Hundreds of entrepreneurs, investors, policy experts and climate activists attended IVP’s happy hour at SF Climate Week, an inaugural event that brought together thousands of people. If that’s not a strong signal that interest in climate tech is growing, follow the money: during the previous three years, investors have allocated nearly $100 billion to climate companies.
We’ve been exploring the climate landscape to understand what is driving all this activity. Climate tech is not new; it had a similar rise in interest in the 2000s, when it was known as cleantech, but that was considered mostly a failure. Back then, the alternative energy sources weren’t economically or technologically viable to win the market.
Today’s interest in climate tech is accelerating because of a much clearer, more compelling “why now” argument. Below, I highlight key trends, including:
- regulatory changes and government support
- improvements in technology reducing costs
- bottoms up, social commitment to sustainability
The ultimate goal of climate tech is to reduce greenhouse emissions. Many of climate tech’s biggest winners will include hardware and businesses with moats strengthened by physical products or proprietary technology in energy, land use and transportation. Some of the largest venture-backed companies in the space, including Tesla, Redwood Materials and Aurora Solar, illustrate this dynamic.
But at IVP, we also believe software and asset-lite companies can see significant success in climate and sustainability markets. Organizations and consumers are changing the way they work and live, and there are several areas where software makes sense because of the combination of changes in behaviors and physical technologies that are primed for optimization.
This is not unlike technology platform shifts of the past. In the development of the personal computer, the hardware advancements in processing power and memory laid the groundwork for the software revolution that followed. Through iterations between hardware, software and behavior change of consumers and organizations, we see exciting themes emerging in:
- decarbonization software
- vertical software
- applications/platforms that enable conscious consumers
Below are some of the key trends in climate tech and areas where we see opportunities.
Trend: Regulatory pressure, especially in the EU, is driving enterprise adoption of climate tech
The EU has made a goal of reaching net-zero greenhouse gas emissions by 2050. As the first step to that goal, it has mandated that nearly 50,000 companies begin disclosing emissions by 2024. To achieve that, those companies will have to start tracking and offsetting their emissions in the medium term and eventually change the way they operate.
By 2025, these reporting requirements will require companies to track not only emissions made by the companies themselves but also emissions across the companies’ entire value chain. Gathering the data to effectively measure an organization’s carbon footprint is a complex and time-consuming manual process that is ripe for automation disruption.
Emissions reporting is likely to become a requirement for U.S. companies as well. The federal Securities and Exchange Commission has proposed a regulation that would require publicly traded companies to disclose emissions.
Governments are also putting capital into accelerating the development and adoption of climate tech. The US Inflation Reduction Act allocates over $370 billion for climate initiatives, for instance, while the EU Green Deal Investment Plan proposes to dedicate up to €1 trillion to accelerate adoption of new energies and climate technology.
Opportunity: Decarbonization software for enterprises
The more climate and emissions data that businesses are required to collect, the greater will their need become for software to optimize for climate-conscious business decisions. The day is coming when enterprises will need to "climate plan" as a regular part of enterprise resource planning (ERP).
Companies like Watershed, Sweep and CarbonChain are allowing companies to track and measure their carbon footprint (see step 2 in the chart below). Once companies track their emissions, they’ll need to reduce or remove their carbon in various ways (see Step 3 below) – currently, the most prevalent method is carbon offsetting. Companies like Patch and Pachama are building software marketplaces to enable buying carbon credits; Sylvera is building software-based verification mechanisms to verify and rate new types of projects.