How landmark U.S. climate legislation and a looming border energy fight could accelerate a generation of climate innovation in Latin America
There is an old idea that drives international investors and policymakers to underestimate the opportunity for breakthrough climate innovations in Latin America, an old idea that is both self-defeating for the continent and now has much less to do with the reality on the ground.
The likely passing of the Inflation Reduction Act comes just a few short weeks after the United States picked a diplomatic fight with the Mexican government over their preferential treatment of domestic energy suppliers. The landmark legislation will not only accelerate climate breakthroughs north of the border (More from Emily Kirsch here), but it adds fuel to the fire as the argument that the United States is telling its neighbors and the world to do as I say, not as I do, when it comes to climate.
In Mexico, this will likely be President Lopez Obrador´s (AMLO) last stand on behalf of the established oil and electricity sector, opening a long awaited window for the next generation of breakout green innovations south of the border. In short order, we may be realizing the vision of a continental climate innovation strategy, one of the USMCAs more ambitious goals.
I have been in Mexico for the last year as a Fulbright Scholar studying at ITAM and working at Dalus Capital, a leading early stage venture capital firm with an express mandate to invest in the next generation of breakout climate startups, rain or shine. This experience has afforded me an intimate perspective on the diplomatic relationship between the two countries and a front row seat to the next generation of pioneering startups south of the border.
The global political moment
The emerging conflict between the United States and Mexico on energy trade comes at a unique geopolitical moment. After decades of taking a globally connected economy for granted, Covid-19 reminded the world of the perils of exclusively relying on soybeans from Brazil, semiconductors from Taiwan, and cobalt from the DRC, the list goes on. The economic and geopolitical fragility of globally distributed supply chains had their judgment day, the west is still trying to pick up the pieces.
Many, including the influential Mckinsey Global Institute thought that Covid-19 might be a trial run for the climate crisis, an opportunity to rethink our approaches to global problems with no clear leaders. The Biden Administration took an initial step toward this vision by appointing veteran diplomat John Kerry as the White House’s Special Envoy for Climate Change while expanding the scope of the Environmental Protection Agency and Department of Energy.
As the world began to recover from the pandemic, Russia’s invasion of Ukraine impacted energy markets far beyond Europe, punishing voters at the pump. President Biden asked Americans to hold on a bit longer, even going as far to pressure domestic producers to ramp up production. Meanwhile, experts that have been framing energy independence as a national security issue for decades are finally taking the podium.
Until last week, Senator Joe Manchin had the U.S. Congress in a headlock, blocking landmark clean energy legislation, while the Supreme Court continues to constrict the EPA´s power and influence. 73% of American voters under 30 years old demand the White House does more for the climate, regardless of party. With mounting pressure and few tools remaining at Biden’s disposal, the IRA bill is a potentially massive win domestically, and adds momentum as the border energy negotiations continue to escalate.
This will be a defining moment in the US-Mexico diplomatic dance given 2024 presidential election cycles on both sides of the border. The diplomatic efforts will require the administration to apply pressure on AMLO to liberalize the energy sector, critical for both economic competitiveness and climate, while still collaborating closely on many other disparate but important issues (including managing record migration and ongoing counternarcotics cooperation).
Since AMLO took office, Mexico has not been seen as an innovator in the climate space, for good reason, with its centralization of electricity and gasoline into a few state supported incumbents and a lack of proactive action against their global climate commitments. One of the first initiatives AMLO seized was an electricity reform that turned back the clock on renewable investment, instead prioritizing petrochemicals. In a drawn out battle, the initiative did not pass the Mexican congress in April 2022, forcing AMLO to utilize executive branch initiatives and encouraging regulatory bodies to slow innovation through bureaucracy.
The week after the reform was rejected I spoke with a former ITAM Professor, clean energy advocate and former advisor to CFE (Mexico’s central electricity agency). It was obvious from the mood of our conversation — it was a victory shadowed by defeat, and a searing disappointment over the energy and time wasted on fighting yesterday’s policies instead of building tomorrow’s — that AMLO´s strategy seemed to work: If you can’t beat them, slow them down.
At that point, there was just enough time for the climate policymakers to poke their heads out from hibernation in the top technical universities and think tanks before Mexico and the United States came to blows a few weeks. What AMLO likely did not anticipate is that he is no longer simply advancing a strategy of stifling foreign competition and slowing a domestic renewable transition, but now his actions are being framed abroad as a departure from Mexico´s commitments under the USMCA, a much more complicated problem with implications far beyond the energy sector.
It is possible that AMLO´s last ditch efforts in the face of a mounting border fight may prove fatal for his protectionism, opening a small window for innovators and investors to revisit Mexico as an opportunity zone for climate and energy innovation. We may finally see a critical piece of the puzzle for a robust climate ecosystem in Mexico and the region fall into place.
Building an ecosystem
Any investor will tell you that developing early stage climate innovations is truly a team effort. Mexico has been building their team over the last decade, resulting in the stakeholders below who are forging a powerful fabric for ideas to spark, teams to be built, investor confidence to foment, and businesses to gain traction. All of these things together create momentum for the entrepreneurs fighting climate change.
Governments and their leaders have the power to not only influence culture and community, but also to incentivize or deter investors and builders, lower or raise the barriers to entry, and ultimately manipulate the perceived risk profile of a country. Earlier this year at a conference in Dallas, I was pitching the creative models we see in the region to growth stage funds and institutions. About 50% of the time I was asked about the status of Mexico’s electricity reform, even if the particular climate startup had nothing to do with energy or its related services. Political signals matter, and certain ones — like the electricity reform, or a poorly managed border dispute — can be cancerous. Government cultivation of messages that illustrate openness to foreign investment and innovation are critical to global funds when assessing opportunities in foreign markets.
Foreign direct investment and grant making from organizations such as International Development Bank and The World Bank in the absence of government leadership can play the role of market makers. In the climate space, they often pick up the slack. They are more active and can make direct investments with less oversight. That being said, their challenge is similar to a jockey riding an elephant: when the elephant leans in a direction, it often takes a herculean effort for the jockey to adjust its course. When federal governments act as elephants, we need large FDI enabled investors to step up and play the skilled jockey.
Enterprise signaling, big companies partner with small companies, they invest in them, and in some cases they even buy them. For example, look at the way a large payments conglomerate like Visa or Mastercard might sprinkle investments and partnerships with an entire batch of open banking startups around the world with the expectation that at some point there will be a clear target for acquisition. In the meantime, that open banking ecosystem is maturing, adding more value to their clients, and the technology is being advanced. The largest companies in any region must identify themselves as potential customers and consumers of innovative climate solutions, signaling that the region’s incumbents will not stand in the way of innovation, but help accelerate it. We are seeing early signals of this from players like FEMSA and Bimbo Group.
Accelerators and incubators are critical for climate innovators, who need to be surrounded by experts and a community that deeply understands the problem they are trying to solve, helping early-stage companies develop correctly. They also operate as a stamp of approval for investors, marking companies that lack outstanding commercial traction as viable concepts, and signaling access to a network and talent. I can’t think of many investors in LATAM who wouldn’t review a pitch deck that has the stamp of Latitud, Newtopia, or Y-Combinator.
Academic institutions are the backbone of any innovation ecosystem. They educate, convene, set long term goals, and are decidedly a-political. Tec de Monterrey is a foundational player in Mexico developing top technical talent across the country with a strong bias towards entrepreneurship while still maintaining deep ties to the country’s industrial roots. Much like Stanford or MIT alumni in the United States, Mexicans would not be surprised to meet Tec de Monterrey alumni on both sides of a startup pitch presentation.
Regional VCs, funds with a strong track record, and deep local networks are beginning to evolve their portfolios to include climate innovation, signaling to founders and LPs that these commitments are long-term. Climate specific funds such as SP Ventures which not only provide smart capital for founders in the agtech vertical, but operate as key experts, can be extremely helpful also in guiding more generalist funds to enter as co-investors in what can be very complex businesses.
Top repeat founders and talent — We are observing a wave of repeat founders from the region’s best unicorns looking for their next opportunity in the climate space. Sebastian Ruales, a key member of the “Rappi Mafia” who has recently launched Bia Energy out of Colombia and Gabriel Silva, Co-Founder and CFO of Mombak, formerly VP of Finance at NuBank are two recent examples. Star entrepreneurs building the next generation of green businesses not only inspire other founders and attract global talent, but they also draw the attention of foreign investors.
The momentum and creativity of these leaders across the ecosystem outlined above will be critical to accelerating the climate innovation ecosystem across the continent.
On the ground at the 2022 LATAM Climate Innovation Summit
Local innovators are not waiting for the government to lead. Just two months after the electricity reform was blocked, we hosted the first ever LATAM Climate Innovation Summit at Tec de Monterrey in Mexico City (recap video). The summit included two days of programming for the 150 leaders most capable of accelerating a green transition on the continent, from top NGO leaders, to startup founders, VCs, academics, and multinational corporations. In his opening remarks, Ambassador Salazar reminded us that the climate crisis doesn’t care about borders — air quality problems in Juarez are air quality problems in El Paso; the Rio Grande is a shared resource — and in our efforts we always return to the shared stakes, and from there build a shared vision.
As one of the only funds in Latin America with an explicit mandate around climate innovation, we felt the event was an intoxicating reminder of the energy, eagerness, and optimism of this community. Organizations traveled from as far as New York, Brazil, and Chile, many met for the first time and quickly developed partnerships.
The event was designed with the understanding that technology has a role to play, but the primary goal is continental collaboration that includes multiple markets and theories of change. The sponsors, participants, and programming of the event reflected this vision. From pitches from top tech entrepreneurs across the continent, to an afternoon spent with the leaders of ArcaTierra learning about pre-hispanic agricultural innovations.
In preparation for the Summit, we launched a lo-fi “call for innovators” to pitch, they had a one week application window for six slots. We received over 40 applications. The business models ranged from traditional consumer products, to B2B software, digital marketplaces, financing tools, and even a hydrogen powered taxi fleet operator. These founders had PhDs, previously owned and operated unicorn companies, had global networks, and competing term sheets. Corporate venture arms from the largest multinationals in the region were listening intently to their pitches alongside foundations, diplomats, and journalists.
This event was an inspiration and reminder that Latin America has a profound opportunity to lead in the fight against climate change, to build the next generation of organizations, communities, and companies capable of responding to the challenge of our time.
Time for a second look
Pressure from the United States on Mexico to liberalize its energy sector is mounting, this will be the last domino to fall enabling the innovation ecosystem to reach an undeniable global maturity. Now is the time for global venture funds, organizations, and corporations to make their setup moves, to look beyond headlines, and to take that extra expert call. The stage is set for the next green unicorn to be in LATAM.
