Demystifying ClimateTech Investment in the Context of Southeast Asia — Part 1

PuiYan LEUNG
Dec 16, 2021 · 7 min read

As a mother, I generally take pride in being a responsible parent who tries her best to nurture the overall growth and well being of my children. But when it comes to climate change, I often wonder how much I have fallen short.

It is said that a child born today faces not only multiple and long term health risks due to climate change, but will also face significant financial burden in future. The recent global and regional momentum around climate change inspired me to get educated around this topic — as an individual and as an investor.

The climate summit COP26 recently came to a close in Glasgow, marking the 5th year anniversary since the Paris Agreement came into effect in 2016. This is a significant milestone, given the reviewed and more ambitious Nationally Determined Contributions (NDCs) being due.

Of the 196 signatories of the Paris Agreement, 151 countries submitted new or updated NDCs. The participants of COP26 also made an unprecedented and historic pledge to speed up the end of fossil fuel subsidies and reduce the use of coal. Another development of the conference was the progress made on the development of carbon credits, including addressing the concerns in relation to double counting these credits by the country supplying them and the country obtaining them [1] .

We live in a time where instead of being passive users of resources, consumers have the opportunity to become stewards of our environment instead. Similarly, in the area of investments, investors can potentially play a pivotal role in shaping the future of sustainability.

Southeast Asia is not immune to sustainability and climate considerations. However, as an emerging market, while we are no strangers to social related topics including financial inclusion and access to infrastructure, our awareness about climate change only picked up pace in recent times.

Given this, the goal of this three-part Climate series is to demystify ClimateTech investment in the context of Southeast Asia, and hopefully encourage more conversations amongst the stakeholders within our regional ecosystem around this topic.

This first part will be focused on clarifying the basic concepts and jargons around Sustainability and Climate Change, as well as provide a broad global context of ClimateTech investment trends. Following this, Part 2 will be a deeper dive into the climate sector in the SEA context. Part 3, the final part, will once again zoom in even further and explore where we see the potential for great opportunity within this sector.

So, let us begin with Part 1.

What is Sustainability?

In 1987, the United Nations Brundtland Commission defined Sustainability as “meeting our own needs today, without compromising the ability of future generations to meet their needs” [2].

The scope of sustainability, however, is not only limited to natural resources or the environment, and can also be applied to social and economic resources. The Triple Bottom Line framework shows us that Environment, Economy and Equity dimensions must all be taken into account for sustainability to be achieved.

The concept around sustainability was further developed in 2015, when all UN member states adopted the Sustainable Development Goals (SDGs) as a “shared blueprint for peace and prosperity for people and the planet, now and into the future.” The 17 SDGs recognize that ending poverty and other deprivations must go hand-in-hand with goals that improve health and education, reduce inequality and spur economic growth. These must all be done while tackling climate change and working to preserve the Earth’s oceans and forests [3].

Climate Change as a Key threat to Sustainability

Climate change generally refers to long-term shifts in temperatures and weather patterns [4]. While these could be attributed to natural contributors such as Milankovitch cycles, solar irradiance and volcanic eruptions, human activity such as the burning of fossil fuels, deforestation and agriculture have caused climate change to occur today at a more rapid rate than the Earth has ever experienced. The emission of Greenhouse Gases (GHGs) from human activity is believed to be the most significant driver of climate change, with Carbon Dioxide (CO2) and Methane (CH4) being the main contributors. For the rest of this article, the terms GHG and Carbon will be used interchangeably.

If the world does not act to mitigate and adapt to change, then the potential consequences can be dire, including reduced liveable land area due to rising sea levels and heat stress, food and water scarcity, loss of biodiversity and loss of human life. In addition, the effects of climate change may potentially wipe out 18% of the world’s GDP by 2050. However, if the goals of the Paris Agreement are met, this number could be mitigated to just 4%.

The Paris Agreement and COP26

The Paris Agreement was signed at the 21st Conference of The Parties (COP21) in 2015, and establishes a framework for global climate action. The key goals of the Paris Agreement are to:

● Limit global temperature rise by reducing GHG emissions based Nationally Determined Contributions (NDCs) commitments.

● Provide a framework for transparency, accountability, and the achievement of more ambitious targets.

● Mobilize support for climate change mitigation and adaptation in developing nations.

The agreement aims to substantially reduce GHG emissions in an effort to limit the global temperature increase in this century to 2°C above pre industrial levels, while pursuing the means to limit the increase to 1.5 °C. As of Feb 2021, 190 states as well as the EU, collectively representing about 97% of global GHG emissions, have ratified the agreement. Among them are China and the US, the two largest CO2 emitters globally. More details about the Paris Agreement may be found here.

As of the recent COP26 climate summit, 151 countries have submitted new or updated NDCs, out of the 196 signatories of the Paris Agreement. The participants of COP26 also made an unprecedented and historic pledge to speed up the end of fossil fuel subsidies and reduce the use of coal, even though a last minute decision to weaken the language on coal from “phasing out” to “phasing down” was criticized by experts a sign that some countries are still wrongly prioritizing energy supply security over environmental goals.

What is ClimateTech?

Technological innovations could be key in accelerating the efforts in mitigating and adapting to the impacts of climate related issues.

ClimateTech generally refers to technologies that are explicitly focused on reducing GHG emissions or addressing the impacts of global warming. ClimateTech startups, through their business models and technological innovations, attempt to address climate change in either of two ways. The first being to mitigate climate change, limiting its pace and magnitude by reducing GHG emissions. Secondly, ClimateTech startups could help people and communities to prepare, adapt, and build resilience to the consequences of climate change.

Other terms including ‘Sustainability Tech’, ‘Low Carbon Tech’, and ‘Clean Tech’ have also been used to describe startups trying to tackle similar issues. For the scope of this article, the term ClimateTech is deemed to be broad enough to encapsulate a large number of technologies and industries with this purpose.

Broadly, ClimateTech encompasses several key categories:

● Energy, such as renewable energy generation, energy storage and grid management.

● Manufacturing, such as the production of sustainable products, circular manufacturing principles and low carbon raw materials.

● Land use, Food and Agriculture, such as alternative foods, low carbon farm inputs and supply chain GHG reduction technologies.

● Built Environment, such as low carbon construction processes, efficient urban spaces, efficient fixtures and building residual management.

● Mobility and Transport, such as mobility-as-a-service, electric mobility, fleet electrification, battery technology and charging infrastructure.

● Horizontal enablers, such as carbon markets, carbon capture, climate and earth data, risk assessments and analytics as well as green financing.

Globally, private equity and venture capital investors see great potential in this space. In the first three quarters of 2021, $30.8B has been invested in ClimateTech startups — 30% higher than all of 2020 [5]. The growth reflects a maturing ClimateTech market, especially in the Mobility and Transport sector, where an increasing number of late-stage startups are disrupting traditional urban mobility through Electric Vehicles and micro-mobility options. Of the global unicorns across all sectors, ClimateTech startups make up around 8%. Of these, the majority are in the mobility and transport sector.

While ClimateTech funding still makes up a small proportion of around 7% [6], compared to total global VC funding, this is expected to grow as more investors pay attention to the sector.

Climate Tech VC (CTVC) tracks over 200 VCs, Corporate VCs (CVCs) and accelerators who have made investments in this genre, and this number is set to grow.

What’s Next?

The objective of Part 1 in this Climate Series was to provide a primer on sustainability and the ClimateTech ecosystem. In the upcoming articles of the series, we will be contextualizing ClimateTech in relation to the Southeast Asian region, and looking more closely at what this space has to offer.

In the meanwhile, feel free to reach out to us at helloasia@vertexventures.com if you have any questions, or are building any innovative solutions in the ClimateTech space.

Vertex Ventures

Vertex Ventures is a global network of funds.

Vertex Ventures

Vertex Ventures is a global network of funds, comprised of affiliates in the US, Israel, China, Southeast Asia and India. This is a unique platform our portfolio companies realize by leveraging the combined experience and resources of our global partners.

PuiYan LEUNG

Written by

Vertex Ventures Southeast Asia | Kauffman Fellow | Mommy

Vertex Ventures

Vertex Ventures is a global network of funds, comprised of affiliates in the US, Israel, China, Southeast Asia and India. This is a unique platform our portfolio companies realize by leveraging the combined experience and resources of our global partners.