Credit image: GlacierNPSNet Zero: simultaneously a shared responsibility and rich opportunity
Recently, three major trending topics have been the focus of interest for global VCs: Investments in sustainability (Climate Tech), Deep Tech, and AI.
Unlike the other two hypes, investing in Climate Tech is about more than just making a profit. Achieving net-zero emissions is not only an environmental and future economic goal, but also inevitable. Coupled with scientific data on climate-related changes and the threat of negative impacts on the most vulnerable environment and society, policymakers and businesses are currently under pressure to act. New regulations are expected to be enforced to respond to consumer outcry, and investors will be urged to adapt.
From an investment perspective, this change will have some critical implications. Some business areas may become obsolete, certain operations and business models will no longer be viable, and new markets will emerge. McKinsey claims that a net-zero transition would entail a significant and often front-loaded shift in demand, capital allocation, costs, and jobs. (McKinsey)
A decarbonized economy is essential if we are to achieve sustainability. There are two main features that contribute to this problem. The first is the sectors and the second is the countries that are responsible for the most CO2 emissions globally. The energy sector is a major cause, although not the only sector contributing to the carbon economy. The energy sector is accountable for three-quarters of greenhouse gas emissions today and holds the key to averting the worst effects of climate change. (United Nations)
Source: McKinsey
The second problem concerns countries that rely heavily on the carbon economy. According to UNEP, most emissions come from just a few countries. The seven largest emitters (China, the United States of America, India, the European Union, Indonesia, the Russian Federation and Brazil) were responsible for about half of global greenhouse gas emissions in 2020. (UNEP Emissions Gap Report 2022)
The net zero targets of the seven largest emitters vary. India has stated it would turn net zero only by 2070, while China has set a target of 2060. Russia and Indonesia have also set 2060, while Brazil, the United States and the EU are aiming for 2050 as their net zero targets. (ECIU) (Climate Watch)
Although the cost of the transition will not be cheap, the commitment to aim for net zero is a good first step. Developing countries and regions that produce fossil fuels will be hit relatively hard by the transition, raising concerns about growth and inequality (McKinsey). Sectors that rely on carbon directly and indirectly (through the value chain) will also be affected. Investing in sustainability and having the foresight to decarbonize across the economic chain will lead to some cost increases, creating risks of jarring changes in energy markets and the broader economy. The good news is that, in the long run this decision will also create new opportunities across sectors and regions, which may lead to improved impact and company valuations overall.
What can the venture capital community do?
How can the VC community contribute to the net zero goal? In addition to initiatives such as the already established Venture Climate Alliance (VCA), the global VC community can provide investment in the development of new physical assets and in the decarbonization of existing assets. Investments must span all sectors, from energy supply to industry, mobility, buildings, agriculture, forestry, and land use. A report by the German Energy Agency gives some good examples of investments in climate technology, covering the following sectors (DENA):
- Energy: Floating off-shore wind, Solar giga-factories
- Industry: Sustainable Heat Supply and Refrigerants, Decarbonizing Cement Production
- Buildings: Green energy in buildings
- Transports: EV Charging, E-fuels (Synthetic fuels for aviation and shipping), Electrified heavy-duty transport and urban bussing
- Agriculture and Food: Meat alternatives, Sustainable Farming, Agriculture 4.0
Future investments that the VC community can also consider include air quality management, renewable energy, grid balancing, electric vehicles, renewable batteries, carbon capture tools, carbon reduction software, refurbishing old cars to achieve carbon neutrality, and AI to identify waste products that can be recycled more efficiently.
Conclusion
There is a pressing call for alignment among stakeholders, including governments, businesses, and consumers, to collectively address climate change and foster a decarbonized economy.
The venture capital community, though a smaller player in the broader capital market and financial landscape, plays a pivotal role in this alignment, crucial for shaping a net-zero future. Climate Tech investments are at the forefront, driven not solely by profit but in response to environmental and economic imperatives. As we transition, certain industries will evolve, and new opportunities will emerge, benefiting both the environment and the economy.
It is a shared responsibility, and by embracing this challenge, the VC community can be a driving force in realizing a sustainable, net-zero future with far-reaching benefits.
Further insights: reality check on climate tech investment
- State of climate tech 2023 (PwC)
- Climate tech investment falls 40% amid economic uncertainty (PwC)
- Alliance of CEO Climate Leaders share open letter to world leaders for COP28 (WE Forum)
- The net-zero transition: The 8 steps organizations can take towards a sustainability plan (WE Forum)
- Climate tech: Bridging the gap between innovation and impact (Economist Impact)
- A publication on ‘Scaling up investment in climate technologies: Pathways to realising technology development and transfer in support of the Paris Agreement (UNFCCC) (DTU)
- Climate investing: Continuing breakout growth through uncertain times (McKinsey).
