ABACON — Investments with Relevance
This article is the first in a series of writings from ABACON on climate change, decarbonization, the convergence of technologies and markets, and how entrepreneurship can solve these problems to move humanity forward.
Intro
It is no exaggeration to say that energy is the foundation of our modern world. From burning wood at the beginning of human society to water wheels and today’s nuclear power, human progress has primarily relied on more energy to solve increasingly complex problems. The development and control of new energy sources have always been the catalyst for humanity’s most significant leaps, lifting our society to new plateaus (see S-Curves) that we would ever have thought possible before. Once again, it is about access to more energy in the upcoming century. But this time, with the condition that it must be clean and abundant energy. For transportation, as an example, this can be simplified into the question: “How can we transport people and goods around the world in an affordable manner without harming our planet?”. It is easy to adapt this question to other issues.
We see three buildings blocks in the transition to a net-zero economy, no cherry-picking allowed: first, we must scale up the deployment of the technologies that are already available; second, we must expand the use of these technologies to new sectors; and third, we must develop entirely new technologies, e.g. for carbon capture. The global transition will require a systems-level approach and the right combination of tech/science, company building, and financing to be successful.
For ABACON, decarbonization is the world’s biggest challenge in this century and the most significant business opportunity. It will open new windows of opportunities as the technologies become exponentially more affordable and efficient, markets mature, supply chains develop, and society witnesses progress firsthand. An opportunity to create a foundation for growth that can endure for centuries.
Data-driven look at the scope and scale of the problem
We start with a well-known fundamental condition, but one worth emphasizing: climate change is real, becoming more urgent, and impacting everything. Today, atmospheric carbon dioxide levels are higher than in 800,000 years.
The picture above is well-known and used countless times across publications. It visualizes the atmospheric concentration of CO2 over the past 800.000 years. But it shows only a small section of our earth. We must look further, about 450 million years. With this zoom, it becomes an entirely different picture:
On geological timescales, Earth’s climate is primarily driven by variations in the magnitude of total solar irradiance (TSI) and greenhouse gases in the atmosphere. Research shows that the gradual increase in TSI of about 50 Wm−2 over the last 420 million years was mostly offset by a long-term decrease in atmospheric CO2. This decrease can be attributed to the silicate weathering-negative feedback and the spread of land plants, which helped maintain Earth’s long-term habitability. Assuming we continue to use fossil fuels unabated, we risk increasing CO2 levels by the middle of the 21st century to those of the early Eocene, about 50 million years ago. The resulting significant increase in radiative forcing and its impact on the Earth’s system would likely be unprecedented in the last 500 million years.
Although the cause for the observed relative stability in ΔFCO2 over the last 420 million years is uncertain, business-as-usual emission scenarios for fossil fuel emissions suggest that atmospheric CO2 could peak in 2250 at ∼2,000 ppm. CO2 values as high as this were last seen in the Triassic around 220–200 million years ago. Due to the steady increase in solar output over time, fossil fuel emission scenarios (e.g. mostly described as Representative Concentration Pathway, a method which was also adopted by the IPCC) are similar to the early Eocene and, by 2250, exceed what is recorded in the geological record for at least 99.9% of the last 420 million years.
A recent study showed that if all fossil fuels were depleted, atmospheric CO2 levels could rise to ∼5,000 ppm by 2400. This is higher (in terms of both forcing and absolute CO2) than at any time in recorded history and could result in unprecedented climate forcing. Although it’s uncertain if such an extreme climate event would leave a detectable signal, prolonged warm greenhouse climate states have occurred in the past. However, the rates of climate change in the geological record are likely slower than what we’re currently experiencing. Unabated fossil fuel use has the potential to push the climate system into a state not seen on Earth in at least the last 420 million years.
In fact, we’re on track to drastically fail with the global carbon budget and the Paris Agreement (RCP 2.6). The increase itself is not the problem but the imbalance of the carbon cycle, which causes an annual rise of CO2 in our atmosphere. The current trajectory (RCP 4.5) of temperature increase points to global warming of 2.0–2.6°C by mid-century (2046–65). If we comply with the 5x more ambitious Paris targets, the average global temperature rise will stay below the 1.5°C threshold by 2050.
The Swiss Re Institute created a “New Climate Index” to stress-test how climate change will impact 48 countries, representing 90% of the world economy, and ranks their overall climate resilience. The results are alarming. Expected global GDP impact by 2050 under different scenarios compared to a world without climate change:
- 18% if no mitigating actions are taken (RCP 8.5 // 3.2°C increase);
- 14% if some mitigating measures are taken (RCP 6 // 2.6°C increase);
- 11% if further mitigating measures are taken (RCP 4.5 // 2°C increase);
- 4% if Paris Agreement targets are met (RCP 2.6 // below 2°C increase)
Inflection point: Improving without polluting is possible
The good news. We have reached a state in which achieving a prosperous economy, society, and planet simultaneously is possible. The global economy has already started decoupling economic growth from emissions growth. Since 1990, global GDP per capita has risen by 67%, while global emissions per capita have only increased by ~10%. Primary energy demand in the US peaked over a decade ago, but economic activity has continued to grow. Some major economies have seen emissions decrease significantly as their economies grow. Since 1990, Germany’s GDP per capita has increased by +40% while emissions per capita have gone negative by -42% — trending negative even when considering the country’s imports, which contain the embedded emissions of production processes in other countries. How can the world produce more with fewer emissions? Two shifts have contributed: the rise of computing and advances in clean tech.
First, the global economy has shifted towards information and services, with services comprising almost two-thirds of the worldwide GDP. The massive reductions in the cost of data and computing in the last 20 years have spurred economic activity in the IT sector while enabling progress in other industries.
Second, clean energy technologies are Exponential Technologies and rapidly becoming cheaper and better than fossil-fueled incumbents to the point where they meaningfully shape power and transport markets. The cheapest new electricity generation one can add to the grid now comes from large-scale solar or wind farms. Renewable energy is already used at massive-scale around the globe to power economic production, resulting in less wasted heat, less pollution, and more efficient operations. As a result, the same amount of products or services can now be created with much less energy, which is more likely to come from cheaper renewable technologies than fossil fuels.
In 2022, global electricity generation had the lowest carbon intensity recorded at 436 gCO2/kWh, made possible by the increasing growth of wind and solar energy. Wind and solar accounted for 12% of the global electricity mix, up from 10% in 2021. All clean electricity sources, including nuclear power, comprised 39% of global electricity, a new record high. Solar power grew by 24%, making it the fastest-growing electricity source for the 18th consecutive year, while wind generation grew by 17%. The solar generation increase alone in 2022 could have met the annual electricity demand of South Africa, and the wind generation increase could have powered almost all of the UK. Over 60 countries now generate more than 10% of their electricity from wind and solar. However, there was a decline in other sources of clean electricity for the first time since 2011 due to a decrease in nuclear output and fewer new nuclear and hydro plants coming online.
As a catalyst, the invasion of Ukraine by Russia caused many governments to reassess their energy plans because of the rise in fossil fuel prices and concerns about relying on fossil fuel imports. This event accelerated the adoption of electric technologies, such as heat pumps, electric vehicles, and electrolyzers. Alongside this, new regulations continue to accelerate decarbonized technology deployment further.
Finally, when looking at the capital markets, we have never seen this capital abundance before, with government and corporate commitments to decarbonization. Even if, from a microscopic view, it seems that capital became very expensive in 2022/23, zooming out it is still in the normal range. Altogether, by some estimates, decarbonization offers a $100 trillion revenue opportunity by the 2050s.
Decarbonization requires system-level change enabled by the convergence of technologies, markets, and cumulative policies.
Let’s take a step back. Decarbonization refers to reducing the economy’s carbon intensity, which involves reducing greenhouse gas emissions from various sources, including energy generation, transportation, industry, and agriculture. These systems are complex and interconnected. Each system affects the others, and we cannot address one without considering its impacts on the others. For example, our global food system requires machinery and transportation, which in turn depend on industry to build these vehicles, and so forth. Accordingly, decarbonization requires system-level thinking and acting.
Electrification is one of the key strategies for decarbonization because it enables the shift away from fossil fuels toward renewable energy sources such as wind, solar, and hydroelectric power. Electric demand will increase by electrifying transportation, heating and cooling systems, manufacturing processes, and other sectors, creating a need for clean and renewable energy sources. This, in turn, will drive the deployment of renewable energy technologies, further reducing greenhouse gas emissions and supporting the transition to a low-carbon economy. Overall, electrification is a critical tool for decarbonization, and the two are mutually reinforcing.
To make it happen, the convergence of technologies and markets is a crucial factor. Convergence refers to merging two or more distinct technologies, markets, or disciplines that lead to innovative and more powerful capabilities, applications, and solutions. In this context, most examples refer to digital technologies. For instance, mobile devices, the internet, and social media converged, leading to new industries like mobile app development and social media marketing. Convergence, however, occurs on many other levels such as:
(a) Convergence of markets — e.g., buildings, energy, and mobility: The integration of renewable energy sources such as solar (e.g., through Enpal) enables the electrification of buildings. On top of that, there is growing adoption of smart building technologies (e.g., tado via Noventic) that optimize energy consumption and reduce costs. Savings can be used to fund charging infrastructure (e.g., Wirelane), e-vehicles (e.g., Miles Mobility), and other sustainability initiatives. Thus, renewable energy is decentralized and can be used immediately, stored in batteries, or used to charge e-vehicles, reducing fossil fuel dependence and carbon emissions.
(b) Convergence of technologies and markets — e.g., batteries are impacting mobility, energy, and buildings: The development of high-performance lithium-ion batteries (e.g., CustomCells) first enables the electrification of roads and then the electrification of aviation (e.g., Lilium). Next-generation technologies like sodium-ion are critical to low-cost, large-scale storage, stabilizing our energy grids and enabling near-complete expansion/conversion (e.g., Encavis) to renewables.
(c) Convergence of technologies: Drones became feasible due to exponential advances in the fields of the Internet of Things and robotics. At the same time, advances in battery technology enable drones to operate freely for extended periods, and advances in powerful, locally-powered AI will allow them to perform flights autonomously. Many components of modern drones are made in 3D printers to save weight without losing stability. The most complex form of a drone — electric passenger aircraft (e.g., Autoflight, Lilium, Volocopter) — is only becoming possible through the convergence of all these exponential technologies.
There are several other areas where deep tech enables and fosters the clean energy transition:
- Energy Storage: The ability to store renewable energy is critical for the widespread adoption of renewable energy sources. Deep tech innovations such as solid-state and flow batteries could play a significant role in enabling the large-scale storage of renewable energy.
- Smart Grids: AI/ML and blockchain can help optimize energy distribution and management. This can enable the integration of large amounts of renewable energy into the grid and help reduce reliance on fossil fuels.
- Carbon Capture and Utilization: Deep tech innovations such as advanced materials, biotechnology, and synthetic biology can help capture carbon emissions and turn them into valuable products. This can help reduce the carbon footprint of industries such as transportation and agriculture.
- Energy-efficient materials: New materials, such as advanced insulation materials and high-performance glass, can significantly improve the energy efficiency of buildings
- Smart building technologies: Using sensors, data analytics, and artificial intelligence (AI) to optimize energy consumption and improve occupant comfort. This can include systems that automatically adjust heating, cooling, and lighting based on occupancy and environmental conditions.
(d) Impact of policies and subsidies — We believe climate success is also driven by cumulative developments at the policy level. A successful feed-in tariff (e.g., Germany was the front runner and enabled a massive solar push, first across Germany and later overall Europe) or tax treatment (e.g., GHG quota to cross-finance the charging infrastructure with profits of the fossil fuel companies) in one jurisdiction becomes the basis for a similar-but-improved policy in another.
The forces of exponential technologies and exponential organizations can enable challengers to swiftly transform massive industries, sometimes in only a few decades. For those not paying attention and not noticing the gradual progress, those success stories seem to happen overnight.
Investments with relevance and the role of venture capital
Investment from public and private sources finally responds to the urgency of stabilizing the climate and the massive opportunity. Since 2020, capital has flowed into climate technologies like never before: CTVC has tracked $100B of venture capital deployed in >1,600 companies across 7 industries and 60+ sectors. Transportation, Energy, and Food verticals still reign supreme, accounting for 60%+ of climate company count and 80%+ of dollars deployed.
Comparing the share of CO2 emissions with the percentage of venture capital invested in this area reveals apparent gaps and opportunities.
Looking at the levers and compressibility potential, each sector bears individual challenges to decarbonizing:
- Energy: Mainly through regulators, global targets are already set, and key actions are underway (e.g., reducing the number of coal-fired power plants, increasing the share of renewables, and new nuclear technologies). Besides the top-down approach, it can also happen bottom-up by installing and turning buildings into decentralized energy hubs
- Buildings: Key levers (e.g., building insulation, energy efficiency through heating, cooling, lighting, etc.) are defined, but retrofitting of the highly fragmented building stock needs to catch up. Rooftop solar (private and commercial) as a critical building block in the next years to accelerate the electrification of buildings and foster other measures
- Transportation: High reduction potential in the consumer sector. Levers include electric vehicle penetration, public transit, micro/shared mobility, and low-carbon urban designs. It is unlikely that commercial emissions will be significantly reduced in the next ten years, but they will catch up shortly after as technologies mature.
- Manufacturing: Overall emissions are difficult to reduce because four sectors account for 45% of CO2 emissions: Cement, Steel, Ammonia, and Ethylene. Decarbonization only by increasing costs, which will lead to economic disadvantages in a very competitive global commodity market due to the high number of plants and individual companies, especially in emerging countries
- Agriculture: Decarbonization is more complex than most other sectors, as they generally rely on natural processes that cannot be solved with current technology: still, agriculture is a critical field, and good progress with proteins and lab-grown meat has been made. But still, massive efforts and investments are needed to achieve anything close to net zero.
OUR INVESTMENT THESIS
From the early day of our group’s founding over 50 years ago, we believe that the world’s biggest challenges represent the most exciting business opportunities. We have a heritage in building sustainable companies in the fields of real estate development (B&L Group), renewable energy production (Encavis), and smart metering and energy management (Noventic Group). Decarbonization will transform many aspects of the physical world in the coming decades. The changes and opportunities will be on par with those of digital technologies.
Stating where society needs to go today is relatively simple. We believe that net emissions must be cut to zero in every place possible and that cutting emissions alone is not enough. There is so much excess CO2 in the atmosphere that we must start actively removing it. Carbon removal will be necessary to counter-balance the residual, ongoing emissions from human activity and at least a trillion tons of historical emissions from fossil fuel combustion. All these efforts are essential to protecting natural carbon sinks, such as grasslands and forests. This means that emissions need to fall both quickly (right now) and rapidly (with a high rate of change)
Based on the combination of our fields of expertise and investments with relevance, we focus our efforts on the three biggest markets in the world — buildings, energy, and mobility — and their convergence towards an electrified net-zero global economy.
The three biggest markets in the world — buildings, energy, and mobility — are converging on top of the electrification of our economies.
From our current perspective, some of the broad outlines of this transition are already clear:
- SUSTAINABLE ENERGY TRANSITION — In the future, all energy will be renewable and decentralized — blurring the lines between consumer and producer, and inherently volatile and dynamic regarding availability and use. This evolution marks the transition to a Net-Zero global economy.
- NEW AGE MOBILITY — Mobility is fundamentally changing as urban areas shift from ownership to an “as-a-service” economy. At the same time, cars are unbundled, and all transport (road, rail, water, air) is successively electrified and becoming autonomous.
- BUILDINGS — Smart urban communities where living, working, and lifestyle are integrated and where buildings become micro-energy hubs while interacting with each other communities
These are the focus areas where we have in-depth expertise, continue to learn and expand our networks daily and allocate most of our capital. In addition, exponential technologies and exponential organizations are critical themes for us. This spans from robotics to financial well-being. In general, we’re looking for investments that:
- Fit with our core thesis ideas (exponential organization, network effects, broadening access, building trust) and focus areas
- Can grow through bottom-up adoption without too strong dependencies from gatekeepers such as utilities or governments
- Are superior products to the current system, even when not accounting for their sustainability benefits, and are viable and compelling on their own, but get significantly better as a platform
- Are capital efficient, leverage exponential technologies, and have a valid environmental impact
Do we need to include your perspective on this topic? Any topic you want to know our stance on? We’d be happy to hear from you, so feel free to reach out.
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