Tech-enabled innovation will be essential if we are to meet the challenge of achieving net zero by 2050, but the challenge is even more critical if we are to meet the target of halving emissions within the next eight years. Public investment alone is not enough to meet those goals, as Mairead McGuiness, European Commissioner for Financial Stability, Financial Services and the Capital Markets Union, explains: “We estimate that an additional €350bn of investment is required each year if Europe is to meet its 2030 target.”
She points to three pathways for investors:
- Investment in what is green today
- Turning away from non-sustainable investments
- Investing in the transition
Investment growth
The good news is that innovations to address climate change abound and climate tech investment is up significantly across the board. In fact, climate-focused funds have raised well over $100 billion in the last three years, according to iCapital, with deal activity in climate tech reaching record levels in the first half of 2021.
Clearly, there is appetite for impact investing and no-end of new ideas eager for funding but channelling that investment into areas with the greatest potential for future emissions reductions will be key. “Climate tech’s rapid growth is a critical mechanism to bend the emissions curve down and get us on track to meet the 1.5-degree goal,” says Leo Johnson, Disruption Lead at PwC UK.
“Investment is needed across all challenge areas but targeting funding to nascent technology areas can drive the breakthrough innovations that are needed for accelerated decarbonisation. The challenge is implementation and speed and scale, and it will take engagement and action from policymakers as well as investors to deliver the potential of these climate tech breakthroughs.”
Climate tech spotlight: Rezatec
By Patrick Newton, CEO of Rezatec – an IT services business helping leaders to manage their ground-based assets and critical infrastructure.
Increasingly, frequent extreme weather events are having an adverse impact on manmade structures such as dams and pipeline networks. These events cause soil and earth layers to rapidly expand as they become rain saturated and then equally rapidly contract as they dry out. This phenomenon has created a risk of collapse in dam structures by putting movement pressure on underground pipeline networks.
Moreover, shorter winters and hotter summers are causing pests and diseases to spread into new latitudes causing reduced yields from commodity crop production and commercial forest operations. In a forest setting, these diseases – combined with higher temperatures – are contributing to fire incidences of greater scope and severity.
Rezatec helps its customers mitigate these changes by deploying its Climate Tech Geospatial AI solutions to remotely monitor and manage assets across the globe. By remotely identifying sub-centimetre soil and structural movements, we enable our Water sector customers to make interventions long before a minor issue becomes a major leak or collapse. Likewise, our Agriculture and Forestry customers use Rezatec’s Climate Tech capability to pinpoint increasing crop and forest canopy health – a leading indicator of the spread of disease – long before it becomes visible to the naked eye so that remedial action can be undertaken.
In all these climate change-driven use cases, the key to driving mitigation, adaptation and response is to get the Climate Tech solution to quickly pay for itself. Mitigating climate change can deliver true operational benefits and financial payback. In the case of Rezatec’s customers, this payback is delivered on average in the first eight months of a 36-month data subscription contract. It is delivered remotely from space which has a direct impact on users’ carbon footprints: it reduces the need for ground-staff monitoring. (Ground staff would have to reach the given asset by car or helicopter or by remote surveillance using light aircraft burning aviation fuel.)
In an investment context, incorporating a climate tech solution into an ESG framework is a clear way for private capital to invest in propositions that enable corporates to transition from legacy ways of managing their assets. These types of propositions are getting high levels of investor attention.
The strategic mandate of an ESG filter on many investment managers is a very positive development. In turn, this has resulted in a clear focus on new and emerging technologies that help manage the transition that we all are going to have to go through in responding to – and limiting – the negative impacts of climate change. This is giving companies like Rezatec a very strong tail wind as we engage with next-generation businesses to support their revenue growth.
Investment barriers
So, what are some of the barriers and how can they be overcome to unlock the private capital needed to fund climate solutions and support investors in accessing what could be a significant value opportunity?
1. Risk – the need to address such a huge issue requires innovative, often-untested ideas that can fly in the face of public opinion, customer behaviours and the usual way of doing things, and that ramps up the investment risk. There’s a need to de-risk investments and improve the bankability of projects. This can be achieved by greater availability of data, and more transparency. Measures such as the EU’s De-Risking Energy Efficiency Platform, an open access platform designed to provides investors with information about energy efficiency projects, including their technical and financial performance, are key steps in achieving bankability.
Incentives will also play a key role. Policymakers are encouraged to consider joint ventures, harnessing public and private funds to de-risk and achieve goals. The battle to tackle climate change is "not going to work without a lot of private investment," and governments must create policy to incentivise private capital to invest, Lord John Browne, former chief executive of BP PLC and chair of General Atlantic Service Co. LP's BeyondNetZero, which targets growth equity investments related to climate change, told listeners at the British Private Equity and Venture Capital Association Ltd.
2. Greenwashing – while greenwashing remains an issue and perhaps more so as global attention focuses intently on ESG, robust due diligence and leaning into the growing information pools and means to verify data, should give potential investors comfort. More and more standards and targets are being established and frameworks such as the Corporate Sustainability Reporting Directive, or BCorp certification, for example, are increasingly available and utilised.
3. Regulatory challenges – technology is one of the most heavily-regulated sectors and clean-tech solutions benefit from that, but there is also growing regulation around sustainability. The publication of the European Taxonomy, for example, is likely to lead to increased regulation and design of metrics and benchmarking to measure company performance and provide increasingly detailed data on which investment decisions can be based. According to iCapital, that regulatory support ‘provides certainty and impetus to the private sector and entrepreneurs’.
4. Returns – although the availability and robustness of performance measures around impact investing remains challenging, iCapital found that nine in 10 impact investors reported that their portfolios either met or exceeded their financial performance expectations according to the Global Impact Investing Network, generating an average annual gross realised return of 16% on their developed market impact investments. While the report also discusses the legacy of underinvestment in clean tech following the Great Financial Crisis, which led to lower returns and company failures, it highlights that more than two decades on, the environment for climate tech solutions is much more conducive with higher rates of market adoption and declining cost curves.
Clean tech investment to drive climate change solutions is a real opportunity for investors both with regards to decarbonisation of the fossil fuel sector as part of the transition and in terms of new solutions. Now that we have a more mature regulatory environment, plus an increased market appetite and awareness of the need to incentivise private capital if governments are to meet critical targets, it’s certainly an opportunity worth exploring.
Patrick Jones
Director – Technology and Technology Enabled
pj@draxexecutive.com
