Originally published on Radical on 2024-06-28.
Climate Performance Potential, or variants thereof, is the “in” term for measuring the investability of a climate startup. Although there is no standard or agreed upon way of measuring this almost every climate tech investor has some version of this metric at play in making investment decisions.
The measure is supposed to show the effect (performance) of a startup and its technology on improving our climate or mitigating its breakdown.
A simplistic example is to compare a piece of hardware side-by-side with the ‘dirtier’ version, say an electric car compared to petrol car. In the best case scenario where the electric car is charged using the cleanest energy, its emissions will be significantly less than the petrol-powered car. Of course its not always best case scenario and you need to also consider the climate impact of mining and industrial production but for the purposes of illustrating the point let’s keep it simple.
The difference between the two gives you the Climate Performance Potential (CPP). You can then compare the CPP with the CPP of other startups pitching for your money and if you’ve done your math right and other factors line up, by picking the best CPP you get the most (climate) bang for your buck.
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The logic behind this works like this.
First we have the underlying assumption that decarbonisation is important. Climate science tells us that we need to cut emissions and increased activism and awareness is demanding that this happens.
From this we jump to the idea that in the future, through regulation and consumer behaviour, any product or service that is emission-free (or captures emissions) will be the preferred choice in the market.
Therefore, a high Climate Performance Potential not only predicts the best environmental outcome. It also predicts the best financial outcome. To quote WorldFund:
Climate performance is a predictor of financial performance.
This is the thesis under which most impact and climate tech investment operates.
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It’s not bad logic as far as it goes.
Where it falls apart is that somewhere along the way from founding to scaling the thesis gets inverted to the following:
Financial performance is a predictor of climate performance.
Essentially, having done the CPP work early on to raise money, the startup switches to full-on growth mode because scale is the only way to deliver those predicted financial returns. The underlying assumption then switches to “if my [product] delivers better CPP, then selling more must be a good thing.” And because scale has to happen at speed, thinking has to be put to one side.