SPEAKER_00 0:09

Welcome to the Future Managers Podcast. Today we're joined by Simon Zadek. Simon is the co-founder and managing partner of Metamorphosis Solutions and Adaptation Focus Investment and Solutions Platform, working at the intersection of climate, capital, and policy. He spent over four decades shaping global markets in sustainability and finance, advising the United Nations, helping steer G20 clean finance initiatives and founding influential organizations like Nature Finance and Accountability. Simon has been at the forefront of rethinking how capital flows into systems that matter. And today he's focused on one of the most urgent shifts of our time: turning climate adaptation into a scalable, investable economy. Welcome to the stage, Simon.

SPEAKER_01 1:07

Thank you very much indeed. I'm very pleased to be here. Thanks for the invitation.

SPEAKER_00 1:11

We're delighted to have you. And the way that we approach most of our interviews is we start with you. How did you get to do what you're doing? Like where does the passion around climate come from? I mean, I understand the urgency. But what drives you? Like, who is Simon behind the scenes?

SPEAKER_01 1:34

Well, um, I guess the Simon behind it, uh, as you said in your introduction, is four decades of working on sort of sustainability business finance, um, really starting uh with the uh uh with with in fact it's Earth Day Today, starting with the Rio Summit uh back in 1992. And and then really a kind of flow of work, you know, first with you know, all those early stage ethical businesses, the Ben and Jerry's and the body shops, and then gradually flowing into that huge arena of sort of corporate reporting, disclosure, measuring impact, material risk, uh, a lot of work around global supply chains, uh, particularly around labor standards in the 90s. That was the sweatshop period, as you may recall. And then gradually pivoting to a greater focus on finance. I based myself in China for quite a period of time, working with the Chinese financial regulators, uh, and then kind of moved into a period with the UN taking that China experience um uh more into the international sphere. Five years really focused on how do you bring nature into financial market decisions? So building on some of the early experience of carbon in particular, and now, as you said, stepping across into the adaptation space. How did I end up in the space? You know, when one looks back at things, one can always offer uh a sort of super rationality as to what one's journey was. Uh, I suspect if one was looking forward at the various steps that I've made, they've been a fairly random uh set of moves forward.

SPEAKER_00 3:22

Interesting. Um as it pertains to uh kind of like what's shaping the industry today. Yeah, I you talk about policy, markets, and capital, but on the policy side, kind of like what what is happening at the moment? What do the next 10 years look like from a policy perspective? Because that would be the the defining the defining force around what companies do. Some companies run ahead of policy, but many of them like to follow. So do you want to give us a little bit of a context, you know, the shape the conversation?

SPEAKER_01 4:06

Sure. I mean, just just to sort of start with the kind of framing device that's in my head. You know, policies are not the only uh drivers of markets, but they are a significant driver uh of what happens across our global economy. Uh just to sort of give perhaps the most obvious example, today we have a roughly$2 trillion a year investment market in clean tech, including clean renewables. And although all of us, I'm sure, would point to that having been hugely influenced by the falling cost of solar, a little bit less so of wind, actually the start of that market really uh was uh Germany uh policy decision uh to build that feed-in tariff and to create a large-scale demand for renewables, followed by China that took that as an industrial strategy opportunity and really went to scale. So, actually, between China and Germany, you know, that policy drive has helped to create uh what today, as I say, is a$2 trillion a year investment market. How does that translate forward? Well, you know, we're in a period of extreme um policy uncertainty. Um, so Maxime, probably I'm not gonna um take the risk of making uh predictions in a very uncertain environment. However, a few things you know seem to us fairly clear. Uh that GDP debt ratios of most governments are at a historic high, over a hundred percent um uh debt to GDP for many OECD countries, uh 80% on average across emerging markets. The potential for using public finance to uh support adaptation in the face of climate change, as a result, very limited, obviously, military spending and shifting priorities, um, using up uh available fiscal space even more rapidly than we might have expected three, four, five years ago. That makes the role of private capital in funding adaptation efforts even more important than has been the efforts in the clean tech renewable space. Uh, and so our challenge really is in the policy drivers uh of what will make adaptation business solutions profitable. Um, that's not going to come through what historically has been framed blended finance, you know, money from multilateral development banks and other sources de-risking often private capital. There'll be an element of that going forward. But as fiscal space becomes more limited, the flow through will be that blended finance opportunities also become more limited. So we'll have to look at other policy levers to create markets that effectively reward adaptation business solutions and allow private commercial capital to flow more unimpeded into those areas.

SPEAKER_00 7:39

How do you define adaptation? Because uh we work with a ton of portfolio companies that are in into circular economy, or like we have a B2B SaaS company that define that that calculates uh PCL and uh the lifecycle assessment and protocarbon footprint. How do you define adaptation? Like what's the definition that you use?

SPEAKER_01 8:04

Sure. And and it's helpful to distinguish adaptation from resilience, which are often used in the same sentence, and it's helpful, as you say, to connect notions of adaptation with other pieces of the story, low carbon, nature positive, circular economy. There are many of these pieces of um kit lying around. So we take adaptation as being principally about the innovations in products, in services, and in business models that will emerge as responses to growing climate disruption and changing customer needs. So we look at adaptation as being the innovation curve in the product, service, and business model space. We understand resilience as being more to do with the stability of asset value and their use. And obviously, we're all looking for resilience in our asset value, but that in and of itself doesn't necessarily drive innovation and doesn't necessarily drive positive, broader societal outcomes. Um, and how does that relate? Well, low-carbon investments, for example, could turn out to be incompatible with the world in which we're going to live in. There are solar systems and wind systems that will suffer asset depreciation in the face of climate impacts, and there are other renewable uh pieces of infrastructure that will be far more resilient to uh to climate change. Similarly, nature-related investments um may be profitable under certain circumstances, but under certain climate scenarios will be less so. So we see low carbon, nature, circular economy all being part of an integrated process of climate adaptation. So the innovations that are needed in products, services, and businesses in order to deliver the products and services that are needed profitably with business models that are resilient in a world that we euphemistically talk about as beyond 1.5, but in reality, one needs to plan for worlds that are much closer to two to three degrees. Maybe just one other variable just to add in, Maxime, and then back to you. We actually rarely talk about climate adaptation, even although we are focused on the climate driver. And the reason for that ambiguity is that adaptation to climate needs to take place in the context of several other disruptions. Uh I would name three that we're particularly focused on, which is geopolitical, number one, uh AI and ethics, number two, um, and the deterioration of nature itself and the impact that has on business models, markets, and economies. So we look at climate change and the adaptation needed, but in the context of those other major disruptors that we're currently facing.

SPEAKER_00 11:31

And you said geopolitical AI, and what was the third one?

SPEAKER_01 11:34

Nature, nature deterioration in and of itself, independently or related to climate change.

SPEAKER_00 11:43

If I was to double-click on what you just said, um, and so two two things that that um um I couldn't agree more. One of them is that maybe in the beginning we were focused on uh that the driver was maybe policy and um uh blended capital. Um now we we're seeing a ton of companies come through us, and we're we're seeing truly solutions that they're climate adaptation friendly or climate forward solutions that they're profitable on their own. So private capital is following through because it just makes sense economically, plus it makes sense from an environment perspective. Um, but the other thought that they had there is like if we're trying to tackle climate, where would the biggest bang for our back come from? Would it come from adapting existing infrastructure, developing new solutions? And I'm sure that the the answer will be all of the above, but like where would we um where would we unlock the biggest value right away? So if you try to portray it into short, medium, and longer term.

SPEAKER_01 12:57

So we should come back to this question of profitability because certainly through Morphosis's eyes, there are clearly adaptation solution businesses in the water desalination space selling into the Gulf, the Gulf states, say, that are profitable. There are businesses selling vertical farming systems and lab grown protein, you know, that are profitable selling into California and Singapore. You know, there are businesses that are profitable um in the um new models of you know sanitation, health, education, and underlying infrastructure. But actually, but actually, what we know is in both financial markets and the real economy, um, climate risk is mispriced. Yeah, it's usually underpriced as a result of many factors. Um short-termism, policy gaps, all of those different reasons that lead to market distortions. And that does lead to suppressed profitability of many adaptation solution businesses because they're facing markets today that are not really pricing in the value of the adaptation solutions that they're delivering. So there is a period of catch-up as markets structurally begin to price in the extent of climate change and the impact it will have across markets, across asset values, uh, and uh how it will change the relative pattern of rewards to different kinds of products and service offerings. You know, we're in we're in the early stages of that adjustment. You know, two years ago, if you had interviewed me and said, how are we doing on climate? And I'd said we're gonna bust through 1.5 and head for something far worse. Actually, I would have been saying something very contentious that many people would have disagreed with. Today, that's not really a contentious view, but what remains contentious is really how bad it's gonna get and what the implications are across a whole series of different asset classes. That is still a very volatile space that people um are disputing and working on as we speak. Now, back to your question. Um, we can see um, even uh in the most recent past, the last few weeks, where um the Iran war has begun to hit oil and gas prices um and has threatened particularly food security across a growing number of countries, we can see that there is going to be significant short to medium-term value at the nexus of disruption at food, energy, and water security. And that's gonna be true in Switzerland, not just in Kenya. You know, it's gonna be true in the States as well as Vietnam. It's certainly going to be true in Australia, but it will also be true in Iceland. Yeah, in other words, the nexus between food, water, and energy security and disruption, you know, will be a significant growth area in the coming period. Now, only part of that in the short term is directly attributed to climate change, which is why I highlighted the fact that process is looking at this more complex geometry of climate change, geopolitics, AI, and nature um deterioration. Uh, climate change, we believe, will become an increasingly important part of that overall disruption mix, but that nexus, water, energy, um, and food, through a security lens will become increasingly significant. Think of the UK over the last 25 years um bettered on global food markets as a source of food security and has allowed much of its farming community to degenerate. So today it's not capable of domestic food production at scale because it's simply allowed that sector um to become far more weakened, unlike, say, France or unlike, say, Switzerland, uh, that have retained heavily subsidized domestic food sectors. Today, the UK is much more at risk than say a France or a Switzerland for exactly those reasons. And so suddenly investment in food production assets in the UK may look much more attractive than it looked even three months ago. Um, we've had in Europe a 51% increase in sales of EVs over the past three weeks compared to last year. Of course, no great surprise. You know, people installing solar solar panels on roofs suddenly have long order books, whereas those order books were declining before. These are all simple examples to illustrate the fact that the security side um of business opportunities is very closely linked, obviously, to disruption more general, but would increasingly be linked to that trending line of growing climate disruption.

SPEAKER_00 18:54

It I couldn't help um I can't disagree with anything you're saying. Um probably about 10 years ago, we started to work with uh Arctic indigenous nations here in Canada in the subpolar circle. The four priorities food, water, energy, and housing. Recently we started to work with um, and by the way, this problem has been here forever and ever, and the federal government has tried to solve it in many different worlds that have not necessarily been successful. And then we recently started to work with some of the Caribbean islands, like British Virgin Islands and Cayman. 90% of their food comes from somewhere else. And if a hurricane comes through, a lot of it gets uh disrupted. So we're we're we're working with them around how do we build vertical farming that's resilient, that can provide like it it's it's actually a nation priority. How do we build food food sustainability so that we're not relying on shipping things on boats all the time into what is a great climate? It's just that it's it's a rideful disruption from a climate perspective. But I want to give you a little bit of context. I mean, now you know me as uh as a capital advisor, like we're we focused on strategy growth and capital. But in two of my prior roles, I was leading risk and I was leading EHG Assurance for a company called Husky Energy, which was acquired by Senovis Assets Globally, including the Chinese Sea, and then most recently with a company called Parking Corporation. And so I was the guy responsible for enterprise risk management across uh 25 different countries. Um you said pricing climate, um, or on the ESG sign, the sustainability report. I I was the person preparing and reviewing the report along with my colleagues. Um we I don't know if we had a pricing model for climate, and and then who is responsible for pricing climate and and all of its externalities? Is is the government, the government in Canada trying to step in and and and put a price on carbon with an escalating curve going to 200, I believe$300 uh per ton of carbon by 2030. We're seeing we're seeing the rating agencies try to do something, we see the companies try to do something, we just try to see the government do something, but it kind of doesn't seem like it's flowing very naturally, it's just very choppy. Um, what are your thoughts on how should climate risk be priced? Who should price climate risk?

SPEAKER_01 21:55

Yeah, so uh you're right. There isn't really a global Climate risk regulator. And so we see four primary influences on the way markets take account. In no particular order, financial regulators, in the way in which they shape risk stress testing, but portfolio stress testing and disclosure across licensed financial institutions, clearly a really critical part of bringing climate risk into investment and broader financial decisions, which then flows into the real economy through asset valuation and capital allocation. We see corporate reporting, back to your experience, as perhaps a weak signal initially, but ultimately a critical piece of the kit required for the business community, the non-financial business community, to begin to price climate risk into their global value chains and their underlying business models. We see public policy, so separately from financial regulation, as being important from everything from building standards and many other standards that are being set, through to um fiscal spending patterns, taxes, subsidies. The very fact that one may be subsidizing oil and gas explicitly or implicitly in an economy changes the way in which climate risk is being priced into all manner of decisions. And then fourthly, there's us, right? Us as consumers and investors and savers and voters, and that sort of public expectation model. You know, why is it that there has been some of the largest relative increases in uh household solar um in Pakistan and Nigeria of all places compared to almost anywhere in the world over the last 12 months? Relative, not absolute. And the answer, of course, is growing expectations that their electricity grids are simply going to stop functioning, yeah, or are simply not reliable enough. Um, and those expectations drive changing demands for different types of technology solutions to energy. So what's happening in the sort of particularly the consumer end um of public expectations has a huge influence. So you've got these at least four different sets of actors. Yeah, all that are shaping the way climate is or isn't taken into account um across every market and every asset class and every business.

SPEAKER_00 25:02

Makes sense. Is there um and in in Canada? I I well, I personally would like to believe that we're one of uh that we're leader in the space. Now, of course, we have a very large oil and gas economy. Uh it's probably one I believe that it's our largest export. Um, but we have a I would consider very progressive, maybe in some cases um facing backlash from from the general public, a very progressive government. Um we have the Canada Infrastructure Bank, which is a federal, uh, I guess federal fund that invests in climate forward solutions, um, like for example, EV charging stations across across the country. Um, and in many cases, they're either forgivable or interest-free loans, or um, so there's we've seen a ton of examples in the space. Do you have a country or do you have an example of somebody that's doing a phenomenal job around this? Or is it like like, for example, we recently met with the Northskin 22, it's a it's a climate fund fund. Uh it's a I don't know if it's a climate, but it's a fund based on uh Africa. One of the largest investors is is the Norwegian Norwegian Sovereign Wealth Fund, but they invest in a lot of climate solution. I mean, do you example Africa because of the uh infrastructure, they're just kind of prone to just kind of leaf rock a lot of the stages of development, kind of like the way that they went into mobile before stepping into landlines, um, because you just kind of make sense. Is it like do you have an example that you can point to that's like saying this country or this region, like or this company is doing a phenomenal job?

SPEAKER_01 26:51

So so firstly, let me just remind us of the distinction we're making between climate action and investments and businesses in general, and adaptation. You know, when you talk to most people about climate change and what one's doing about it, um uh they mentally have a model of solar, renewables, and other ways in which we're seeking to decarbonize the economy. Now, decarbonization is one aspect of adaptation, but adaptation is not just decarbonization. Okay. Um, and so we have to understand that you know, delivering you know, food security, to come back to one of the earlier examples I gave, it is not necessarily a matter of decarbonized food, uh food production systems, yeah, but are very different kinds of resilience. In some parts of the world going forward, there will be very weak nutrition, um growing difficulty uh in growing food in soil at all. You know, and that's a point that you made earlier. You know, will vertical farming become more than um marijuana and basil in California and become a real solid basis in which even lower income, but certainly middle-income countries can um uh manage at least part of their food production systems in the context of extreme disruption and soil deterioration. So I think it's important that we don't get caught up with a confusion between decarbonization and adaptation, even although there are links between the two.

SPEAKER_00 28:43

Can I just jump in on a specific example? One of our clients is a company here in Cairo called Genoptic LED. And this is this is where I think that we'll we'll come to the argument around um compounding. Genoptic LED is a company that spends exorbitant amount of money on research and development in partnership with different universities around the world. And they have developed technology that in terms of delivers light in a vertical farming setting to plants that need it in such in the most efficient way that helps the plant vitality, uh, but also helps reduce energy consumption. And so, yes, it the the original intent around food security is not decarbonization, by but by stacking a solution that delivers light in a more efficient way. In a way, we are decarbonizing because we're pulling less, uh, we're consuming less energy.

SPEAKER_01 29:42

Completely agree. So, you know, next generation vertical farming, you know, will probably save anything up to 90-95% of water compared, you know, per product compared to um uh even quite high efficiency models such as in Israel and elsewhere. Um, it will deliver significant reductions in carbon related to uh per unit food production, obviously dependent a little bit on the intermediate technologies. That's your example, but also dependent on what their actual source of energy really is. Is it solar, is it wind, is it coal, is it oil, is it gas, is it nuclear, and so on and so forth. You know, so and and by being close to market, um, you know, there will be much uh less possible losses and costs associated with transport. There's more fresh and so and all so you're right in the underlying point, which is conceptually, one can and should separate mitigation from adaptation, but in many instances there will be compound and co-benefit architectures uh that join the dots between the two. I think that's right. Now, coming back to your question of who's doing well at the national level. So um you'll probably be a little disappointed in my answer because it'll be more ambiguous than one would like. Okay. Morfostas has um over the last year developed a sort of first metrics model to try and assess exactly what you're asking. So we uh launched at the World Economic Forum in Davos this January uh the first pilot of what we're calling an adaptation economy index, um, which ranks countries not according to their adaptation or risk, but according to how far they've gone in developing the markets that are needed to attract capital into adaptation solution businesses. So, you know, this isn't only what are we doing in water or what are we doing in food, but where are our financial regulators? What are our industrial strategies? You know, how are we deploying our public procurement in a way that incentivizes businesses that are offering these sorts of solutions? You know, so these are cross-cutting uh aspects of public policy and market creation, as well as verticalized focuses on particular areas like, as you said, shelter, education, whatever it happens to be. Um that index um uh still at a fairly early stage is unique. Uh there's no other work out there that has really followed the same path. Clearly, there are sovereign ratings that assess risk and therefore incorporate climate-related risk. Um, and there are asset level indexes, particularly for public equities, um, that offer information on physical risk. Um, you know, and so one can look at one can look at companies through the lens of how they're managing to mitigate physical risks associated with climate change. MSCI has that data, S ⁇ P has that data, uh, and so on. But a sort of broader how are the economies of different countries doing, you know, remain, you know, in in the face of climate change remains an open question. A couple of examples to make the point. France last year issued its adaptation strategy. Okay. The headline on the front page, the front cover of the document is planning for a four-degree world. Yeah, just to put it in context. So they're expecting extreme levels of change and beginning to think about not only how to make some of the infrastructure that's in place more resilient, you know, things not being washed away, fires and droughts and so on and so forth, but food production systems, industrial strategies, the whole rack of stuff. Have they done it? No. Are they really beginning to think about it in a more systematic way? Yes. Take Brazil. You know, so Brazil, as we know, obviously is the Amazon or a major part of the Amazon, is agribusiness, is mining, uh, are huge swathes of indigenous peoples, you know, producing relatively small-scale scrap crops, relatively technology-light, and actually an almost carbon-free electricity system. Yeah. Okay. Because it's almost all based on hydro. Um, so they produced, what, 18 months ago now, uh, through their Ministry of Finance, interestingly, their new sort of ecological industrial strategy. Uh, and that focuses on improved use and resilience of food production, uh, of more broadly agricultural production, um, moving up the bioeconomy scale into agricultural products that have technology enhancements, so things like biofuel. Um, and uh clearly they're looking at the upside opportunities of climate change, such as the shift to sustainable biofuels uh for um for planes and others. Uh, and they're looking at associated climate disruptive risks, which obviously uh in the case of Brazil can be very extreme given their dependence at multiple levels on the state uh of the Amazon. So, really interesting case in point. China, take a third example. They've just issued their latest uh five-year plan. Uh, for the first time, really, there's a substantive piece on adaptation incorporated into their plan. Uh, interestingly, two or three years ago, China declared a food self-sufficiency objective, not for all aspects of food, but for major nutrients, proteins, carbohydrates. Um, and that almost certainly is linked to that food security objective, you know, a belief in global food chain instabilities going forward, uh, and the need to onshore food production to protect themselves from that. That's not possible in a pure soiled food production environment. They'll need to go CapEx intensive uh in that space, as we've talked about, lab-grown protein, vertical farms, the whole sort of architecture, which actually for them uh is not just a user phenomena, but also it can become part of an industrial strategy. Just like China today is the exporter of EVs, solar, wind, and batteries. Tomorrow they could very well be the major exporters of CapEx intensive food production systems that are climate resilient. So that turns into a sort of food, sort of food industrial strategy link. And then my last example, you know, which we've all seen actually in the newspapers over the last few weeks, um, are the Gulf states in particular and water. Yeah, as we know, there's effectively no groundwater. Uh so those economies are approximating 100% dependent on water desalination andor recycling. Um, you know, and it's interesting that although uh quite rightly the news has highlighted the risks of those facilities becoming damaged during the war, what's perhaps been less described is the fact that many of the Gulf states have multiple redundancy systems. Yeah, so not just second installations, but a whole series of backup models for ensuring that they can secure um water availability in the context of major disruption to that equipment and infrastructure. Um, obviously, nothing is resilient to everything, but but that sort of redundancy analysis and redundancy investment becomes really critical for the most important parts of what one needs, which is obviously water, food, and shelter uh and security. So those would be not the best examples, but certainly diverse illustrations of how different countries are beginning to try and get their heads around this piece. For those that are interested, uh Morphosis released a series of technical papers uh on this topic last year um in Sao Paulo on the eve of climate negotiations, COP 30. Um, that included two country case studies, one was Brazil, one was China, both published on our website, uh free to download.

SPEAKER_00 39:13

Simon, um that's fantastic, and thank you so much for the examples. Is the adaptation risk framework publicly available? Um is this something that you could share? Uh and I'm not saying the scoring criteria, but just kind of what goes into the thinking behind it.

SPEAKER_01 39:31

Actually, um, right now it's not only publicly available, but we are sort of pleading for people to feed back, to plagiarize it, um, to use it, um, to evolve it. Um, you know, a little bit like you not needing to monetarize this podcast. Our first objective is not to monetarize these frameworks, but to push them into broader use, to improve crowded in wisdom. You know, these are quasi-public goods. Now, Morphosis can derive revenue streams from that, you know, with a second tier of services and research and analysis. It's very relevant for our due diligence as of Series A businesses that we're investing in, but all that material is also available uh on our website, including the fairly simple methodologies that we're using on the data side. We're very happy to have recently onboarded um a new partner. Uh, we have a chief technology officer now that will gradually be turning this from a sort of analog model into a sort of AI LLM platform that will enable more real-time analysis of the progress of different economies, first and foremost, but bringing that down to a sector level, to a city level, and ultimately to an asset level as well.

SPEAKER_00 41:00

That'd be amazing. Um that you mentioned the word AI. Um, and I'll give a couple of examples. Uh, what I would ultimately like to get from you is your perspective. Is AI a force for good in this context or not? And on one hand, we recently met with uh Vincent Kuiper out of Netherlands. Uh he runs an uh an angel syndicate that invests in food tech, and for example, the two crops that are most ripe for disruption from a climate perspective are cocoa and coffee. And so they invest in either cell-based or alternative solutions to this. So in AI has helped these companies advance their uh journey to market. And on the other hand, in the States, kind of like what has happened last week in terms of Sam Alpman being lower, his house being attacked twice, uh uh being shot at with multiple cocktails. Um people are furious about the build out of data centers. And and you you talked about the source of electricity and energy. The easiest things to fire up and power up is coal, right? Like everything else is much longer term in duration. So um, and and and rightfully so, the general populace is upset if their prices are going up for electricity, whereas either regulators or companies are not pricing the externality associated with bringing data centers on stream because so you have two spectrums. Where do you land in terms of AI? And is it the force for good or not in terms of climate adaptation?

SPEAKER_01 42:47

Do you think there's a single person that has been interviewed in the world over the last six months that haven't been asked about AI? It's sort of hard to imagine. Um, so uh everyone has an opinion, and of course, it's full of uncertainties. Look, you know, it's clear that AI will deliver a completely different production architecture across almost every sector and activity, yeah. And that our challenge in the longer term is how does one build a macroeconomics that delivers effective demand and livelihood opportunities that can take advantage of those huge productivity advantages? And which country is most likely or which countries are most likely to be able to innovate in the macroeconomic dynamics of ensuring that those productivity enhancements can deliver income and wealth developments within the country rather than just huge leakages out of the country. So, you know, that that those are, you know, I'm I'm an economist by training, and and if you put climate to one side, you know. We've spent hundreds and hundreds of years using labor markets as the basic way of channeling production wealth into effective demand. That's going to falter or even in major parts collapse. We need to have, as you said, a different circular economy that can channel those productivity gains into demand that can actually deliver then profitability to the businesses that are incorporating AI. This is kind of one of the great economic design puzzles of our time, even before you get to any climate adaptation space at all. So that that that's super important, but probably not the piece we're going to dive into on this podcast, but super important. Secondly, Morphosis's thesis is not that we should focus on one sector, water, food, and so on, but that what is likely to evolve in response to adaptation, in response to climate change, and harnessing AI in particular will be more and more distributed infrastructure solutions. Yeah. And obviously, we already see that in the energy space. We all know the energy story. Um, but we don't yet really understand that to be the case for food. We don't really think about that in relation to water, even although we have desalination plants sitting in the Gulf states and elsewhere. We really don't think about that through an education lens or a health lens, or even new models of finance lens and security lenses. And yet, Morphosis would argue that what connects all those sectors up in the context of climate change and adaptation will be the emergence of distributed infrastructure solutions across all of those sectors and in many instances, interconnections of that distributed infratech between what we have historically thought of as distinct sectors. Yeah. Now that's our way of evolving an investment thesis for investing in adaptation solution businesses. Obviously, it's at a high level, it then needs to be brought down. Um, but all of those infratech solutions will be very, very AI intensive. Yeah. And so if we stop thinking about AI as a phenomena and think about what AI is going to enable in terms of adaptation solution businesses, um, the opportunity is enormous, but also the imperative is enormous to develop this much more sophisticated distributed infrastructure to deliver on the basic needs that all of us have. Um, so all of that leans towards the critical importance of AI to feed that new set of business solutions. And it doesn't really touch on the real question of, you know, are data centers using too much energy? Are they using too much water? Are they going to be underwater in the future in order to cool them? Are they going to be in space in order to get out of legal jurisdictions? I mean, all of those things are going to happen in various different ways. I'm sure data centers will become less energy intensive and we'll use more green energy and we'll recycle water more and we'll sit underwater to cool and we'll sit in space and use solar in a different way. All that's going to happen. But that's not really the key to understanding the broader adaptation agenda. It's important and it's now, but really we need to understand how that's going to flow into the kind of solution spaces that are going to be critical, particularly for low and middle-income households in countries that no longer can sustain large volumes of centralized infrastructure.

SPEAKER_00 48:17

Makes sense. If I was to maybe put a score, I think you're more of an AI bull than AI bear. Um, I couldn't agree more. For me, the the big observation that I have uh about AI, not just purely the context of climate adaptation, is that AI has allowed us to go from a one-to-many model to one-to-one model. Now I can build my own solutions that uh perfectly fit for me, rather than me trying to conform to whatever is built for everybody else. And same thing, what it's around vertical farming or this distributed infrastructure, I think we'll we will get to a point where it's feasible, it's economic that this could be done. I mean, Canada, this data center is uh one of the four one of the four core priorities for the province of Alberta, but also for Canada. Cold climate, right? So we we have uh very low temperature. So from a cooling perspective, well, you're in a cold climate. Um but if you think about kind of like how do we keep the grid electrified, it a lot of it is with um peaking plants, gas plants that just fire off when electricity is needed. But if you have this infrastructure distributed where houses could possibly generate, you still have to have the grid electrified, there's no question about it. But I think that the there there'll be solutions, but it's vertical farmers with electricity where you can shift it away from mass plants into micro solutions.

SPEAKER_01 49:59

So so I think all of that is true. Um, I I'm very much aligned with your comments. I I guess my uh not my if and but, but my and um you know would be we can imagine households and communities securing a higher level of operational autonomy in the face of climate change and new technological solutions across some of the basic needs areas that we've described. You know, I'm I'm sitting in East Africa, I'm not reliant on tomato paste from America. Yeah, um, but but we have to ask the question where does that technology come from? And who's gonna pay for it? Yeah, and and so you know, it may well be that Kenya, you know, at a distributed level, can achieve high levels of operational autonomy, but it may also be that they create new forms of dependency with technology providers that are coming from outside of the country and associated data-related governance models. Now, the only relevance of that to this to this conversation is that many of the pressing needs for adaptation solutions currently not only but largely sit in countries that are going to experience higher climate risk, weaker currencies, more policy risk, and therefore become less and less investable through many parts of the capital markets. Yeah. Um, and at the same time, um, the producers of those technologies, which may be sitting in China, maybe sitting in Brazil, you know, maybe sitting in Europe, maybe occasionally, or the US, they're going to be seeking to land equipment sales uh and service sales in those markets if they can. So our business model and investment challenge becomes how you effectively deploy at scale these adaptation solutions that allow for distributed autonomy sitting in markets that are struggling to pay in hard currency to the technology providers and the IP owners. And I think we will face a new, you know, this is not a new subject, but it will be a far more accentuated um set of challenges to find ways to service those markets effectively going forward.

SPEAKER_00 52:54

So I'm I'm I'm an internal optimist, and I I personally believe that AI has become a um something that has leveled the playing field, and I think that this AI has provided access to developing countries to uh create solutions. It has really given them a plethora of solutions they can now use to go and create uh uh to be innovative and create solutions and not have economic dependence on what it's big farm or big tech or big agriculture uh from other countries. Um that's my personal perspective. I think it's going to come to emerge as this is the key as the case. Um, but I want you to tell us a little bit more about Morphosis, kind of like what and if you don't want to mention specific portfolio company by all means, but what are the the most exciting investments you guys have made uh in the climate annotation sphere?

SPEAKER_01 53:53

Yeah, so we're at an early stage, we've been around for about six, eight months. So pulling out our portfolio and taking our first suite of businesses um uh to capital providers. Um, we've had uh examples of companies that we're working with um that are in the water desalination space um but are not um purveying uh technologies like reverse osmosis, which come with various environmental challenges, you know, offering more off-grid solutions, uh, are offering thermal approaches to desalination, so less environmental fallout, uh, and can scale up and down from industrial down to household. So that fits that sort of distributed sort of infratech uh uh lens that I was providing a few minutes ago. Um you know, we're working with a business um that is in the food cleaning area. Okay. Um uh as we know, uh there is huge food wastage um in many countries at the production end and in many other countries at the consumption end. So we're less engaged on the consumption side of food waste, much more engaged uh production side of food waste. And there are many, many reasons and many solutions for food waste. Um, but we're working with the business that is focused um on larger scale capability of uh ensuring um that live food, I don't mean literally live food, uh, but food that can acquire bacterial problems and so on, uh can be cleaned more effectively and made fit for purpose for longer periods of time. So that's less on the distributed infretech side. These are larger scale systems, um, but are trying to address particularly um uh production, the production end um of food security and safety, uh, in fact. We're working with another business that actually isn't in the technology space at all, not everything has to be technology, but is in the business of uh ecological investment. So large-scale investments into nature restoration and conservation with associated monetarization models uh linked in particular to biodiversity credits, so the equivalent of carbon credits in the nature space. Why is this relevant? Well, it's relevant because we need to channel funds into nature restoration and conservation as part of the adaptation process, because well uh healthy nature uh provides many adaptation services, uh, both locally and in some cases uh transcontinentally. It enhances the productivity of many landscapes, um, uh whether it be for food or timber or carbon or other variables, uh and uh investing in nature landscapes can lead to significant asset protection. Think of the case of Los Angeles, where um the evidence is clear that if the nature landscapes around Los Angeles had been better managed, then the fire damage would have been far lower. And there's a whole story behind that, but we know that effective investment in nature in order to protect assets in the context of um uh uh natural catastrophes and climate change uh will become a more and more important part um of the overall adaptation agenda. So there are three examples one in water, one in food security uh and uh reduced waste, and one in nature investment. Uh we're particularly focused um at the moment on series A B percentage of investment. Um, and uh you know that's usually, as we all know, sort of two to ten million sort of equity shots, uh, plus perhaps uh a pile of debt uh where project financing uh is also relevant.

SPEAKER_00 58:34

And in terms of geography, um, Simon, do you meet companies where they are? Uh doesn't matter. Like, I mean, you gave examples from Brazil and China and France. Um the other question they have is is your investment criteria predicated on a multitude of factors or dimensions? Um economics being one of them, climate adaptation impact being another one. Kind of like, can you tell us a little bit more about kind of how and where do you make investments?

SPEAKER_01 59:09

Yeah, so you know, we're at an early stage. I really enforced the point. Um, so I don't want to make claims that are sort of theoretical um rather than uh real. Um, we have a global landscape view at this stage. Uh so we're not an emerging market player and we're not an OECD player. Um that said, uh, what we see, unsurprisingly, is that for many emerging market businesses at an early growth stage, it's very difficult to attract international capital, not so much because of the business, but because of weak currencies uh and unstable regulatory environments. So, in one of the cases we're working with, um, the business is sitting in a Latin American country, and we are creating a European um effectively mirror business that will be headquartered in Europe. Um, and it will obviously it'll retain its market risk in terms of deployment, but will significantly reduce its risk in terms of jurisdiction. Um, and that obviously changes um not completely significant degree um uh what capital providers think about the subject. Um we talk about being particularly interested in products and services that are relevant for low and middle income countries, uh low and middle-income councils um in uh in vulnerable uh climate vulnerable countries, but that's not a secret word for the global south. We feel that's relevant to some parts of the global south and actually increasing parts of the global north. And the reason for that focus um is not is you know, in part perhaps a moral view, it is in large part because we think those are going to be the fastest growing markets. You know, demand for adaptation solutions in low and middle income households that are vulnerable will be the growth market if one can drive down costs of the relevant solutions uh to the right unit level.

SPEAKER_00 1:01:29

Okay, okay. I know that's weird time. I mean, this has been a fascinating conversation. I could just keep going. Um, I've learned a ton from you. Um, I've really enjoyed a conversation. In the show notes, we'll put um where people can follow your work, uh, website, white papers, anything that you that you have developed. Any parting words?

SPEAKER_01 1:01:54

Um, you know, to quote the Singapore Sovereign Wealth Fund, the GIC, adaptation, in their words, is the inevitable investment. This is not an asset class. This is a whole bundle. And so whether you like it or not, if you're allocating assets or if you hold investments for other reasons, adaptation will become a critical part of what you're doing. There's no choice to that. You it's not up to you whether you become an adaptation investor. The only thing that's up to you is whether you're on one side of the fence or the other side of the fence.

SPEAKER_00 1:02:38

Okay, okay.

SPEAKER_01 1:02:39

Thank you, Simon. Thank you very much indeed. A delight.