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Amid market instability from the COVID-19 pandemic and other global crises, an investment tool to raise capital and acquire companies has gained favor in the last year. SPACs, special purpose acquisition companies, are known as “blank check” companies because they are formed without specific target acquisitions in mind with the sole purpose of acquiring enterprises. The method allows companies to go public without nearly as much public scrutiny or technical hoops as a traditional IPO, and while there may be various pros and cons — and motives — to any SPAC, this option has also emerged as a popular way for sustainability-conscious investors to support like-minded businesses and an alternative to IPOs for companies looking for quicker access to capital.
One new SPAC recently caught my eye because it is organized as a public benefit corporation and a Pending B Corporation, and it plans to invest in companies that both address the United Nations’ Sustainable Development Goals and that are capable of becoming Certified B Corporations, which are businesses evaluated for their impact on people and planet as well as their ability to make a profit. Sustainable Development Acquisition I Corp. (SDAC) has strong roots in the B Corp community, as it was formed by Renewable Resources Group, a newly Certified B Corp, and Capricorn Investment Group, a Certified B Corp since 2014. Investors who decide to be a part of SDAC know their money will be used to acquire companies with stakeholder-oriented governance and purpose-oriented practices.
According to Nicole Neeman Brady, CEO and Director of SDAC and Principal of RRG, the time was right to form a SPAC focused on companies that commit to B Corp values of people, planet, and profit. I recently spoke with Neeman Brady about the new venture as part of my research on stakeholder-focused businesses.
“I’m amazed at how many business opportunities there are with this kind of focus,” says Neeman Brady, who notes that SDAC is focused on companies that value authenticity and accountability as well as the bottom line. “For us, ingraining the long-term governance and having that alignment with the management is very important, and they also need to have significant growth potential.”
By backing these companies, SDAC also is helping to grow the B Corp movement and attract investors who are looking to support companies addressing global challenges including the climate crisis.
“These investors are going to hold for a long-term investment,” she says. “Operating with public benefit corporation governance and structure helps mitigate risks and allows companies to deploy the capital with the greatest impact.”
In the highlights from our conversation that follow, Neeman Brady shares more about the story behind SDAC and how it hopes to help more companies address the world’s pressing challenges while creating returns for investors.
Christopher Marquis: What’s the origin story of SDAC? Who were the key players in bringing the group together and launching it as a benefit corporation?
Nicole Neeman Brady, CEO and Director of SDAC
Nicole Neeman Brady: We formed SDAC to capitalize on the full potential of a more than decade-long partnership between Renewable Resources Group and Capricorn Investment Group, which each have more than 15 years of dedicated impact investing, research, and operating experience focused on climate change and sustainability. Both of us saw a pent-up demand for growth-oriented businesses in the water, food and agriculture, renewable energy, and environmental resources management sectors that are ready to go public and worth over $1 billion, and decided that a SPAC was the ideal vehicle to deliver significant impact with scaled, pooled capital.
We are proud to be the first publicly listed SPAC that is legally structured as a public benefit corporation, and the first SPAC designated as a Pending B Corp. We did that because we wanted to embed good governance into our company from the very beginning. SDAC’s co-sponsors both believe strongly in the B Corp mission. Capricorn has been a Certified B Corp since 2014 and RRG recently completed its own certification. Both firms encourage companies — from our portfolio companies to our partners and peers in the multiple industries where we work — to join the B Corp movement to use business as a force for good.
Being a public benefit corporation means that we are legally empowered to pursue positive stakeholder impact alongside profit. And SDAC’s Pending B Corp status — as well as the experience of its sponsors with the B Corp certification process — is a strong, clear signal of our commitment to environmental, social, and governance (ESG) standards. For investors looking to make the most impact with their dollars in these emerging fields, this is a powerful combination.
We’ve shown that by having strong governance and a focus on impact, you can produce attractive financial returns. Both of our firms have done numerous investments in companies that either have become or are becoming B Corps, and we have real experience in the certification process.
Marquis: SPACs were relatively unknown until recently. Can you explain how SPACs work and why companies may want to go public through a SPAC?
Neeman Brady: First, there are several benefits of going down this path, particularly relative to doing an IPO on your own or a new listing. It’s an incredible source of new capital for the company and a fairly cheap source relative to what else they may get out there.
When we formed the SPAC, we raised a considerable amount of money from investors. That money is put in trust and effectively earns treasury rates while the search occurs. It’s sitting there and really cannot be tapped into at all. The IPO investors also get warrants associated with their investment that allows them to buy additional shares of the issuing company at a later date.
After a little more than a month, those will separate, and then the warrants and the stock will trade separately on a public exchange. When we find the company that we want to acquire, we put it to the shareholders to vote. The public investors can vote to redeem all or a portion of their common shares and get their initial investment and interest back — or to stay on as a shareholder in the newly-public company that has been combined with the SPAC. We believe public investors may view this as a low-risk proposition and opportunity to see what company has been selected.
Additionally, there’s the at-risk capital which the sponsors put in themselves. That is the capital that funds the SPAC operations. The sponsors do get some founder shares and warrants associated with having put in that at-risk capital and for their overall efforts. If I don’t find a company and I use up all that money, it’s the sponsors whose investment is at-risk. The public investors’ money is still sitting in trust, and would be used to redeem the public investors’ shares if I don’t complete an acquisition within a pre-determined period of time.
When we look for a company to acquire, the simple rule of thumb is that the company target size is somewhere around three to four times how much you raise in the IPO. That’s the enterprise value of the company. You can certainly go bigger, and you can certainly go lower, so it doesn’t preclude either direction. Another thing that happens that’s important to this whole puzzle is that typically there is a PIPE (private investment in public equity). This is where additional investors — usually very credible names — come alongside and make a significant investment, to the tune of collectively $100 to $200 million or more, to provide validation that the deal is worth doing.
Marquis: Why is B Corp certification a key component for potential target businesses? How does the certification go beyond “greenwashing” to ensure companies are operating with positive impact in mind?
Neeman Brady: The reason SDAC decided to pursue targets who have already attained B Corp status, or that have the potential to do so, is that B Corp’s robust, industry-specific environmental and social standards ensure that a business’s operations are creating meaningful impact.
Greenwashing has become a major concern in the responsible investment space. There aren’t many trusted mechanisms for investors to use to both vet and verify impact. B Lab’s deep engagement with a company’s policies, practices, governance, and supply chain — tailored to the industry in which it operates — makes it one of the strongest certifications currently on the market to ensure that impact is being achieved and sustained for the long term.
In this regard, one of the unique value propositions that SDAC can offer is that if our target does not yet have its certification, we will use our significant expertise to help accelerate the certification journey by identifying areas for improvement in governance, employee management, and environmental sustainability. The leadership of SDAC have proven experience helping portfolio companies attain B Corp status and most notably, B Lab’s CEO and co-founder, Andrew Kassoy, is on the SDAC Board. RRG has assisted the management teams at two portfolio companies, Sun World International and Woodspur Farms, in completing their B Impact Assessments and targeting areas for improvement toward certification. Fishpeople, a wild-capture fish business and RRG portfolio company, has been a certified B Corp since 2013.
Another SDAC Operating Partner, William Orum, was involved in Capricorn’s B Corp Certification and improvements over time, as well as B Corp work within Capricorn’s portfolio. Capricorn encourages all of its portfolio companies to qualify for the B Corp certification. Its current portfolio companies that are B Corps include QuantumScape, Falcon Water Technologies, Sustainable Insight Capital Management, Greentech Capital Advisors (now Nomura Greentech), and Inherent Group.
It’s safe to say that staff at both co-sponsor firms, including managers and analysts, have been involved in certifying and managing B Corps within both portfolios.
Marquis: Through your focus on businesses in water, agriculture, and other environmental issues, you are working with companies that can address the U.N. Sustainable Development Goals (SDGs) through their operations. Why is it important for more businesses to align their practices and policies to address the SDGs — and what opportunity does that present for investors?
Neeman Brady: SDAC brings a lot of operational, investment, and functional experience to bear on a simple yet powerful proposition: You can make a difference in the world — and deliver for investors — by supporting companies that are in the business of supporting universal goals for a more sustainable future.
What sets SDAC apart from the competition is our mission to support companies whose products or technologies are helping to advance the SDGs and our experience as investors and operators in the sectors we’re targeting. The SDGs are ambitious, global goals — and a $12 trillion market opportunity. We need ambitious and globally focused companies to address them, and responsive, pooled capital to help grow and scale those companies. That’s part of the reason why the SPAC seemed like a good way to amplify impact.
The global population is anticipated to reach nearly 10 billion by the year 2050, and feeding that growing population will put new strains on resources. With this increase comes a lot of opportunities to deploy socially responsible capital into the food, water, and energy sectors and obtain meaningful returns. For example, meeting the expected 50% increase in total food demand under current industry practices would require more irrigation and produce more greenhouse gas emissions, which will mean new climate and water supply concerns for many regions and the people who live there.
Drilling down into just one of these a bit further, water is a big market opportunity — it’s estimated to be $800 billion — and we don’t know of any other SPAC focusing on it to the degree we are, and certainly not with the regulatory, technical, and operational expertise in the sector that we have. That’s where it kind of comes full circle.
Marquis: How or why does the SPAC structure lend itself to these types of investments? How was demand during the capital raise?
Neeman Brady: We were very, very pleased with the reception SDAC got in the market. The original capital objective for our initial public offering was $250 million, but given the significant investor demand, the sponsors decided to increase the offering, which ultimately led to a $316 million raise.
We believe that a SPAC is the perfect vehicle to quickly focus on the larger opportunities in the ESG sector, and it will allow us to add to the value of a target company at a more efficient pace.
Demand for ESG and impact in public markets is rising in several ways. Public equity impact strategies experienced one of the most significant growth rates across all asset classes from 2014 to 2018, and sustainability-focused funds saw record inflows in the first quarter of 2020, particularly to mitigate risks amid the COVID-19 pandemic.
SDAC is one of several public benefit corporations to go public since the beginning of 2020, which shows the momentum in this status being accepted and valued by the public markets. But the availability of ESG-focused companies addressing global challenges are not increasing to match this demand.
For example, two-thirds of ESG strategies use only negative screenings that exclude certain industries or activities from portfolios based on ESG criteria. ESG integration, or explicit and systematic inclusion of ESG criteria in investment analyses, is still growing.
SDAC is not only targeting companies that actively address global issues identified by the SDGs in their operations, but also ingraining long-term good governance through public benefit corporation status and validating impact through B Corp certification.