Today, we’re speaking with Neelesh Agrawal, Founder and CEO of Calculus Carbon, a Temasek portfolio firm that is pioneering the institutionalization of large-scale nature-based solutions (NbS) as an asset class. Neelesh has a diverse background in finance, from investment banking and asset management to fintech entrepreneurship, and is now at the forefront of mobilizing climate finance for impactful NbS projects across the Global South. His expertise has helped institutional investors create a pipeline of over $80 million in potential investments within forestry initiatives, while his research in game theory and portfolio optimization has contributed to academic and industry advancements. In this interview, we’ll explore Neelesh’s journey from finance to climate solutions, his thoughts on the future of natural capital, and how institutional investors can be engaged in scaling environmental projects globally.
Interview Questions:
1. As the founder and CEO of Calculus Carbon, how did you transition from a background in investment banking and asset management to focus on climate finance and nature-based solutions (NbS)?
Answer Here: My work during Investment Banking primarily involved raising private institutional capital for large scale infrastructure projects across Telecom, Hospitality, Renewable Energy, Roads among others. Subsequently, I undertook asset management for a $1.2 Bn Real Estate platform, focussed exclusively on building and operating greenfield Industrial Real Estate or Logistics Parks. Both these roles helped me understand the entire life cycle of development of large scale infrastructure projects and how the risk-return profile of an asset evolves over the same.
Nature-based Solutions (NbS) projects such as large scale commercial forestry and sustainable agriculture, curiously mimic an infrastructure asset on multiple counts. Akin to any infrastructure investment, an NbS project has a multi-decadal economic life (20-30 years), a long term predictable yield, along with clear design, build and operate phases. This causes NbS projects to have a very similar investment profile to that of an infrastructure project, thereby positioning it as an attractive asset class to the infrastructure institutional investors in the near future.
Having seen the emergence of various Natural Capital Funds (NCFs) in a similar vein to those of a long term infrastructure investor ~2.5 years ago, was motivation enough for me to transition almost organically to this upcoming infrastructure asset class of the next few decades.
2. Your work at Calculus Carbon focuses on raising institutional capital for large-scale forestry projects. What are some of the key challenges when it comes to convincing institutional investors to allocate funds to natural capital and NbS projects?
Answer Here: The challenges are not particularly as much around investing within the NbS sector, as in streamlining an investment process that is tightly run and professionally well- managed as in traditional sectors such as infrastructure and real estate. This is particularly driven by the technical nature of the NbS projects, which creates dependencies on their in-house technical team for investment teams within these asset managers to better understand an opportunity in terms of its risk-return profile. A significant aspect of our work in building an NbS focussed investment bank at Calculus Carbon, is to deploy the best practices from mature asset classes such as infrastructure and real estate, to streamline an investment process for NbS assets that would serve to attract larger institutional capital providers including sovereign, pension and endowment funds towards this asset class over the next few years.
3. Having worked in asset management at IndoSpace Capital, you were involved in managing a $1.2bn portfolio. What lessons did you learn in traditional asset management that you’ve applied to managing climate-focused investments?
Answer Here: The particular role in managing a portfolio of 15+ operational assets across multiple locations, was a masterclass in undertaking a top down view of one’s portfolio as an asset manager and dynamically updating one’s investment thesis to continually align the financial and operational goals of a fund to those set out to the LPs. The experience particularly comes in handy now in working with multiple asset managers (NCFs), to understand at a fundamental level what’s driving their investment theses at any given point, by posing second order questions and uncovering the underlying levers of their decision making process. This further enables us to connect deeply with asset managers and align our investment sourcing to better fit with their long term goals with a particular fund.
4. Your research in game theory and portfolio optimization has been published in several high-impact journals. How have you applied the insights from your academic work to solve real-world challenges in natural capital financing?
Answer Here: All transactions invariably are problem statements in a Nash or a Stackelberg game to varying degrees. Successfully closing a transaction is then essentially figuring out an optimal solution that successfully maximises the collective outcome for both the NCF and the NbS project developer, while satisfying each party’s individual constraints. While not intentionally, I do sometimes apply an academic lens to potentially understand whether a particular transaction set up is closer to a Nash or a Stackelberg game, determined by which side, if any, has an unfair advantage over the other governed by a team’s particularly superior experience in seeing multiple investments through.
- You’ve collaborated with asset managers across the EU, UK, and Singapore. How do you navigate the different regulatory and market environments in these regions when raising capital for NbS projects?
Answer Here: Each asset manager is unique in their mandate, dictated by their periodically adjusted investment thesis, which in turn is governed principally by the risk-return profile of their respective LPs. The key then is in essentially becoming a partner to an asset manager in really understanding their overarching investment philosophy and what a particular fund intends to achieve for their LPs. This significantly helps in aligning potential deals which fit well within an asset manager’s framework for a particular fund and subsequently increases their odds of capital deployment. The market and regulatory variables are then implicitly solved for, being a derivative of a fund’s broader investment strategy.
6. In your previous role at Avendus Capital, you were involved in managing a large buyout transaction. How did you approach structuring complex financial deals, and how does that experience influence your approach to financing large-scale NbS projects?
Answer Here: In my (limited) investment experience over the last decade, a so-called “complex” transaction essentially involves a relatively higher number of inter-dependent variables over a plain vanilla deal. The buyout transaction being referred to here, was a bankruptcy transaction where I was involved in building a consortium of investors to buy out a controlling equity stake in a large listed Telecom EPC player with multiple active operations globally. A key insight I picked up in evaluating the fair value of equity, was through understanding the value of each of its underlying locations and their potential to scale supported by the gradual strengthening of balance sheet post transaction.
An emerging number of our larger NCF clients today are keen to take an exposure in NbS via equity investment in a platform/developer undertaking multiple projects. Here again, the value of the developer equity is similarly derived from the commercial merits of their underlying projects and their respective ability to scale.
- Calculus Carbon’s work spans a variety of NbS projects, including afforestation, agroforestry, and mangrove restoration. What do you see as the most promising natural capital projects for the future, and why?
Answer Here: Each sub-category of NbS projects is unique driven by the nature of the underlying ecosystem services they provide. Mangroves for instance provide the highest benefits in terms of carbon sequestered and biodiversity, while agroforestry helps create a financial revenue stream through sale of agro commodities. From an investment perspective, however, I personally feel that commercial forestry and sustainable agriculture projects would be the greatest beneficiaries of institutional capital, given they provide existing commercial revenue streams with environmental and social benefits layered on top, thereby making them more bankable. Investment is rather tricky in pureplay restoration projects such as mangroves, given their total reliance on the nascent environmental markets makes them commercially risky, as price discovery continues to be underway in most of these markets.
8. Given your extensive experience in investment banking, asset management, and fintech, what do you think are the key trends in climate finance that investors and companies should be paying attention to in the next 5-10 years?
Answer Here: What excites me immensely is the gradual attribution of a financial value to the environmental attributes provided for by nature (carbon sequestration, local atmosphere and water regulation, biodiversity protection among others) by the global financial markets. Parallely, we see the internalisation of negative externalities caused by water and atmospheric pollution for instance, creating significant financial and regulatory costs for corporations. As both these trends evolve rapidly over the next decade, novel instruments would need to be created and leveraged for the markets to deploy the committed capital at scale towards credible large scale nature projects. This would potentially create unique opportunities and investment cases for private players to enable the evolution of the underlying market infrastructure, that facilitate channeling of that institutional capital at scale.
9. Your work aims to make nature-based solutions an institutional asset class. What are the key metrics or indicators you use to measure the success and financial viability of these projects?
Answer Here: NbS projects greatly differ in their investment case, ranging from those being developed for ecosystem restoration to ones focussed primarily on commercial harvesting. The NCFs each have a distinct mandate that informs their interest in a particular investment opportunity in an NbS project. Consequently, the underlying success metrics also vary on a scale, with maximisation of impact (tons of CO2 sequestered/hectare, cost of 1 ton equivalent of CO2 sequestered) at one end and financial returns on the other (IRR, MoIC).
- Finally, with your deep experience in both finance and climate initiatives, what advice would you give to young professionals or entrepreneurs looking to combine finance with sustainability and impact investing?
Answer Here: I personally am of the opinion that the global financial markets are best poised to create the necessary incentives and infrastructure to channel the institutional capital needed at the scale they are. As the markets evolve to efficiently price in the negative externalities, historically ignored by the financial markets (causing climate change to be referred to as the greatest market failure that the world has ever seen by Nicholas Stern), finance professionals are particularly well placed to firstly educate and upskill themselves and then secondly contribute to innovating and formalising the instruments and the infrastructure needed to channel this once in a generation movement of capital.
