Climate tech is here to stay

How we frame and approach investing in climate

By: Sam Smith-Eppsteiner, Josh Rapperport, and Carrie von Muench

Climate tech as it stands today

The past few years have marked an inflection point for climate tech. We witnessed a sharp rise in company formations, new investments, accelerated renewables deployment, and carbon credit sale and trade volume. While the money pouring in might raise some eyebrows, we continue to be compelled by the long-term opportunity in climate tech. Nevertheless, this increased innovation is just a drop in the bucket compared to the scope of the climate problem.

Addressing climate change will be the most important work of our lifetime. The past century’s unparalleled industrialization brought myriad meaningful benefits: increased life expectancy, educational attainment, and poverty alleviation. But these gains came at an unimaginable cost to planetary health and sustainability. Atmospheric CO2 concentration has increased by 50%, ocean temperatures have risen by 1.5°F, and at least 20% of earth’s biodiversity (any numbers here are inherently diminishing given the tragedy of any individual species loss and its effect on ecosystems) is already lost.

While we have seen recent resource deployment toward reversing climate change, it’s worth noting that:

How we’re approaching climate change

So, we have work to do. At Innovation Endeavors, we invest in companies leveraging emerging technology to transform industries and drive planetary, human, and financial impact. Since our inception, we have invested in companies driving sustainability broadly: Planet enables earth observation, Plenty is growing food closer to consumers and with less water, Blue River Technology is reducing chemicals required for agriculture, and Afresh is minimizing food waste.

We also have invested at the intersection of industry and decarbonization, in companies leveraging machine learning to drive efficiencies: Citrine in materials and product development, Fero Labs in manufacturing, and ClearMetal (acquired by project44) in supply chain. For the past two years, we have been refining a focused thesis around climate change. This work led to key investments in Futureproof (climate risk and insurance), Plotlogic (sustainable mining and battery metals), and additional investments we look forward to sharing more about soon. In this piece, we want to provide context on the market and detail what we’re excited to see in the future.

A core premise of our thinking is that climate change touches nearly every aspect of our lives and economy. So, as opposed to thinking of climate as a distinct vertical, we think of it as a persistent, horizontal, underlying trend in nearly every space we touch: industrials (manufacturing, supply chain, materials), transportation, agriculture, food, construction, and buildings. As a result, we expect climate tech to be broadly market-defining, much like mobile or data was in prior waves of innovation.

Below you can find the core framework we’re using to approach climate. The core (vertical) pillars here are: emissions reduction, emissions removal and reuse, climate risk, and minimizing non-carbon impact. You’ll also see (horizontally) that we outline the necessary and enabling market structures needed for these pillars to thrive: carbon accounting, target setting, and carbon markets. While certainly imperfect and simplifying — as all frameworks are — we have found this to be a MECE way to frame the work that needs to be done and contextualize individual research projects, ideas, or companies.

For further information on our framework for investing in climate solutions, check out our deep-dive on Notion here. Specific segments are linked below.

Investing: What we’re looking for and the questions we ask

Beyond this core framework that categorizes projects based on what they’re doing, we have also found it helpful to think about the archetypes of projects we are likely to see.

Below is an outline of how we think about the types of work that must be done including:

  • Scaling existing technology: While new technology solutions will be part of the solution (see below), we already have many of the tools we need, including low-cost renewable energy generation (e.g., solar, wind) and natural carbon removal (e.g., forestation). Where we already have tools, we need to see a massive financing and infrastructure rollout; this alone could cut 70% of emissions. We expect to continue to see companies innovating core enterprise software, financing products, marketplaces, and orchestrating go-to-market solutions that scale known technologies.
  • New technology, research, science, and engineering: Beyond the rollout of existing technologies, there are areas where we need continued innovation. Long-duration energy storage and carbon removal are notable challenges in need of cheaper and better solutions. There remain countless other unsolved problems distributed throughout the decarbonization and carbon removal spaces (e.g., nitrogen alternatives, cement & steel production, shipping, etc.) where we expect to see breakthroughs.
  • Sustainable products and services: Another prototype of the company we see is the ‘sustainable X’ model. We have already seen revolutions in electric vehicles and alternative proteins. Looking forward, we anticipate that sustainable options will increasingly become available for most of what we buy and use, from packaging and furniture to personal care and credit cards. Companies making or selling these products will benefit from both consumer demand for more sustainable options as well as the increasing corporate voluntary movement.

While we’re seeing more demand for climate solutions from both individuals and businesses, the areas where meaningful businesses can be built are dependent on what private markets can support at scale absent changes in incentive structures (for example, regulation).

Solutions that private markets can support without any incentive structure changes fall into a few categories:

  • Solutions that are cost-equivalent today: Solutions in this category don’t require carbon markets to be successful. For example, the electrification of transportation and certain applications of heat pumps are ROI positive today, as are carbon-sequestering agricultural tools that drive value through yield increases or loss avoidance.
  • Solutions that are not yet cost-equivalent but have early adopters who are starting to bring down the cost curve, paving the way for future mass-market success: This bucket is similar to the above; however, unit economics might not be there yet. Early adopters who value sustainability might provide a sufficient wedge with expected broader adoption as economics change, regulation evolves, or carbon credit monetization becomes more viable. For example, whole-home electrification is gaining traction among certain early adopters even in advance of clear economic ROI. The goal would be to drive toward the mass market over time.
  • Solutions that may never be cost equivalent, but have a customer base willing to pay a premium: Certain products, both industrial and consumer, could see enough brand halo upside from associated sustainability benefits that the green premium still makes sense to customers. One recent example is BMW now planning to use more low-carbon steel in its vehicles. Since steel is a relatively low input cost for luxury cars, and the target customer is not particularly price-sensitive, it could prove a strategic choice even if it is more expensive.

Changes in fundamental incentive structures could pave the way for additional opportunities. Examples of incentive structure shifts include:

  • Increased public pressure to decarbonize and scrutiny on voluntary carbon markets: Driven by the rise in corporate net-zero commitments, the voluntary carbon market is growing rapidly, with some estimates citing a $10-$40 billion market by 2030. Today, the market remains nascent and chaotic, with serious concerns around offset integrity. As these issues come to light, the public and investors are pushing companies to focus on decarbonizing their operations, and to source offsets that are more permanent and verifiably additional. Nevertheless, most offsets purchased today are still ultra-low-cost, with average prices around $3–5/tCO2e. Looking forward, we hope that added scrutiny will encourage companies to invest in decarbonizing their operations more directly and through insetting. Practically, we anticipate that many companies will still seek to buy offsets and will source the most cost-effective carbon offsets they can find that are also high-quality enough to minimize reputational risk. If scrutiny on quality is sufficient, this will increase demand for high-quality carbon removal offsets. So, while bringing down the cost curve of incipient technologies (e.g. DAC, mineralization) in the way that Microsoft, Stripe, and others are doing is a key stepping stone to meet this demand, we also anticipate that increasing access to high-quality solutions that are more scalable today (e.g. forest and other ecosystem restoration) will be equally important.
  • Regulation in carbon markets and beyond: Regulation is a critically important instrument for incentivizing emissions reduction and carbon removal. Despite the pandemic and war in Ukraine requiring significant governmental resources and attention, we are seeing increasingly ambitious carbon pricing instruments worldwide. For example, allowance prices in the EU have hit an all-time high, and we are seeing new compliance markets come online globally, most notably in China. We anticipate that regulation will be a key driver of pricing and demand in the voluntary offset markets in the future. This is already evidenced by increased interaction and convergence between the voluntary and compliance markets. For example, airlines can use seven voluntary standards to offset their emissions under CORSIA. Furthermore, additional action on the part of governments — e.g., only allowing carbon removals to count towards net-zero targets or only allowing projects to generate offsets if they contribute to emission reductions outside of a country’s Nationally Determined Contribution (NDC) under the Paris agreement — could meaningfully alter price and demand dynamics in carbon markets.

Not only is now the right time to invest in climate tech, but the situation is urgent — we need swift change. Moreover, from an investment standpoint, the landscape feels ready.

First, from a talent perspective, we’re seeing a massive migration of talent toward working on climate change solutions. Having the world’s top minds wanting to work on this problem is a huge tailwind for the space. We’re seeing high-caliber founding teams and top talent drawn to working for mission-driven companies. Second, the capital structures around climate investing have evolved significantly since cleantech 1.0. We see much more “full stack” capital — meaning there is dry powder in the wings for all stages of investment, from R&D to early-stage VC to later-stage capital, project finance, and public market interest, even in the face of the recent market downturn. While we were missing growth capital (in large part due to a lack of exit opportunities) during the first go around over a decade ago, we expect companies to be well-supported financially through their lifecycle. Third, we’re seeing critical communities and ecosystems being built in the climate space (shoutout to My Climate Journey). These kinds of networks are important for founding teams to find one another, get feedback, meet investors, and intersect talent and thought leaders. Groups like this are an accelerant to the space overall. Fourth, the economic benefits have arrived. Renewable power is now the cheapest energy in history, and storage is coming down the cost curve quickly.

Finally, we want to share some context on what we’re excited to see from an investment perspective. Conceptually, what we’re looking for in climate is no different than in any other space. We want world-class teams working to solve problems that would generate meaningful human, planetary, and financial impact. For us, a meaningfully differentiated and incremental technology approach — often taking advantage of trends in data proliferation, compute accessibility and affordability, and advanced engineering methods — makes an opportunity all the more compelling. Below is a non-exhaustive list of a few areas where we’re excited to see innovation:

  • Whole building or home electrification, “beyond solar” → How do we accelerate the rollout of storage, bidirectional charging, heat pumps, next-generation electrical panels, and more?
  • Battery software, design, and supply chain products → Batteries are a key part of the energy transition — from EVs to utility-scale storage. What technologies will enable battery design, optimization, and recycling or repurposing?
  • Carbon offset origination → We think there’s a huge economic opportunity to optimize land use for climate and related financial impact, from renewable energy development to natural carbon removal solutions. How do we direct land to its “highest and best (carbon) use”?
  • Enabling technology and infrastructure for the rollout of renewable energy and carbon removal technologies → What types of financing, investing, simulation, ops management, and marketplace products will accelerate the rollout of critical technologies?
  • Energy market connectivity and services → How do we best orchestrate the massive amounts of distributed energy resources coming online? How do we provide better savings, resiliency, and more renewable power through energy retailers, VPPs, PPAs, and community services?
  • Vertical-specific ESG tools → After the first wave of more general carbon accounting platforms is deployed, what problems still need solving? How can data, sensing, and software go deeper into the decarbonization workstream in areas like real estate and industrials?
  • Waste → How do we reduce our reliance on virgin materials and unnecessary waste, from fashion to metals to plastics to food?
  • Bio-solutions to remove carbon and decarbonize supply chains → Where can the rapid evolution of computational and engineering biology be best used to manufacture key foods, goods, and materials sustainably and otherwise reduce carbon?

We are happy to — finally — be sharing our perspective on climate tech. We hope to engage the community, spark thinking, connect to thinkers and builders, and get feedback. From here, we will share our thinking on specific pieces of our climate tech framework, from energy and electrification to a deep dive into wildfire risk and insurance. Please reach out if you are working on a project to reverse climate change. There’s no time like the present!

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Sam Smith-Eppsteiner

Sam Smith-Eppsteiner

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VC @ Innovation Endeavors. Tech for the real world, people, infrastructure, and the climate.