Hi there! Welcome to this week’s edition of Climate Focus.
I hope you had a good week and I am personally glad that the longest month of the year is behind us.
I say that despite (or because of) an injury setback in January that took some of my planned running mileage with it. I am glad it was only some. Well, what’s the point of being human if you don’t drop the ball every now and then =) I am sure nothing will change between the time you drop it and pick it back up (as long as you are picking it back up).
How was your January by the way? 💙
I read something interesting earlier this week about people switching from jobs in high-carbon industries to low-carbon industries. It spoke of a few personal stories of young-ish folks moving from a career in aviation to climate activism, from oil and gas to renewables, and (wait for this) from managing operations at the Royal Association of British Dairy Farmers to … The Vegan Society. (This small pivot intermittently cracked me up for a couple of days).
I am not sure if it is a popular sentiment or something an average person in the global south would think about.
The general inability to establish anything credible about this sentiment notwithstanding, I can say that careers that prioritise climate benefits are becoming common occurrences around me and in my professional network. I could not have said this half a decade or so ago.
It sure is promising.
What better subject to segue to after talking about viability of climate careers than the viability in climate tech investing.
That’s what this week’s edition is about. Read on.
Is a Funding Glut Good?
2021 was a phenomenal year for funding all around.
You could attribute it to a post-pandemic recovery, or to all that extra liquidity floating around the global economy (what inflation?), favourable interest rate regimes (at least until recently), or anything else that tickles your fancy. What stands true is that there was/is an obscene level of money moving around.
I don’t want to sound like a pontificating old man, but you tend to question the nature of your reality (H/T Westworld) when global stock markets delivered double-digit growth for three years in a row as of last year, when the world spent two of those years in a prolonged pandemic.
If funding towards startups is representative of global economic activity, then it is safe to say that the economy was on steroids for the entirety of 2021. (Startups received $643 billion last year, a 92% increase over 2020).
I must add (for comprehensiveness) that 2020 was a period when staying put and holding on to capital made more sense. However, activity that year either matched or was above-par compared to previous years.
*Pontificating-old-man-living-in-denial rests*
All that glut of venture money meant there was plenty coming towards climate tech as well. Which is both good and bad. It is a little early to say which one outweighs the other. I will explain that in a bit.
Before I take a tilt at this week’s edition, there are a couple of things that I want to clarify without presuming it is common knowledge.
ESG vs Climate Tech
Last week’s edition spoke about a bubble in ESG investing. That is not to be confused with climate tech investing.
ESG is a broad category, climate tech is much, much narrow: Climate Tech exclusively focuses on companies whose core business directly mitigates or removes emissions or enables adaptation to the negative effects of climate change. (think of: Electric Vehicles, clean energy sources like solar, wind etc., carbon capture technologies among others). There is no standard classification of climate tech but here is a (very random) list to give you an idea of what it includes.
ESG does not preclude fossil-fuel companies and high-emissions sectors, because of the broader definition, and is bound by interpretations of investors who are deploying capital into these companies
With that out of the way, let us get into this little fuss in Climate Tech funding that yours truly desperately wants you to know about.
(I am amazed I still have subscribers)
Mo’ Money….
Between the second half of (H2) 2020 and the first half (H1) of 2021, climate tech received a whopping $87.5 billion. Of that nearly $60 billion came in H1 2021.
This also represents a 210% increase year-on-year, from the ~$28 billion allocated 12 months prior.
And this is only a conservative estimate, largely because existing sources of climate investment data are not comprehensive. Moreover, the coverage is higher in North America and Europe, and much lower everywhere else, including China.
This level of attention and capital afforded towards planet-saving technologies, with a trend line pointing upwards, is obviously wonderful. Climate tech now accounts for 14 cents of every venture capital dollar.
When conservative estimates are this ‘whopping’, it' can’t be bad, surely?
… Mo’ Problems?
But as I have made it a customary practice when I deliver this newsletter, there is more than what meets the eye.
It is the obvious (and cliched) Messrs Devil and Details who like to cohabitate frequently.
The current state of climate tech funding makes me slightly nervous for two reasons:
#1/ Nearly $58 billion of the $87.5 billion went to just one sector: mobility and transport
This includes electric vehicles, micro-mobility and the supporting infrastructure that comes with it
The data set gets skewed when nearly 2/3 of the funding goes towards one sector out of the total eight identified.
I call it the Tesla effect. Where one success story results in large volumes of money deployed towards replicating that success (read: mimetic desire). I don’t have a problem per se with money being pumped into the electric mobility and low-carbon transportation space. But the sector only represents 16% of the world’s total greenhouse gas emissions.
Funding is a zero-sum game and sectors with the highest potential for decarbonisation are losing out.
Out of 15 technologies […] just a quarter of climate tech investments between 2013 and the first half of 2021 went to the five technologies representing 80% of emissions reduction potential
State of ClimateTech, 2021: PwC
#2/ The average deal size almost quadrupled year-on-year from $27.5 million to $96 million
This unease I speak with higher deal sizes isn’t as straightforward. And no, I am not cynical.
The thing about venture deals is that higher the ticket size, higher the viability of the business model. A viable business model can only be built around steady revenue streams and mature technologies. Therein lies my discomfiture.
Most technologies that have the highest emissions reduction potential (like green hydrogen, Direct Air Capture etc.) aren’t anywhere near acceptable levels of viability
I am not suggesting that venture funds pump capital into moonshots and unproven business models. But if the primary business of venture capital is allocating ‘risk capital’, it is kinda like doing the opposite thing to go risk-free and back mature technologies.
There is the history of baggage when it comes to climate/ clean tech investments. It could very well be a case of ‘once-bitten, twice-shy’ - where plenty of venture firms burnt their fingers, hands, and entire arms during CleanTech 1.0 in the early 2000s.
Here is a quick summary:
At the turn of the century there was a flurry of venture capital that went into various cleantech plays, from battery factories and new photovoltaic materials to algal biofuels and solar roads. […]
The timing was unfortunate, coming as it did just after one of the deepest recessions in living memory, but that wasn’t the root of the issue. […]
There were far too many assumptions made concerning the speed of regulatory implementation and the value of carbon-pricing mechanisms, which proved to be slower and lower than many expected.
Why the CleanTech boom went bust? The Wire
We don’t live in the early 2000s anymore. The regulatory environment is shifting. The impetus is higher. The science is stronger and unequivocally backing aggressive climate action. Just this last week, the European Central Bank launched its first-ever systematic stress test to measure climate risk and level of preparedness among European banks. That is phenomenal! And unheard of until now.
There are of course leaders and laggards in progressive and proactive climate regulations. Certain geographies like the EU are ahead of the curve. US and China hold ambitions for global climate leadership. The timing could never be better to take risky bets to accelerate our path to decarbonisation.
I sure would like to see more money going towards early-stage, unproven technologies in hard-to-abate sectors. At least that would mean deploying ‘risk capital’ towards actually taking risks.
(Cue Schitt’s Creek GIF, per usual)
Some housekeeping: A couple of wonderful souls asked me to turn on the community features that will allow people to like and comment on my newsletter editions. Thank you for engaging from ‘the void’.
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Bonus
— Mildly Interesting
— When Climate Action Meets Geopolitics
(If you are a regular here, you will probably already know I am borderline obsessed with this)
Banter
— And that’s when …everybody loses their minds
(I couldn’t have found more relevant banter to this newsletter if I tried)