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The Climate Tech Ecosystem

J.S. Held’s Inaugural Global Risk Report Examines Potential Business Risks & Opportunities in 2024

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Introduction

Climate Tech is an area of technology that is expressly concerned with the mitigation of greenhouse gas (GHG) emissions, the primary driver of climate change. In addition to GHG mitigation, climate tech also includes technologies that help us better understand climate change and adapt to its impacts. Climate tech is increasingly displacing the terms 'cleantech' or 'greentech,' which more generally look to address human impact on the environment. Climate tech includes technologies that decarbonize energy, transportation, and buildings. It also includes things like carbon capture, afforestation, agtech, geoengineering, and technologies that reduce or track emissions in supply-chains.

New venture funds are being established with an explicit focus on climate change. According to PWC, investment in climate tech is growing, with $88 billion invested last year representing a 210% year-over-year increase in funding. For every dollar invested in venture capital, 14 cents will flow to a firm focused on climate change technology. Investment in climate tech has outpaced the overall venture capital market at a rate of 5 to 1 and is poised for even further growth.

As the world looks to address climate change, nearly every sector of the economy needs to be fundamentally transformed. The process of deep decarbonization will require changes to systems, processes, materials, and energy sources. This transformation needs to happen over a relatively short timeframe if we are to meet the goals of the Paris climate agreement and avoid global temperature increases from exceeding 1.5 degree Celsius and achieve net-zero GHG emissions by 2050. GHG emissions are pervasive throughout the economy, so virtually every industry will be impacted. While this transformation will create disruption, opportunity abounds for climate tech investors.

Climate Tech Verticals

The decarbonization challenge will see billions of additional investments flowing into climate tech firms in the coming years. Given the fundamental reshaping of finance that is currently underway, it is important to understand the categories or themes that exist in the climate tech arena. We describe these categories in terms of investment verticals. They include energy, transportation, agriculture, industrial, and climate & carbon. We overview each investment vertical to provide a sense of the emerging technologies that will shape the coming economic transformation.

Energy

A quarter of all global GHG emissions come from the production of electricity and heat. When you include energy used by buildings, this increases to 31%. If we are to solve climate change, finding low-cost, abundant, and reliable sources of energy must be a top priority. Most energy related GHG emissions come from the burning of coal, natural gas, and oil. Alternative energy must be zero emissions. The most likely candidate to replace fossil-based sources of energy is electricity generated with zero emitting sources. This includes renewable electricity generated using wind, solar, and hydro. It could also include geothermal energy. In any case, because renewable energy is intermittent in nature, it needs to be paired with long-duration storage like hydroelectricity or grid-scale batteries.

Over the last decade, the problem statement around renewable electricity has changed. We used to be concerned with how we can make renewables cheap. Today, renewables are now the world’s cheapest source of energy with the installation cost of large-scale solar projects falling 85% in the last decade. Now, we are concerned with how we can make zero-emission energy more reliable. While grid-scale lithium-ion batteries and other forms of storage can be helpful, their purpose is largely limited to short-duration storage applications. Pumped hydroelectricity offers long-duration storage, but most geographies are not conducive to building hydroelectric dams.

Many energy experts agree that nuclear energy (including next-generation fission and first-generation fusion) will be needed to decarbonize energy by 2050. The future of energy will be electric, and that electric energy must come from a reliable source. Nuclear energy has the highest-capacity factor of any energy source. The problem with nuclear to date has been waste and cost. However, a recent breakthrough in nuclear fusion could make both of those concerns obsolete. Nuclear fission is the process that powers the sun and has the potential to deliver near-limitless clean energy. In fact, energy would be so limitless it would be virtually free. The implications are extraordinary. According to technology investor and futurist David Friedberg, in the coming decades nuclear fusion will allow us to terraform earth by taking ocean water, desalinating it and pumping it to the desert to transform these ecosystems into rainforests. We will also be able to remove carbon directly from the atmosphere with this virtually free source of energy.

Transportation

Closely related to the clean energy investment vertical is transportation. The volume of electricity that will be required could double, or more, as we look to displace petroleum-derived fuels used in transportation. Climate tech investments in transportation include not just batteries, but also charging, fleet management, and micro-mobility solutions whereby people may opt for things like electric bikes or scooters for short-distance transport under five miles.

Transportation also includes things that are not automobiles. Planes, boats, trains, and urban public transportation can also be bucketed into this investment vertical. When it comes to some of these heavier transportation modes, electrification may not be feasible. In these cases, clean fuels may be the best alternative. Clean fuels include things like bio-based fuels, hydrogen, and hydrogen carriers like ammonia and methanol. Beyond fuel switching, there are also mode changing innovations such as shipping containers over the ocean using hydrofoils.

Agriculture

The food system is responsible for most of the emissions for the commonly reported Agriculture, Forestry, and Other Land Use or AFOLU category. This category makes up 24% of total global emissions. Most of these emissions come from the cultivation of crops and livestock, as well as deforestation that enables agricultural activities. It is important to note that the 24% of total global emissions that come from this category does not take into account carbon dioxide removal that occurs in natural systems. Approximately 20% of emissions from this sector are offset by natural processes that trap carbon in biomass, dead organic matter, and soils.

There are significant innovations in the space that aim to reduce GHG impacts. This includes alternative or cell-based protein that aims to displace the production volume of meat. This is important since it is estimated that animal production makes up 70% of all AFOLU-related emissions. Other innovations in this area include things like regenerative and vertical farming, enteric fermentation management, and remote sensing for yield optimization. Not to be overlooked is the important innovations that are occurring in sustainable fertilizer. When fertilizer is produced and used, it releases significant amounts of nitrous oxide. Nitrous oxide is a potent GHG and is responsible for more than 6% of global climate change. Improving the management of nitrogen fertilizers can improve the efficiency in which essential nutrients are absorbed by plants. This saves money for the farmer and also reduces the impacts of climate change.

Industrial

The industrial emitters category includes the production of steel, chemicals, and aluminum. It also includes GHG emissions associated with mineral transformation processes that are not associated with energy consumption (such as the production of cement from limestone). The production of these materials is a huge driver of global GHG emissions, with 21% of total emissions coming from this category. In general, there are three ways to decarbonize the industrials sector: 1) fuel-switching; 2) process changes; and 3) consumptive changes. It is process changes where most of the future innovation is likely to occur. How can people make the same thing using different manufacturing processes of recycled materials? This could include things like blending hydrogen in existing blast furnaces to make green steel or blending carbon dioxide into cement.

Climate & Carbon

The emerging climate industry includes technologies associated with data, intelligence, and risk management. Innovations in the space include monitoring and remote sensing. This can include continuous emission monitoring systems (CEMS) such as Qube’s Axon device which is a pre-fabricated measurement and data transmission solution that uses artificial intelligence to quantify methane leaks, infer location, and determine which leaks to prioritize for repair. Another emissions monitoring system is the Honeywell Mini GCI that is helping industrial facilities continuously monitor gas leaks using hyperspectral sensors. Both systems provide real-time analytics and give users alerts when leaks are detected. The trend from pure measurement to measurement plus climate intelligence and insight platforms is expected to continue.

Companies operating in the climate risk and insurtech space are also part of the emerging climate tech industry. Much like the Fintech revolution, there is reason to believe that insurance is heading down the path of disruptive innovation as artificial intelligence is increasingly used to better underwrite risk, including those risks that are stemming from climate change. The emerging climate industry also includes start-ups in the resilience and adaptation space. For instance, a number of companies are working to develop “climate intelligence” platforms that offer predictive analytics to enable better anticipation and preparation for extreme weather events. One Concern is an example of a company operating in this space. The firm combines machine learning and more traditional weather modelling techniques to dynamically and hyper-locally model the effect of climate change in a digital twin of the world’s natural and built environments.

The carbon management industry is distinct from the climate industry and is primarily concerned with the removal of emitted carbon from the atmosphere. One such carbon removal technology that has received much attention is the Swiss company Climeworks that recently began operations of a commercial scale direct air capture plant in Iceland. Other innovations in the carbon management space include carbon tracking and accounting platforms. This includes leading software solution providers such as Cority, Enablon, Intelex, IsoMetrix, and Sphera. Carbon offsetting tools and markets also round out sub-sectors in the carbon management vertical.

Conclusion

As we look forward to the big trends that will continue to shape the climate tech investment space, we discuss three findings on the state of climate tech. First, it is expected that capital will flow to those technologies that have proven climate change technologies and business models. It is not enough for companies to simply have high emissions reductions potential. Even the most promising technologies can go unfunded unless there is a clear pathway to profitability and investor returns. Once a technology is proven, investment capital can quickly rush into the space. This influx of capital helps to scale technology deployment and accelerate adoption.

Second, there is a need for increased funding across all investment verticals. While transportation has seen some of the largest capital inflows in recent years, other investment verticals have been underfunded. This reduces the volume of potential breakthrough innovations and sectoral tipping points that will ultimately help humanity dig itself out of the climate change hole we are currently in. In particular, early-stage research and development is one area where government support would be useful. Another way government could help is by supporting a price on carbon and providing incentives to early investors. This will not only help technology development, but also the pace of technology development at commercial scale.

Lastly, early-stage venture capital investors need to rethink their return time horizon for climate tech. Delivering breakthrough technologies to the market that have the ability to reshape our relationship with energy and food systems takes a long time. Venture capital investors may be accustomed to a 3 to 5-year investment horizon that is typical with software development. Climate tech requires more patient capital. The investment horizon for new technologies that decarbonize hard-to-abate sectors or remove carbon from the atmosphere could take decades. The payoffs, however, could be well worth the wait. Climate tech founders are looking to solve some of the world’s most pressing challenges. If they are successful, demand for their products (and returns to their investors) could be immense.

Acknowledgments

We would like to thank Steven Andersen for providing insights and expertise that greatly assisted this research.

Steven Andersen is a Senior Vice President in J.S. Held’s Environmental, Health, and Safety (EHS) practice. Steven has spent over 17 years in the EHS industry, with specific experience in air emissions management systems, information management systems, and data integration. He commonly fills the role of sponsor on large scale implementation projects, consults on Environmental, Social, and Governance (ESG) strategy and data management, and has performed the role of solution architect on many air emissions system implementations. As the founder and chief executive officer (CEO) of Frostbyte Consulting, Steven was responsible for strategy, partnerships, and business development. Under Steven’s leadership, Frostbyte grew into a company that delivers ESG and EHS advisory and information systems globally across all industry sectors.

Steven can be reached at [email protected] or +1 368 209 1012.

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This publication is for educational and general information purposes only. It may contain errors and is provided as is. It is not intended as specific advice, legal, or otherwise. Opinions and views are not necessarily those of J.S. Held or its affiliates and it should not be presumed that J.S. Held subscribes to any particular method, interpretation, or analysis merely because it appears in this publication. We disclaim any representation and/or warranty regarding the accuracy, timeliness, quality, or applicability of any of the contents. You should not act, or fail to act, in reliance on this publication and we disclaim all liability in respect to such actions or failure to act. We assume no responsibility for information contained in this publication and disclaim all liability and damages in respect to such information. This publication is not a substitute for competent legal advice. The content herein may be updated or otherwise modified without notice.

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