From devastating wildfires and unprecedented heat waves to catastrophic flooding, hardly a day goes by without dire reports about the impact of climate change. And while it’s easy to feel defeated by the cacophony of alarming news, as a climate tech investor, I’ve got a very different point of view. I’m a climate optimist who knows that climate change is a problem that we can solve provided we recognize that the time for small moves is over. It’s big-moves-only time.
To be clear, the climate crisis absolutely poses serious risks to humanity. Nevertheless, there are some very compelling reasons to be hopeful. Among them is the staggering amount of technological innovation happening right now to eliminate greenhouse gas emissions from human activity and remove legacy emissions from our atmosphere. The fact that renewable energy sources like solar and wind have become less expensive than fossil fuel-based power is just one example of that innovation. The power of economic gravity has taken hold.
Estimates from the UN and McKinsey put getting to net-zero carbon emissions at between a $125 trillion and a $250 trillion economic opportunity.
Consider also that companies currently addressing climate change, whether directly or through their own operations, are among the world’s fastest-growing and most profitable businesses. And, rather than tanking the economy as some people fear, stopping climate change will actually be a boon for it. Estimates from the UN and McKinsey put getting to net-zero carbon emissions at between a $125 trillion and a $250 trillion economic opportunity. That’s a pretty massive carrot to drive the innovation and change necessary to mitigate the crisis.
Beyond these and other reasons, I also know that when push comes to shove, people are exceptionally good at finding new ways to solve problems. I have confidence that we will not only find the solutions necessary to tackle climate change, but that we will implement them, too.
The rise of climatech
I’m sure you’re well aware of how human activity led to climate change. You may be less familiar with how the dynamics driving the adoption of new climate-related technologies have evolved over the past 20 years.
Back in 2002, an entrepreneur and investor named Nicholas Parker coined the term ‘cleantech’ after pioneering the movement to invest in tech solutions that solve environmental challenges. At the time, using cleantech to benefit the environment was viewed as the moral and ethical thing to do. Unfortunately, ethics and morals alone rarely govern economic decisions, and as a result, cleantech never really took off as the customer demand for these brilliant innovations was lower than the amount of capital invested in them.
Fast forward to 2016 when the Paris Agreement went into effect, and governments and corporations worldwide had suddenly committed themselves to working toward decarbonization in a very big and public way. That was important because the climatech companies that have emerged since aren’t trying to solve environmental challenges just because it’s the moral and ethical thing to do. They are also trying to help the businesses, governments, and institutions around the world that have made solving climate change a business imperative.
The Paris Agreement, and a variety of other stakeholder pressures, stimulated a global demand for climate solutions that didn’t exist before.
Simply put, the Paris Agreement, and a variety of other stakeholder pressures, stimulated a global demand for climate solutions that didn’t exist before. The previous lack of interest was quickly overcome and replaced with a funding gap as customer demand for climatech solutions suddenly far exceeded current and past levels of investment.
The quest to decarbonize
As climatech investors, my colleagues and I are interested in technologies that can deliver the greatest amount of decarbonization in the shortest period of time while also creating the best financial returns. We think the energy and agriculture sectors, which collectively account for about half of all anthropogenic emissions, are the most interesting places to begin achieving those goals. That said, we also examine and invest in the other four sectors of the economy, too, including mobility, industrial processes, waste, and buildings. Frequently the technologies we invest in address more than one sector at a time.
But we don’t just look at sectors alone. Equally if not more important when deciding which technologies to invest in is how the tech contributes to decarbonization. There are three ways this can happen. The first is reducing the intensity of emissions produced by swapping an existing technology with a more efficient one, like when you use LED light bulbs instead of incandescent ones. The second is replacing an existing greenhouse gas or carbon-emitting system with an entirely new solution that doesn’t emit anything. A good example of that would be replacing a coal-fired power plant with a solar-powered one. Finally, you can introduce products that remove carbon from the atmosphere and permanently sequester it, as in one of the examples I’ll share below. We refer to this framework of reducing, replacing, and removing as the three Rs of decarbonization.
From the grid to the ground: two of the technologies we’re very excited about
It’s no secret that to meet the world’s current decarbonization goals, we must move away from fossil fuels and electrify everything. That means that we also need to be able to generate a lot more energy from renewable sources. One of the big obstacles currently preventing that from happening isn’t a lack of renewable energy but rather that most electric grids only operate at around 55 percent of their capacity.
This is because utility companies haven’t historically had a way of knowing the condition of every power line they operate. That matters because if they happen to pass too much electricity through a powerline, it can compromise the line causing it to overheat and fail, for instance. That in turn can damage the utility’s infrastructure and potentially lead to blackouts or fires. Rather than take that risk, local utility companies tend to be conservative about how much electricity they’re willing to push out over their lines at any given time. As a result, they often have a lot of excess capacity stored in reserve that they simply aren’t able to distribute fast enough.
One of our portfolio companies is working to solve that problem. LineVision has created a dynamic line rating system that allows utilities to measure all of the factors that could potentially jeopardize the integrity of a power line in real-time, such as temperature, pressure, and ambient air quality. By knowing the condition of any line at any time, utilities can unlock up to 40 percent more capacity in their grids without risking a failure or having to install additional power lines. That will play a big role in allowing us to bring on more renewable power faster, electrify more things, and become less reliant on fossil fuels.
Another area where we see a lot of opportunity is in using soil to recapture carbon en masse. Unfortunately, over the past 150 years, industrialized farming has released around 300 billion tons of carbon into the atmosphere and destroyed much of the network of highly beneficial mycorrhizal fungi that naturally exist in the soil and that is the primary and most prolific route of carbon into the soil. These fungi are key in bringing nutrients to plants and sequestering carbon.
Groundwork BioAg is a company that’s working to fix that problem by producing ultra-enriched mycorrhizal inoculants for mainstream agriculture. Their products effectively coat seeds with fungal spores. As the plants and mycorrhizal fungi grow together, they develop a symbiotic relationship where the mycorrhiza extends the plants’ root systems, allowing them to increase their intake of water and key nutrients such as phosphorus. That ultimately helps farmers grow larger, more resilient crops using much less fertilizer, which is one of the most carbon-intensive products in the world to produce.
On top of that, the mycorrhiza help to sequester vast amounts of carbon permanently. As plants photosynthesize, they convert sunlight and water into sugar. That sugar gets passed down to the mycorrhiza, which in turn convert it into proteins and mineralized carbon that is permanently captured in the soil. We think this has so much potential that Groundwork may become the first company in our portfolio to reach the status of ‘gigacorn,’ the term we use for any climatech solution with the potential to deliver more than a billion tons of carbon reductions and reach an enterprise value in excess of $1 billion.
Shifting to a decarbonized economy
As easy as it can be to feel like a full-on climate crisis is unavoidable, the reality is that between the advances in technology that are emerging and the economic opportunities that solving climate change is creating, that doesn’t have to be the case. While it will take time, we’re already on our way to transitioning toward a decarbonized economy. Not only can climatech help save the planet from the dangers of climate change, we believe it will also help drive a new era of economic growth as part of what I refer to as the decarbonization of everything.
Nelson Switzer is the Co-Founder and Managing Partner of Climate Innovation Capital (ClimateIC), a Toronto-based growth equity fund that invests in innovative companies working to accelerate the deployment and adoption of meaningful, sustainable decarbonization solutions across the economy. ClimateIC identifies, invests in, and grows climate innovations with the highest potential financial returns and the greatest decarbonization potential that can be delivered in the shortest period of time. The fund leverages its strong network and extensive experience as operators, climate advisors, and investment professionals to deliver its mandate.