Climate Tech, the cure for a healthier planet?
As the eyes of the whole world are turned towards the fight against the COVID-19 pandemic, the problem of climate change remains. The deadly wildfires that have ravaged the US West Coast, as well as the unusually high temperatures – more than 3°C above-average recorded in Siberia between May and October this year – are another warning to take action and limit the effects of climate change. In 2015, world leaders in Paris reached an agreement to limit global warming to 1.5-2°C above pre-industrial temperatures by the end of the century. Since then, over 120 countries, representing two-thirds of the world economy, set a goal of achieving net-zero carbon emission by 2050 (China by 2060). According to PwC’s Low Carbon Economy Index from 2019, the progress so far has been modest. In 2018 the carbon intensity of the global economy fell by 1.6%. The decarbonisation rate required to achieve goals set in Paris is seven-fold higher. Therefore, we can see a gap between the adopted rhetoric and an actual response to climate change. In this article, I aim to show our readers that the startup world can play a crucial role in bridging that gap and become part of the cure for a healthier planet.
The world of venture capital (VC) has changed significantly over the past decade. Ten years ago, in the US, there were less than 20 “unicorns” – startups valued at $1 billion or more. The number climbed to 216 in the third quarter of 2020. VC funding developed rapidly. Only in 2019, the whole industry deployed approximately $264 billion. One of the segments of VC that expanded the most was climate tech. According to the PwC report (“The State of Climate Tech 2020”), it has grown over 3750% in absolute terms since 2013 and accounted for 6% of global annual VC funding in 2019.
What is climate tech?
Climate tech seems to be currently focusing on reducing greenhouse gases (GHG) emissions and on addressing the impacts of global warming. Achieving net-zero carbon emission will require a shift away from fossil fuels, the decarbonising of mobility systems, a rethinking of food and land use and the disruption of current supply chains. The startup/venture ecosystem can play a crucial role in accelerating these processes due to its ability to form fast-growing companies that can leverage capital well and have a technological edge. The confluence of various factors, such as an increase in venture capital funding and in demand for sustainable businesses, resulted in creating a stable environment for climate tech to thrive. New and cheaper technologies allow startups to optimise and scale solutions, as well as do things in fundamentally different ways. An excellent example of how much new technology can help the planet was presented in the PwC/Microsoft analysis of Artificial Intelligence (“How AI can enable a Sustainable Future”). The study suggests that implementing AI into agriculture, energy, transport and water sectors can reduce GHG emission equivalent to the 2030 annual emissions of Australia, Canada, and Japan combined.
It is worth mentioning that many startups across the globe have already implemented their ideas, leaving a positive mark on the environment. Bboxx and Fenix International have been building affordable solar home systems and so far, delivered clean electricity to over 850k households in Africa. Ofo, a startup that provides a bicycle sharing system – at its peak – had 63 million monthly active users in 250 cities. Impossible Foods in 2016 launched a plant-based substitute for a meat burger. Ecobee has made smart thermostats and occupancy sensors which application has saved enough energy to take all the homes in Las Vegas off the grid for a year. Planet Labs, in turn, has delivered small satellites into orbit to provide frequently updated information and insights relevant to climate monitoring, urban planning, crop yield prediction and disaster response. The list of such innovative and intriguing startups could go on and on…
The variety of areas that climate tech encompasses, reflects the complexity of the climate crisis. Despite the significant growth of climate tech in the past decade, the levels of funding have still been insufficient to reach the pace required for net-zero transformation. The barriers that climate tech startups face include differing regulations across geographies and a shortage of talent and skills. Moreover, some sectors – most notably energy and transport – are more mature than others, e.g. FALU (Food, Agriculture, and Land Use). From an investment perspective, the less advanced a certain sector is, the riskier the investment is, as the amount of capital and time it would take to generate returns, is higher. With stronger founders entering climate tech, the scientific and sector-specific barriers will be increasingly overcome. However, taking into account the urgency of the problem, governments and other non-VC sources of finance need to step in, especially in less mature sectors, to see the results now. Startup opportunities might then emerge in analytics, optimisation, marketplace or distribution in these challenge areas.
Startups may, therefore, play a key role in certain aspects of tackling the climate crisis. Recent government commitments on the environment that have been matched by many investment institutions and global corporations provide additional demand for startup innovation. VCs financing gives startups the incentive to explore uncertain areas with potentially large markets and high returns. The capital, in turn, fuels the talent to create new products and services, driving adoption in the market. So far 43 climate tech startups, including Tesla, Beyond Meat and Nest have reached “unicorn” level. Given the upward trends in climate tech funding, the strengthening demand and growing investment opportunities, we can expect new climate tech “unicorns” to emerge in the 2020s with modern innovations that can help us heal our planet.