuels, materials, green steel, and some of the long-duration energy storage. Some of those enabling technologies that are going to be necessary to global electrification and decarbonization. As we're prioritizing for the remainder of our fund, we're particularly prioritizing in those areas – fuels, materials, carbon removal would be another, and then long-duration storage.
Those are a few examples. We're not the only ones. We've begun to recognize that innovation investment is not going to be the tool that solves this alone. In some cases, you're particularly going to need policy support or even philanthropy. That's really where the breakthrough energy catalyst commitment that we made in addition to our Climate Innovation Fund, that's where that comes into play, is recognizing that even with this, the market isn't moving fast enough, and we're going to need some non-market tools to bring about the change we need to see.
Hilary: Climate Positive is produced by Hannon Armstrong, a leading investor in climate solutions for over 30 years. To learn more about our climate positive journey, please visit HannonArmstrong.com.
Chad: Let's talk about a few of your portfolio companies. You've directly invested in over 20 companies at least to date. First, I want to talk about Climeworks, which removes CO2 from the atmosphere using direct air capture or DAC. Then if the removed CO2 is combined with underground storage, it can obviously result in permanent removal of those legacy emissions which, obviously, no longer contribute to climate change. Could you tell us a little bit about the broader carbon removal or CDR space and why you believe Climeworks, in particular, is well-positioned to be a leader in this space going forward?
Brandon: We have been a purchaser of carbon removal over the last several years, one of the early purchasers at scale in this nascent market. What we've recognized is that additionality and durability are two of the most important metrics for quality in carbon dioxide removal. Climeworks rose to the top in terms of the landscape as we were looking at engineered carbon removal with that permanence over a thousand, well over a thousand, even over 10,000 years of permanence in terms of anticipated storage duration.
In identifying what is it that this market needs in order to reach the adoption curves that we've seen in other technologies, first, we scoped out what is the scale of the shortfall in terms of what's going to be needed in carbon removal. We worked with Economic Research Group, Rhodium Group, we worked with advisers Carbon Direct to understand the market and to understand the different technologies in it. The difference between a solid sorbent technology and a liquid solvent technology, the relative scale and modularity of each of these.
Climeworks is interesting to us because they have a modular solution powered with clean, renewable energy that is injecting and storing third-party certified carbon removal well beyond the human time horizon. That is very expensive at the moment, but it has the potential to drive down cost over time and become a technology that can be adopted with few of the constraints that you see from land-based carbon removal, from nature-based removal.
It represents this longer time horizon of unbounded scalability and permanence. Now, what needs to happen next is that scale up, that deployment. That's where we see early capital, and early demand really partnering up to drive the creation of a market where there hasn't been one before this.
Chad: Just real quick follow-up on that. How do you create a market for carbon removal without a price on carbon in many places today? How does that scaling work?
Brandon: That is the crux question. To our view, the voluntary markets, the specific role that they need to play today is in defining the standards, defining the contracting approaches. We've joined up with other corporates through both First Mover Coalition, and Business Alliance for Scaling Climate Solutions to articulate what we think those standards should be.
We've also published a white paper each year on what are our lessons learned as a buyer, and how do you make this more accessible to corporations beyond Microsoft. I think that policy is absolutely needed in this space. Thankfully, while we don't have the price on carbon that you're talking about, the Inflation Reduction Act has begun to put in place some of the incentives that will drive carbon removal through 45Q and other mechanisms.
There is action in the absence of a comprehensive solution. I think the key is not to let perfect be the enemy of good, but to make progress where we can.
Chad: Totally agree. Next up, let's talk about LanzaJet. The airline industry contributes about 2% of all CO2 emissions globally, and 98% of that carbon footprint is driven by fossil fuel jet use. Now, fortunately, many airlines have committed to become net zero by 2050. I understand you recently visited LanzaJet's first commercial-scale plant Freedom Pines Fuels in Georgia. Tell us a little bit about LanzaJet's sustainable aviation fuel, or SAF, technology, and why you think this company is well positioned to drive this space going forward.
Brandon: Sustainable fuels are one of the technologies I mentioned as being underfunded, and there's a good reason why. Investors have been rightly scared of the sustainable fuel space ever since Cleantech 1.0. That said, the innovation that we're seeing in sustainable fuels, sustainable aviation fuels, and stationary fuels as well, really has caused us to put it as a high priority on our list.
It's an area that is expensive to decarbonize, and we've identified players, including LanzaJet, as well as Twelve, as having technologies that we think could be part of that sustainable fuels' decarbonization pathway. The LanzaJet technology specifically is called an alcohol-to-jet technology. It can take any sustainable ethanol, and then it uses a bacterial fermentation process to transform that, and then refine it into a fuel that can be used by airlines.
There are a number of partners from the airline industry, and from the fuels industry who are joining together with us, and with others to get this off the ground, pun intended. We're very excited about. We're also excited about other pathways, including e-fuels. These are electro fuels produced through essentially carbon transformation, and Twelve is a great example of that. That's a California-based carbon transformation company.
I did have the chance to visit LanzaJet's Freedom Pines Fuels plant in Georgia. One of the things that's great about seeing real steel in the ground, and seeing something move from idea to reality is that you get to speak with the people who are behind it. We had the chance to meet not just with the investors, and the corporate off-takers, and so on, but also the operations and maintenance folks, the construction teams, the local mayor and the county council, and to really hear what type of opportunity this represents from a geographic, and job creation perspective. That was cool to see.
The other dimension of that that I was particularly excited about after visiting in December was seeing the role that government support has played for getting this launched. I think that it's a great example of seeing all the pieces that need to come together for systems change. Sustainable fuels is not going to suddenly become easier, in particular sourcing of feedstock that's fully sustainable and waste-based. That's a challenge, and it's a constraint for the industry as a whole, but fuels are so energy dense that I think is a critical part of the decarbonization portfolio.
Chad: Staying on that jobs piece, I want to move to BlocPower, which is a Brooklyn-based climate tech company that's rapidly greening American cities. We've actually had their CEO, Donnel Baird, on this show before. They've made some recent strides with regard to expanding the green or climate workforce while also advancing racial and climate justice.
For example, New York City recently announced a $54 million investment in BlocPower's efforts to train up to 3,000 New Yorkers and connect them to job opportunities in the green economy. Can you talk to us a little about BlocPower and your support for them?
Brandon: Yes. This is another example of how we try to match the capital that's needed to the opportunity at hand. In talking with Donnel and his team, we identified that the type of facility they needed in order to really scale up beyond the initial geographic footprint where they'd been operating was closer to a project dev facility or development facility, and so we worked with banking partners and others to structure that and extend it so that they could go from their current New York focused footprint to a more flexible US wide footprint.
That's how we're partnering with BlocPower at the moment. We have a dual mandate to both innovate and accelerate, and we see this as an example of the importance of capital being deployed towards that accelerate mandate. Retrofits of buildings in these type of communities, in many ways, adding a heat pump, adding these electrification technologies.
These are not novel technologies, but the business model is novel, and importantly, it's adding the green skilling that is needed to support the climate transition.
We were incredibly excited to support BlocPower and help them reach the next level of scale. A big part of that is that it's a contribution to climate equity, and it's the acceleration of the deployment of existing climate solutions that are on hand but not reaching the scale they could.
Chad: You've talked about philanthropy, that's public sector investment as well there, but you talked about philanthropy a little earlier. I know the Climate Innovation Fund is not itself providing philanthropic capital, but Microsoft has made philanthropic contributions in the climate space. Specifically, you mentioned breakthrough energy catalyst, could you tell us a little bit about the role of climate philanthropy in building some of the markets the companies you've invested on the VC side need to ultimately thrive?
Brandon: We've had the opportunity to participate in a few blended capital facilities. I think the broader point that these type of blended capital partnerships underscore is we're not moving fast enough. Technical innovation, in many ways, it's the way out of what can otherwise feel like a zero-sum game in the climate crisis. The adoption of new technologies usually cost more, but as we innovate, we drive that cost down, we make it easier to switch.
What we're seeing, though, is even with mainstream capital mobilizing towards this challenge, the forces, just pure market forces of supply and demand, are not going to move fast enough to reach the scientific net zero that we need to see on the timeframe that we need to see it. If you look at solar, if you look at wind, if you look at storage, these all follow relatively well-understood adoption curves as prices come down and scale goes up, but for some of the hard-to-abate sectors that we're talking about, that cost isn't going to come down fast enough without something to bridge the gap, and that's where both philanthropy and public sector, public finance come into play.
We've seen that really bridging the gap and helping to pull the market forward. I think that it is directly addressing the green premium in a way that bridges the market supply-demand gap and accelerates the path of adoption towards the goal that the science tells us is necessary.
Chad: In a similar vein, in terms of acceleration, you've talked a lot about the role of industry partnerships in driving climate action and moving us towards solutions within the timeframe that we need. Could you tell us a bit about one of the industry partnerships you and Microsoft have led and maybe a specific outcome that would not have been achieved without it?
Brandon: We recently launched along with ClimateWorks Foundation and over 50 other companies, we recently launched the Carbon Call. This is a private sector initiative to call for and create a roadmap for interoperability of carbon accounting standards. This sounds like wonky minutia, but ultimately it is what underpins the entire climate transition.
The Carbon Call is a great example of the specific role that technology companies and others need to play in tying together a range of different standard bodies, a range of different registries, and showing a roadmap towards interoperability and clear definitions for net zero and for accounting for the world's greenhouse gas emissions.
That's the most recent and most salient one I would call out. I think that it plays effectively a formative role in terms of defining where standards need to move so that you can operate across borders and address a truly global problem with global accounting solutions.
Chad: What is next for the Climate Innovation Fund? I believe you deployed about half, $500 million, of the billion that you are targeting over the next few years. What key lessons have you learned over these last three to four years, and how are they informing your strategy going forward?
Brandon: We've learned a lot. We've learned that the co-investors you choose to partner with are a critical part of designing the outcome, not just for venture capital but for new initiatives. For example, we are co-investing alongside UN Green Climate Fund and others in EverSource Capital in India. We are co-investing alongside both philanthropic and banking partners in cross-boundary energy access.
I think that one of the major lessons learned is to surface early what the expectations are of each of the co-investors around the table, both in terms of market creation and in terms of technical expertise, advice that can be provided to help a company grow and thrive.
We've also revisited the target technologies that we set early on, and we've learned as we've moved through our own process what are the areas that Microsoft has the in-house expertise to do the direct investing most effectively, and what are the areas where we need support from others in order to understand the best way in which to intercept a market and drive new solutions into it.
Finally, I would say we've really learned that it's important to keep people at the center of all this. It can start to feel almost like a disembodied concept of technology innovation, but ultimately what you're talking about are solutions that people and the companies and organizations they form are going to use. You're talking about teams that are founding and growing these solutions, and you're talking about communities that are affected by the facilities that are built there and communities that are affected by climate change itself.
Learning to center people in the theory of change, both from a climate equity perspective but also just as good business, that's one of the major learnings as well.
Chad: Thanks, Brandon. We're almost done, but first, we have the hot seat. We ask for your immediate reactions to the following statements. The hardest decision I ever made was?
Brandon: Where to build my career and life. I started as an east coaster, found my way to California, and then north to Seattle. I have to say Seattle, with the mountains and the ocean right in one place, is the best place, but it was not always a straight line and the journey to figure out where I belong.
Chad: One thing I've changed my mind on is?
Brandon: I've changed my mind on how science, technology, policy all fit together. I used to think it was a question of which one is in the driver's seat, and all the others are, by definition, not then in the driver's seat. I've increasingly recognized that it takes all of these components to make change happen, and they work together very much as a system.
Chad: The person I've learned the most from is?
Brandon: Two people, Carol Browner and Suzy George, both partners in Albright Group and then Albright Stonebridge Group, and both leading women figures in the US climate and foreign policy space. I've learned a ton from them on both how to build a career and how to build a life.
Chad: If I had to do it all over again, I would?
Brandon: Not change much. I think I would take more engineering classes, but I can still do that now, so I would double down on that technical understanding early on.
Chad: When I need to recharge, I?
Brandon: Get outside. I love running, camping, hiking, skiing, classic Pacific Northwest.
Chad: The key ingredients to my productivity is?
Brandon: Be here now. This is a mantra that stuck with me that you may recall. I think focusing on what's in front of me at the moment, and seeking to be present with whoever I'm talking with or whatever I'm doing.
Chad: I want my kids to know?
Brandon: Intention matters. The historically Quaker community I've spent a lot of time in in my personal life has a motto simplicity, sincerity, service. I think that the intention, the sincerity, and not letting yourself get cynical, and taking an attitude of service towards others, that motto is what I would pass on.
Chad: I like that a lot. The most insightful book or article I've read recently is?
Brandon: I recently read The Big Burn, and I would absolutely recommend it. It's about a huge fire in the Western US from over 100 years ago. It has a lot of lessons and context to provide now in an era when we're looking at climate change, conservation, and land management as a interconnected and intertwined set of issues.
Chad: Finally, to me, climate positive means?
Brandon: Leaving the world better than we found it through technological innovation and working with others.
Chad: Great. Thank you so much, Brandon. It's been a really fun and insightful conversation, and really appreciate your time.
Brandon: Likewise. Great to speak with you.
Chad: If you enjoyed this week’s podcast, please leave us a leave a rating and review on Apple and Spotify. This really helps us reach more listeners.
You can also let us know what you thought via Twitter @ClimatePosiPod or email us at climatepositive@hannonarmstrong.com.
I'm Chad Reed.
And this is Climate Positive.