VC firm Fifth Wall to bankroll deployment of carbon-free building tech

Fifth Wall launched in 2017 to invest in software tools to modernize the real-estate industry. Last summer, it added a venture fund specifically focused on decarbonizing the buildings sector, and that’s grown to $740 million.

On Thursday, Fifth Wall announced it would go further than placing venture bets on startups or taking private equity stakes in them. The firm will now open its decarbonization fund up to financing the physical assets that need to be installed broadly throughout the built environment to zero out carbon emissions from people’s homes and workplaces. And it’s considering raising a separate infrastructure vehicle to complement the existing funds.

It’s a philosophical evolution for an investment firm founded on the theory that Silicon Valley investors were largely ignoring the ways software was belatedly reshaping the gargantuan real-estate sector. Fifth Wall still manages more than $2 billion focused on that thesis, but it has recognized that tackling carbon emissions from buildings requires more than lines of code.

“You have to start talking about atoms if you’re going to truly decarbonize the built environment,” said Brendan Wallace, co-founder and managing partner. In other words, the task requires deploying real assets to make buildings operate differently.

The firm anticipates a variety of financing structures for its infrastructure activities: It could own and operate assets, take debt positions, become a project-finance partner. The goal is to offer ​“full-stack” support for its portfolio companies as they grow from early stages to widespread deployment. Its climate-oriented portfolio companies include Aurora Solar, Span and Turntide Technologies.

Fifth Wall also will offer infrastructure financing to companies it doesn’t own a stake in, said partner Alok Sindher, who just came over from D.E. Shaw’s renewables infrastructure practice to run this initiative. The plan is to tap Fifth Wall’s knowledge of the sector to make savvy choices.

“The existing platform did the research on the technology and the market,” Sindher said. ​“We have this opportunity now to fund this next step.”

Wallace shared some compelling numbers to support this move. Real estate is the single-largest carbon emitter by industry worldwide, he said, accounting for some 40 percent of emissions (that includes emissions created by manufacturing building materials and from generating the energy used to power buildings). But by his reckoning, only 6 percent of climatetech investment has gone to technologies applicable to real estate (the billions flowing to solid-state EV batteries and nuclear fusion reactors aren’t making your office cleaner). That’s an enormous mismatch between investment aimed at stopping carbon emissions and the real sources of those emissions.

In the U.S., real estate generates 13 percent of GDP, and in Wallace’s view, there are three major trends pushing the sector to decarbonize.

First, local regulations are starting to require building decarbonization. Some rules mandate this for new buildings, but New York City’s uniquely assertive Local Law 97 imposes substantial penalties on owners of large existing buildings if they don’t reduce emissions later this decade. Such rules are hard for landlords to ignore, for obvious reasons: ​“Unlike other industries, you can’t move” real estate, Wallace said. ​“You’re inherently subject to local regulation.”

Second, the cost of capital is going up for inefficient buildings, as markets favor lower-carbon structures. The real-estate sector is especially sensitive to the cost of capital, so these changes reverberate for building owners.

Third, tenants are demanding lower-carbon offerings — especially large corporate tenants that have their own carbon pledges to fulfill, Wallace noted. Many of the biggest companies in the world track the emissions from their real-estate footprint as part of their carbon accounting. If a landlord wants to lease to Google or Amazon, they’re competing not just on the quality of the space but also on its greenhouse gas profile.

All of these forces are leading real-estate interests to look seriously at things they might not have considered just a few years ago. Rooftop solar is by now a well-proven option. Battery storage is still in fairly limited use in buildings, but it can offset expensive, carbon-intensive power with clean energy stored earlier in the day. ​“Anything big is going to have a battery over the next 20 years,” Wallace said. ​“So we need a lot of batteries.”

Then there’s a suite of insulation and weatherization tools that reduce the energy needs of a building, as well as highly efficient electric heat pumps that replace fossil-fueled space and water heating.

Even newer tools for building decarbonization include building-scale carbon capture, such as the system CarbonQuest installs in high-rise apartments in New York City. And the perennially up-and-coming thermal-storage industry is eager to improve HVAC efficiency by storing hot or cold thermal energy in insulated containers.