Why SPACs will be key to the sustainability revolution

Energy

Technology and finance have complementary histories of innovation, from the royal charters that launched the first global explorers to the early stock markets that fueled the industrial era. Today, the rise of SPACs is a capital markets innovation that matches the urgency and scope of our global sustainability challenges.

For the uninitiated, SPACs — special purpose acquisition companies — are publicly listed entities that raise capital and then merge with a private growth company, providing that target company with the raised capital for further growth.

After 21 years as a sustainability investor and strategist, I’ve enlisted a diverse team of veterans in our field to launch a SPAC.

Although SPACs are not new, they have recently evolved and surged in number and account for about 60 percent of all new stock listings in the United States. In just the first six weeks of 2021, SPACs raised $33 billion, more than was raised by all SPACs before 2020.

Electric vehicles have been one of the hottest categories for SPACs, as more than 24 EV-related companies agreed to go public via SPAC mergers over the last nine months. SPACs are pursuing a broad range of growth companies offering what we at Broadscale call “disruption for good” — transformative solutions that are cleaner, healthier, and more equitable.

Some warn that this budding love affair could end badly, with the same kinds of disappointments we saw in the first cleantech boom during the 2000s. But we believe SPACs will be critical to meeting sustainability goals — and driving a long boom for investors — for a number of reasons.

First, SPACs can quickly provide a fast-growing company with a large amount of capital at a certain valuation. Unlike a traditional IPO, in which companies must market their listings based solely on current financials, a SPAC merger can rely on future projections of revenue and profit, crucial for disruptors in change-resistant industries such as transportation, energy and food. A growing amount of venture capital backs world-positive breakthroughs, although not nearly enough private capital dedicated to scaling technologies that are already proven. SPACs can fill this gap — and thus justify more early-stage investment.

Second, the growing number of sustainability SPACs offers investors more opportunities to back companies that match their values. ESG-minded institutional investors are allocating a record amount of capital to sustainable investments and SPACs enable the broadening of the investor base to consumers who want to invest in sustainability leaders. Mission-driven investors are more likely to embrace long-term value creation rather than the prevailing short-termism of quarterly earnings. They can provide patient capital more readily than VCs. And the results so far have been promising: ESG-oriented SPACs have been far outperforming traditional SPACs following their respective merger announcements with targets. As of Feb. 12, the median return for ESG SPACs from announcement (June 8) is 59.5 percent while the median return for other SPACs is 7.7 percent.

Third, as public companies, SPAC targets will be more transparent and accountable, and better governed, than their private counterparts. Their boards will be more diverse due to new standards set by the Nasdaq and NYSE markets and states including California. They will have less tolerance for the practices of a founder such as Adam Neumann, who got the board of his private company WeWork to give him payouts that were criticized by governance experts when they finally came to light during the company’s failed IPO.

Nikola Motors has been cited as an example of the dangers of SPACs because the company’s founding chairman was forced to resign when fraud allegations came to light just three months after it went public via a SPAC merger. Yet this is precisely the advantage of the public market: had Nikola continued to raise capital privately like so many other unicorns, the founder’s actions likely would have remained undisclosed for longer.

Fourth, SPACs reward entrepreneurs in long-term alignment with investors. Until recently, most cleantech companies “exited” via sales to larger incumbents. A common problem with these buyouts is that the acquired company’s leaders stay for their earn-out and then depart as soon as they can, leaving behind unrealized impact and diminished value.

To counter this, more incumbents are keeping acquisitions as stand-alone businesses so they can grow faster without bureaucracy — and their equity can continue to appreciate, benefiting both the acquirer and the startup team. Now, some incumbents are using SPAC mergers to go further: Engie, for example, just used a SPAC to spin-out EV Box, a charging business it acquired in 2017, which should incentivize the EV Box team to continue creating value for shareholders including Engie.

SPACs are not a panacea for every growth company or the only form of innovative finance driving sustainability, and they will need to evolve with the market. But as we radically reorder how our society moves, lives, builds, eats and more, we will need to deploy unprecedented amounts of capital to scale sustainable technologies. We’ll want investment structures that offer opportunities for all investors, good corporate governance and strong incentives for successful entrepreneurs. SPACs are a timely innovation to achieve these goals.

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