Payments for Ecosystem Services Benefits to Drive the Regenerative Transition— Investing in Epoch

Payments for Ecosystem Services Benefits to Drive the Regenerative Transition— Investing in Epoch

May 28, 2024 3:08 PM
Posted by

Jahed Momand & Matthew Stotts

From its origins in the 1990s, the voluntary carbon market (VCM) has faced a bumpy road toward adoption and impact, hindered by mostly unintentional fraud (“greenwashing”), double-counting, lack of transparency, and accountability to local communities. This has led to lawsuits, low trust, and most importantly inadequate finance, returns, and impact.

The time has now arrived for originating and verifying environmental assets in addition to the VCM for the next billion dollar companies formed around the climate opportunity, as corporations with trillions in budget turn to insetting to address their direct carbon footprints, as regulatory regimes bring rigor and compliance to carbon neutral claims, and as governments hold corporations to account for their environmental impacts globally, especially for Scope 3 emissions (those carbon-intensive activities from assets not owned or controlled by the reporting organization).

We believe the next 10 years of returns in climate will be led by the world’s largest businesses turning an analytical eye inward to their own value chains and making changes, because that is both where the biggest financial opportunities are, as well as the biggest impact. The VCM has shown us what offsetting alone can achieve. Now Nestlé, Unilever, Mars Wrigley, and more have committed near-term to making changes in their own supply chains because they’re attracted to the savings, profitability of owning environmental assets originated on their commodities, and ultimately the impact that guarantees their businesses are healthy for the long term.

Due to regulations worldwide, companies in industries with >90% of their emissions in Scope 3 will only have the lever of influencing their supply chain partners to reduce and meet emissions targets, by definition. Any US Government contractor with contract value higher than $50m is required to set a net-zero target, for instance. With the lawsuits crowding out carbon neutral claims (Delta), and the heat turned on the voluntary carbon market, corporations and brands have earmarked billions (Nestle’s 1B CHF Sustainable Coffee Fund, Unilever’s 1B EUR Sustainability Fund, Mars Wrigley’s $500M Cocoa for Generations Fund) to drive these changes. If a corporate can create and be credited for a provably climate-positive environmental asset, they can move their carbon footprint from the liability column to the asset column. By becoming producers of climate-positive outcomes (decarbonization, afforestation, etc), corporations can evolve their business model to make net-zero a break even or better value proposition.

However, these companies need tools to manage and deploy these programs at global scale with the ability to both quantify emissions through clear, objective, verifiable, scientific, and publicly accessible datasets and methodologies, as well as make the payments for ecosystem services. Corporations with net-zero targets do not currently possess the ability to reduce their Scope 3 emissions (monitoring and incentivizing action) and report on those reductions in a globally scalable way.

Enter Epoch.

Epoch provides corporations with the tools to monitor emissions from select supplier activities, incentivize reductions in emissions, and report the emissions reductions in a globally scalable way. It specifically provides supplier emission monitoring in line with SBTi and GHG protocols using remote sensing data and farm data management systems, verification and reporting of measurement data and emissions calculations in publicly available storage and distributed computing infrastructure to meet public disclosure requirements, and inset purchasing based on verified carbon impact enabling multi-party collaboration via predefined rules.

The Epoch Team

Jinal Surti is founder and CEO of Epoch, and a Waterloo engineering graduate and an HBS MBA, and was the first product marketing hire at Ripple, where he led go-to-market strategy for their commercial blockchain enterprise solution, taking it from 0 to over 100 enterprise clients. He then spent the better part of 3 years as the Head of Asset Management at Menai Financial, a major digital asset market-making platform where he built the team responsible for VC and Product Management. He has deep and broad expertise in global payments in emerging markets gained at Ripple and Menai over the last 8 years, which he’s now taking to the insetting space, helping global corporations deliver last-mile incentives to drive land-use changes in their supply chain.

William Ouellette is the co-founder and CTO at Epoch. Previous to Epoch, he was Co-founder and CTO of SoilWatch, where he built an MRV solution for quantifying carbon stock change in landscapes for the voluntary carbon market, which he ran for 3 years before recently leaving to join Jinal. He has built solutions for the UN FAO, World Bank, and Spacebel (an ESA systems developer), and has a knack for turning scientific research papers into open source projects to solve remote sensing problems. He holds an MS in Earth Observation from KU Leuven in Belgium, and a BS in Environmental Sciences from University College Utrecht.

Market Opportunity

This opportunity lies entirely outside of the VCM, and it’s exciting to imagine a very large business here because the return potential is entirely capital-driven, not driven by regulation. The world’s largest FMCG companies realize that they need to ensure the continuity of their land assets, that these assets are not quite reflected in their top or bottom-line accounting but that they are crucial nonetheless, and they have backed these realizations with $500M to $1B in funds.

This is a new market vertical, but judging from their first contract, they have a very competitive offering. What we mean by this precisely is that they are getting what looks like a very commoditized pricing arrangement on their core tech—monitoring for LUC emissions. They will be able to compete on price with market leaders who built their business model around monitoring.

However, the way that you mobilize capital into this vertical is not by focusing on emissions—in our opinion, it will be done by payments, after human actors and agents have made the decisions necessary to meet the emissions targets. You unlock the emissions targets by unlocking the flow of payments (and incentives) along supply chains. This means that competitors may actually become customers of Epoch, bringing their transactions onto the platform, as they are getting paid for emissions monitoring, but they do not have the ability to deliver incentives against those emissions changes, which we believe is the core value proposition in the market.

Given this assumption, the global packaged food market is $2.4 trillion, and one can say that Epoch is an index on this number. However, to get more specific, the following companies have made public insetting commitments:

  • Nestlé: Nestlé aims to achieve net-zero GHG emissions by 2050, with an interim target of reducing emissions by 50% by 2030 (Nestlé, 2021).
  • Unilever: Unilever has a goal for achieving net-zero emissions across their entire value chain by 2039, with an interim target of reducing emissions by 50% by 2030 (Unilever, 2021).
  • Cargill: Cargill has committed to reducing its GHG emissions by 30% per ton of product by 2030, using a 2017 baseline (Cargill, 2020).
  • Danone: Danone aims to become carbon neutral by 2050, with an interim target of reducing emissions by 50% by 2030 (Danone, 2021).
  • Mondelez International: Mondelez aims to reduce its end-to-end CO2e emissions by 10% by 2025, using a 2018 baseline (Mondelez International, 2020).

If the GHG emissions of these conglomerates map to their market volume, it could mean as much as 10-50% of the commodity volumes running through an insetting verifier. In the case of Nestlé, that would mean 35 billion CHF in sales requiring verification and payments for ecosystem services in the bull case, and something more like 1-3 billion CHF in a bear case. In the bear case this yields an enterprise account value of $5,000,000 annually with 0.5% fees on a 1 billion CHF monitored revenue stream. In the bull case this one customer can be worth as much as $175M annually. You only need a few of these types of customers to have a very large, outlier company.

The global opportunity as measured right now in 2024 is $700B of commodity import/export that needs verification. If Epoch is a 1% index on that volume, it’s at $7B in enterprise revenue, and at current SaaS payment network multiples, a $40B to $70B company.

Product-Market Fit

Dozens of companies have built MRV for soil carbon, biomass measurement, and various other approaches. The market problem Epoch is going after is not a new one. However, their approach is unique and very differentiating. Based on our (and their) customer research in this space, the most important criteria for companies privy to GHG, EUDR, SBTi, or CSRD emissions metrics is reportability.

In order for data given to them by the Big4 accounting firms or any consultant for that matter, the data has to be completely transparent on methodology, data, and assumptions used for calculation of emissions metrics, so that the metrics can be replicated and reported on in a legally compliant manner. However, the current MRV solutions in the market, of which Epoch is partly one, rely on monetizing their data and ability to calculate emissions, which is why their methodologies are proprietary. This is a huge market opportunity for Epoch in that customers want this data to be open and transparent so that it’s easily auditable. Only Epoch has the revenue model and business model to compete against existing solutions in this way, as all the existing players are ignoring payments and focusing emissions.

Unfair Advantage - Why We Invested

Payments. Jinal spent the greater part of 5 years on the ground building Ripple’s enterprise business, and in far-flung geographies understanding what it takes to drive usage on the ground. This is an advantage that can’t necessarily be outsourced or bought, and it powers the core business behind Epoch.

The other unfair advantage is the edge this focus on payments gives them in their business model. Most of their competition focuses on accurate emissions tracking, but does not have a way to mobilize the capital from large commitments. This lets Epoch compete with very low SaaS pricing for commoditized tech, while making it up in payments volume. We see this as a very, very competitive business model advantage, and are eager to see it play out as they compete for contracts with the world’s biggest FMCG companies.

Nothing contained herein constitutes investment, legal, tax or other advice nor is to be relied upon in making an investment or other decision. This article contains the opinions of the author, and such opinions are subject to change without notice. Furthermore, it may also include data and opinions derived from third party sources. Cerulean Ventures does not accept liability for the accuracy or completeness of any such information or opinions which can be subject to change without notice.