Episode 97: Investing in the Ocean with Kate Danaher

Molly Wood Voice-Over: Welcome to Everybody in the Pool, the podcast where we dive deep into the innovative solutions and the brilliant minds who are tackling the climate crisis head-on. I'm Molly Wood. 

All right it’s high summer and I bet a lot of you are at a beach, headed to a beach, just came back from a beach so it’s a good time to talk about the ocean the world’s largest carbon sink supplies 40 to 45 percent of the global population with food supports like 80 percent of animal life on the planet its temperature directly impacts global weather and it’s heating faster than expected 

Yeah, that. I thought I’d do a couple episodes talking about the ocean as a climate tech category fair warning that one these interviews is water broadly with an ocean lens 

And so let’s kick it off with a venture capital fund that followed the money straight into the sea. 

Kate Danaher

Thanks for having me. So my name is Kate Danaher. I'm the managing director at S2G Investments. I oversee our ocean strategy along with another partner, Larsen Mettler. And we are essentially, we're a growth stage investment firm that as a firm, we invest across oceans, sustainable food and agriculture and the clean energy transition. And within the ocean space, I really focus a lot on decarbonization, ocean intelligence, more the tech digital side of the house.

Molly Wood 

I definitely just want to keep talking about oceans for a minute. How did that come to be, know, energy transition, food and agriculture, somewhat obvious kind of climate investment spaces, oceans just are like misunderstood and neglected, it seems. How did that come to be an investment focus and how long has it been?

Kate Danaher 

Yeah, I think it is, the oceans really is, well, I think one of the challenges with it, just to begin, is that oceans is more of a theme than it is an industry. And when you think about food and agriculture, there's obviously a lot that sits under that or the clean energy transition. There's the built environment, there's, you know, there's sub industries, but like food and agriculture really is like an industry or a sector. The ocean is a theme.

And so it can be difficult to define exactly what the opportunity set is within that. And I think historically, a lot of people think about the ocean and they think about it as more of a philanthropic endeavor, that it's just falling apart or taking terrible care of it, all of which is true, and that we need to pump a lot of philanthropic money into the system to try and fix it or mitigate it. Again, all those things are true, but I think what people forget is that actually multi-billion and trillion dollar industries that have been around for, I mean, some of our earliest industries, the shipping sector, operate in and around the ocean. And those are very large industries with big assets. They represent like big parts of our GDP globally. And their interaction with the ocean and how they interact and how we think about moving goods or fishing.

All of it is really, there's a real economic value to it. And if we can align the economic value with the outcomes that we wanna see, like a healthier, more resilient ocean, then there's an investment opportunity there that is not nascent, small or philanthropic. It's actually quite large and it's working with large incumbent corporations to move that.

and how S2G got into oceans. Being in food and agriculture for over 10 years, we've learned a lot about what it takes to, I mean, we have not, I would not say we have transitioned the sector, but we've learned a lot about as systems level investors, these kind of hard to abate sectors and industries. There's a handful of ingredients that's true in a lot of these sectors and.

Kate Danaher 

if you can start to recognize if there's pattern recognition in one of them and any overlapping relationships, networks across them, then you have a real opportunity to kind of multiply that systems change. And so if you think about food and agriculture, 90 % of goods travel over the ocean. Quite a lot of that are commodities and food products.

On the energy side of the house, it's a lot of our energy comes from offshore oil and gas, the emergence of the ocean, like wind, ocean wind turbine industry. And so I think we came to oceans with a view from our historical investing that we had, that there was an opportunity to harness kind of the relationships and the networks and all the ways that these other industries we know quite well.

operate to create an investment thesis around investing in the oceans because it shares similar characteristics as a hard to evade sector.

Molly Wood 

Okay. And then.

So then that feels like a good point for you to talk about S2G's kind of investing approach also, which is a little bit unique in a way that probably helps you cross-pollinate this knowledge.

Kate Danaher

Yeah, yeah. So as I mentioned, we're a growth stage investment firm, really focused on accelerating the transition to a more sustainable future and resilient future. And our investment thesis really centers on identifying opportunities at the intersection of our three sectors, which we think are critical to the future of human and planetary health, food and ag, oceans, energy. These sectors are really deeply interconnected and they're really essential to addressing climate change and building a healthier planet. And our approach to investing in companies that are transforming these industries is really through the innovation, decarbonization and systems level change. we can look at a single sector and I'll use maritime as one just because I'm spending a lot of time on it right now. Again, we can talk about all, I think people are aware.

that the maritime industry is very large, that it moves most of our goods and that, you know, back in COVID when everything shut down, there was a huge, huge global ripple effect in the logistics and supply chains of what we were able to get our hands on because everything was locked up at ports. That in just, ever. Yeah, yeah. And it was front page news.

Molly Wood 

I think people who had never thought about shipping containers definitely did then.

Kate Danaher

For us S2G, when we think about the need to decarbonize that industry or to build more resilience into that industry, so when the next global pandemic happens, when the next, when new trade lanes are being opened because of piracy or climate change, any of those things, the three sectors with which we invest in are useful to have knowledge or technical expertise in or relationships.

to help think about what the real opportunities are, the inflection points of change within the maritime industry. So again, like in sustainable food and agriculture, we've built a lot of relationships over the past 10 years with some of the very large food commodity brokers like Cargill or Louis Dreyfus or many, many others. We have a perspective from just being in conversation with them about how they think about how their initiatives for decarbonization can be driven.

through the maritime sector. Our energy team has technical expertise around emerging technologies like battery cells or new fuel types that are going to be the innovations or technologies of the future to drive the decarbonization. And then on the ocean side, our team has a lot of relationships with vessel owners in the aquaculture and seafood industry. We understand the chemistry of the ocean and why certain technologies will have a positive or a negative impact on ocean ecology. And so just like having that kind of that buffet of insights and relationships makes us uniquely positioned to make those investments that kind of cross over. You know, lot of funds just do energy or just do food or nag, but given the three that we do in the interconnected nature of them, we have the ability to look at an investment opportunity or a part of the system that we want to change.

Yeah, have a unique perspective that is well informed.

Molly Wood 

Yeah. Let's get more specific. You've made 17 plus, it sounds like, investments in ocean-related sectors. Give us some examples, like some of the things that feel like they are transformative and generate economic return.

Kate Danaher 

Mm-hmm.

Molly Wood

Yeah. You mentioned that people kind of have a sense that the maritime industry is big. I would say it is still worth quantifying the extent to which the maritime industry emits. And you have data about this coming out or already released about maritime decarbonization. What are the key takeaways there? I think that this is still something that isn't 100 % understood in terms of impact.

Kate Danaher 

Understood. Yeah. mean, for context, the maritime, when people think about the maritime industry, if they ever do, I think they think about container ships, the things that they see at the ports that they drive by on their way to work if they live in a near coastal community. it includes those container ships. There's over 100,000 ships operating globally. And it doesn't actually sound like a very big number, but when you think about how much those hundred thousand those it's like 105 hundred seven thousand ships but those ships move 80 to 90 percent of the world's goods on those ships so it's a lot and it's everything from your Nike shoes to your to our rice and our grain to oil and know energy products to people to seafood to servicing vessels for all the industries that operate on the ocean so it's

It's very large and it's very interconnected. And that industry collectively contributes to 3 % of the global greenhouse gases that are emitted each year. it's a big contributor. Yeah, it's a big contributor. That's about the size of it.

Molly Wood

Yeah. Yeah. It's big. It is also, oh no, it's like, let's quantify, you know, the impact of this industry. And then it has also, as you mentioned, been described as hard to abate. So what are the biggest opportunities? Is it, you know, fuel alternatives? Is it efficiency? Is it new kinds of vessels? Is it all of that?

Kate Danaher

I mean, it is all of that. think it depends on the time scale that you want to look at. when we think about decarbonizing the industry, it really is about energy efficiency, number one. I mean, think that a lot of these old, like very old industries with a lot of incumbents, they don't run as leanly as they could. And so...

I mean, a lot of the shipping industry still works on paper. It does not even like fully optimize to operate in the cloud. And so you can imagine what that means for all of their systems. I think that when we think about alternative fuels, E or bio, methanol, hydrogen, ammonia, LNG, these are fuels, some of them are on the market now like LNG, others are in rapid development and are available in very small quantities.

That will be the biggest mover in the future of decarbonizing the shipping industry. Cause when you can run an alternative fuel, you will be able to reduce your emissions from a hundred percent today to like close to zero. But those, know, in order for those fuels to scale, in order for the infrastructure, I mean, I think every single port needs to have brand new infrastructure to bunker those fuels. And if it's multiple fuels, that's a bit more complicated and not every boat just goes point to point.

they kind of pop around the globe, those fuels at any scale are going to be available probably not closer than 10 years from now. And so we have to think in the meantime between zero and 10, like what ways can we meaningfully decarbonize the industry? And that actually looks like a suite of other technologies that can kind of one Z, two Zs reduce the

the emissions from the vessels. So wind sales are really interesting. mean, the whole industry started sailing, right, with actual wind sales. Wind sales are coming back. They look a lot different now. But they're a fascinating technology that can save up to 20, 30 % of fuel on any given route. And so that's really powerful. Route optimization, we already mentioned battery technology. You know, I think with the

Molly Wood

Yeah.

Kate Danaher 

With the growth of battery technology with EV, know, electric vehicles, there's a really big opportunity. I mean, I think people say, you will talk to people who are in the industry and a lot of people believe there will be a battery on every boat moving forward. Now, some of those are optimal for to be fully electric, like tugboats, ferries, you some of the smaller vessels that do go point to point, close to shore.

Molly Wood

Right.

Kate Danaher

But there's also applications on cruise ships, for example, to run all the auxiliary power, like how people run their showers and turn on and off their lights, kind of the hotel services. So there's a lot of interesting opportunities around batteries and shipping. then, I mean, there are so many technologies. There's air lubrication that goes on the hull of the boat that reduces the friction between the actual hull and the water that can save quite a lot of...

fuel emissions. So, those altogether, you you're going to have to layer them. Those altogether can save 30, 40, sometimes up to 50%, which is really meaningful. And someday when those fuels are available, a lot of these technologies don't become redundant because these new fuels are going to be more expensive. And so if you can...

Molly Wood 

Yeah.

Kate Danaher 

continue to focus on energy efficiency and efficient operations in your boat, using these technologies will make the cost that much more palatable when new fuels come online.

Molly Wood Voice-Over: Time for a quick break. When we come back, we’ll talk about the importance of global regulation to all kinds of ocean-related companies but also all the ways the economics work out no matter what and we’ll geek out on aquaculture a little, too. 

Molly Wood Voice-Over: Welcome back to Everybody in the Pool. We’re talking with Kate Danaher of S2G investments  about better mapping for cargo ships the dismal state of ocean intelligence and why if you think about it it’s SUPER weird that we eat wild-caught seafood. 

Molly Wood 

I want to ask about other parts of the investment and thesis and portfolio, but on decarbonization for another minute, how hard is adoption? It has been my understanding from an investment perspective and also I just knew somebody who worked for a shipping startup that like an industry that still runs on, I believe he called it clipboards and bribes. It can be hard to, pardon the pun, turn that ship. And so what are the drivers of

Kate Danaher 

Yeah.

Kate Danaher 

Mm-hmm.

Molly Wood 

adoption of these new technologies in such an old industry.

Kate Danaher

Yeah, think that I will mention them, but I also think we're at a little bit of a tipping point where there are certain technologies that are the adoption is accelerating, either because they're easier to integrate into systems or because they're frankly the most effective technologies given what I'll speak about in a moment, which is like, you know, there's the regular.

really the thing that is pushing the industry the hardest and the fastest is the regulatory framework. The second is that with fuel volatility, the price of fuel volatility, all the uncertainty that goes along with making sure you're very thin margin voyage from Asia to Europe is run profitably. There's a lot of things that get in the way right now. Fuel price volatility,

Again, because of geopolitical issues or the climate events, you might have to take longer or different routes that cost more. There's a lot of things happening in the industry that create uncertainty. And again, the industry operates on relatively thin margins. And so they really have to do what they can to assure that they can run each route as profitably as possible. I think just the efficiency.

is a big seller and the economic viability of that, but regulations. there are a number of regulations that have been layering on each other that make it absolutely imperative for the vessels to reduce their emissions. So the big one, the umbrella is the IMO, the International Maritime Organization. And they have a number of standards coming out that their target is to be essentially zero emission by 2050. And there are regulations already in place that if you are going into any international waters and you're going into any port, that you have to reduce and demonstrate that you've reduced your emissions by X percent. On top of that, the European Union, their emission trading system, EU ETS, has created another layer.

Kate Danaher 

whereby you actually will pay a penalty, like essentially a carbon tax, if you haven't been able to demonstrate, if you demonstrate that you haven't reduced your emissions enough. So like there's the EU regulations layered on top of any boat that's coming in and out of European ports, there's an extra tax. Then there's some regulations emerging in Singapore, there's some of the carbon taxes in the United States with the California Air Resource Board.

These things, they're popping up everywhere. And so it almost becomes impossible to, if you're a vessel that goes anywhere in the world, it becomes very difficult to avoid it somewhere. And so, and the penalties are quite expensive. I spoke with a company this morning who does wind assisted propulsion. So like again, the sales. And I asked if regulation was to be wiped off the map tomorrow and all these penalties just went away, what's the economic

Molly Wood 

Right.

Kate Danaher 

imperative, like what's story, the return on investment that you make to the customers. And the return on investment for some of these wind sales without any penalties is four to six years. Now that's not a bad ROI when you think about a vessel lifespan being 25 years. But with the penalties, the payback on that same boat with the same technology is two to three years. So it costs, I mean, the cost of not being compliant is very big. Yeah.

Molly Wood 

That's significant, yeah. I mean, there aren't many investments that you make as a business that have a one to three year payback period. Like, you know, if anybody has run a business is thinking about CapEx, that's, that's good. So what are, you mentioned that some of the technologies are getting quicker uptake. it, it sounds like it's sales, maybe it's batteries. Like what are the ones that are really being adopted quickly for all those reasons?

Kate Danaher 

Yeah, think route optimization has been adopted relatively broadly. There's a number of companies doing this,  partially because it's software. So it requires a lot of data and integration and cooperation with the vessel owner or the customer. But it's not a big, heavy capex lift. It's kind of a monthly recurring revenue.

or monthly subscription opportunity. it's relatively easy to integrate. It really supports your performance and you can save up to 5 % on any given route. I'd say another one that's gotten pretty broad adoption is air lubrication. air lubrication, again, it's like micro bubbles that it's like a cape or a, but I don't know what the right word is, but it's micro bubbles that just.

wrap around the hull of the boat and reduces the friction between the water and the hull. And that one's interesting.

Molly Wood

I'm so sci-fi, by the way, in my brain that I'm just like, cool, so that's what turns ships invisible in the future? And then they fly away. Where we may all need to go if you don't get this right.

Kate Danaher 

and then they float and then they fly away to never, never land. Totally. Yeah, exactly. But that's, you know, I think one of the reasons that's interesting, of course, it say it's, it is quite effective, but also a lot of the technologies for these boats need to go on the deck or in the hall, places where boats don't have, the vessels don't have a lot of room or it eats into their margins. Whereas like air lubrication sits on the outside of the boat. It's not.

it's not taking anything away from the critical space on or around the boat. So that's, that one is interesting. And it's, it's lower capex than like a big sale or some of the other opportunities. And then I'd say that when does system repulsion is having a moment? Absolutely. It's kind of, I think the darling of the industry it's early in its adoption curve. So I think that from an investor perspective, there's some challenges.

to it in terms of like, where does it go? Who buys this? Like the sales cycle is very long. How do you ensure enough adoption over time to continue to grow? But it's a really, really relevant technology that has shown some of the highest cost savings and emission reductions in the industry. So there's a great reason to pay attention to it. And yeah, I think the last one is batteries. Just because again, batteries is everybody knows it.

Everyone's familiar with batteries. We've gotten very good at marinizing batteries. there's, think the assessment across the industry is that there will be a battery on every boat someday. It's just how quickly can we get there.

Molly Wood

love the idea that everybody's like pretty excited about putting sails on boats. It's sort of a delightful, know, it's like, yep, everything old is new again. The hot new thing, putting sails on boats. Amazing. Okay, let's talk about some other sectors. So you have spoken about ocean intelligence. We know that we don't know enough about the ocean. Talk about that as a thesis and then how it starts to inform.

Kate Danaher 

Mm-hmm. It's really cool. I love it. It's like a full circle. Yeah. We got some things right. Yep. Yeah.

Molly Wood

investment.

Kate Danaher 

Sure, yeah, I mean, said it. Yeah, so I mean, the idea behind ocean intelligence is, I mean, that is the thesis. We don't know what we don't know. We're not collecting enough data on the ocean. the end, most of the data that's been collected has been done by the scientific community. it's, I don't wanna say it's sparse, because I think some scientists would totally disagree with me, but I think we...

Kate Danaher 

there's an argument to be made that if we had more data, if it was more pervasive, it was more recurring, and we had a bigger data lake, especially with the tools that are emerging with machine learning and artificial intelligence, that we could just understand the ocean that much better. We make decisions. We have a company out of France who has developed an interesting satellite technology that can detect any boat on the water, even when they turn off their AIS tracking systems. And we invested in it for illegal fishing.

because a lot of governments, the EEZ zones, the marine protected areas, there are a lot of governments across the globe where the seafood industry is a big part of their GDP and they have a very strong interest in protecting the resource. And so this company has worked with a lot of governments to help monitor essentially the marine protected zones, their EEZ zones. But you can also imagine

Kate Danaher 

that kind of application being useful for the insurance industry who wants to track and understand what happens at sea when there's a collision or a theft or cargo is lost. And then we've invested in an unmanned surface and subsurface business. It's essentially a boat and it can collect all kinds of data, but it also can be used to monitor different areas of the ocean.

Molly Wood 

Yeah, mean, this all raises a question of public-private partnership and also, I guess I would say, good, right? Which is like, these are companies who are building businesses around gathering data that some governments have abdicated responsibility for gathering, and that is really valuable for humanity. And I wonder how you balance that as an investment thesis and how the founders that you invest in think about that.

Kate Danaher 

Mm-hmm.

Kate Danaher 

Think about that, yeah. It is really hard. I remember when we started looking into ocean intelligence, I think we had a little bit of a Pollyanna view on collect the data, use it for what you need, and then give it away for free. Because it's a big topic in the industry, is like, how do we leverage all of this data for the public good? And we need to be able to aggregate it in order to be able to really do something with it. that data,

Molly Wood

Mm-hmm.

Kate Danaher 

the proprietariness of that data is what also gives some of these companies their commercial edge over their competition. So it's a legitimate challenge that we've kind of taken off the rose-colored glasses and we understand it a bit better. That said, I think the companies that we have chosen to work with recognize the, partially because some of them are like scientists and come from the scientific community and really understand the need, they really try hard to build their products in a way that they can benefit from the proprietary nature of the data they're collecting and they can make it of service to the rest of the community.

Molly Wood 

Yep. Let's keep talking about sectors. The other one that is fascinating is blue foods and aquaculture, It's like we have this romantic idea about wild cotton farmed one. It's sort of like, you understand this is the last thing that we actually wild catch. And it's bad. It's actually bad.

Kate Danaher

here's a really interesting opportunity for aquaculture being the last, for seafood being the last major protein to be industrialized to learn from the mistakes or the challenges of the industrialization of other proteins. Also, there's a lot more consumer awareness and regulation around how we produce proteins that I think the aquaculture sector gets to benefit from because we just have a better framework for how to produce clean food now. And I think that aquaculture, you know, think if you read the statistics, aquaculture, the production of aquaculture accounts for over 50 % of the protein, seafood protein that's being produced these days. So it's not like a small part.

of our seafood consumption, it's over 50%. And it will continue to do that. We have the ability to efficiently grow seafood in a way that allows us to take the pressure off of wild catch, even while global population is growing in the places where population and wages are growing the most. They tend to be heavy seafood consumers. And so it's really important that we find a way to grow seafood efficiently, because the place where people are gonna want it the most is where we're gonna have real collapse from the wild fisheries if we don't figure out how to manage them better. But aquaculture has so many opportunities. One, it's highest feed conversion ratio, so you can produce more seafood.

protein per pound on less feed as you can any other protein. So from a greenhouse gas perspective, it's a really smart thing to do. The technologies that are coming together to, we call them enabling technologies for the aquaculture industry, to reduce waste, optimize and track health metrics and just make the whole system overall really efficient and transparent are really exciting. 

Molly Wood 

Yeah, interesting. What are, can you give me a couple more examples of potential investments? Like I doubt you are not opening fisheries. Like say more about cameras and the technologies.

Kate Danaher

No, we're not in.

Sure. So we have one company in our portfolio, it's called Real Data, and it is a, they have feeding cameras that they place. They actually, their cameras are designed for the recirculating aquaculture system, so land-based aquaculture. Most of aquaculture right now is still done in water, in the waterways, near or offshore.

recirculating aquaculture is bringing aquaculture on land, which is very interesting. But it's trying to have an ocean system on land is a very difficult thing to do. But we're really getting there. So one of the challenges of managing a fish farm is to understand, to control your feed conversion ratios, to make sure that your fish aren't eating too little or too much, and that you're

Molly Wood 

Yeah.

Kate Danaher

able to pick up kind of on the biometrics to make sure that you understand the health of your fish and where they need support or where you need to back off. And real data started with a camera system that really measured the feed, like what would fall to the bottom versus what was getting consumed. that feed being the number one cost input for producing fish is a really important metric for producers to be able to manage to have a sustainable business model to keep their margins in line. So they started with a camera system, but they've since evolved their technology set to be able to...

anticipate fish health and they've also integrated machine learning and artificial intelligence to be able to run models on what's going to happen within the fish tank or the fish farm to make that more efficient. 

Molly Wood 

I feel like every time I talk to an investor, you're all very cool about the stuff that you see every day, right? And when I work with startup founders, sometimes I have to remind myself that I live in the future.

Like when you talk to these entrepreneurs, you can be very casual about saying like, they're just moving fisheries on land. What are you seeing that makes you hopeful? Like this is a little bit of a tough time for climate entrepreneurs and people in this space and there are policy concerns. What do you see that makes you hopeful and excited? Especially around something, a resource as crucial as the ocean.

Kate Danaher

Yeah.

Kate Danaher 

I think that something, and it has nothing to do with investment actually, it's something that we have very little control over. Which is that I do feel like internationally speaking.

governments and governing bodies like the UN have really gotten behind trying to figure out how they, in their unique role, which is like policy and regulation, can influence the development of a more sustainable marketplace across a lot of the ocean bound industries. And I think what is also encouraging is that historically, typically,

You really need the United States to play a role in that because we are the largest market. are one of the largest markets for all the reasons that people want the United States involved. What I'm hearing a lot right now, given all the just fluctuations and changes that are coming out of the United States right now that are impacting other, the industries that we're involved in is kind of a...

a posture of, you we're going to the mountaintop with or without you guys. Like we're already on our way. We would love for you to come, but if you can't, we're still going. And that is really encouraging to me because this stuff, the wild seafood industry and how we fish has got to change.

the maritime industry and how they think about their carbon intensity and their impacts on ocean ecosystems has to change. Oil and gas, I mean, you think of the oil and gas industry, a lot of those companies are rebranding themselves to be energy businesses and the development of wind and wave energy is really interesting. so I am, I,

Kate Danaher

think it's important that the United States continues to play a big role in this. But if we are going to take ourselves out of the equation in some cases, I'm really heartened by the fact that the rest of the world's like, we're gonna keep on keeping on. And that to me is encouraging.

Molly Wood

That's great. That's great. Kate Danaher is a managing director at S2G Ventures, where she leads the firm's oceans and seafood investment strategy. Thanks so much for the time today. I appreciate it.

Kate Danaher

Thanks for having me. Thanks for being interested in the topic.

Molly Wood Voice-Over:

That's it for this episode of Everybody in the Pool. Thank you so much for listening.

Remember I want to hear from you! Our 100th episode is coming up and I’d LOVE to hear from you about any of the ways that you’ve changed something about your life in the face of the climate crisis  what you buy or don’t buy your job where you live anything! If it was because of this show I REALLY want to hear it but honestly just tell me what you changed I want to hear it and inspired everybody else in the pool. 

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