Climate Investing: The Trillion-Dollar Opportunity
We’ve heard about the melting ice-caps and dying polar bears for decades. Neither that nor the future of our children have managed to create the kind of urgency required to save the climate. So, let’s not talk about those things. Instead, let’s talk about why the world and big businesses are finally investing in climate.
To put things bluntly, the climate in 2021 is like what the Internet was in 1998. The next two decades will see climate change is going to touch and transform the fundamental basis of competition for every industry. Its impact will cut across sectors like energy, agriculture, transportation, construction, manufacturing and finance among others.
Fun fact: Those six industries add up to one-third of the world’s GDP! IFC estimates that in the next 10 to 20 years solutions to climate change will create upwards of $20 Trillion USD of economic value in emerging markets alone.
How Climate Change Will Impact Industries
Much like the ripple effects of the Internet were difficult to predict and prepare for (Think, Netflix disrupting Hollywood instead of Blockbuster) the secondary impact of climate change on industries will be immense. Take for example how ride-hailing companies will have to switch completely from combustion-engined vehicles to electric and other clean energy alternatives over the next decade or two.
Similar changes can be predicted across industries like the end of industrial meat for example and even the way we consume power. There’s incredible economic value to be created and captured here. Especially since entire sectors are being redesigned from the outside in thanks to their impact on or how they overlap with our environment.
How Investors Can Benefit From This Shift
Let’s look at climate solutions in four broad buckets. Think of them as four broad scopes of potential investments. The first bucket is reducing carbon emissions; shorthand for electrifying everything and switching the source of electricity to renewables. This will mean drawing down existing carbon from the air through low-tech means like reforestation, or high-tech ones like Direct Air Capture.
The second bucket is creating sustainable lifestyles. This refers to changes both on a macro and micro scale. Things like building vertical farms, promoting a circular economy, and sustainable waste management to name a few will be widely popular.
The third bucket is all about adaptation & building resilience to climate consequences. This can be best described as being prepared for all that nature can throw our way. Right from disaster-preparedness to focussing on drought-resistant crops and smarter climate insurance.
Where India Currently Lags Behind
India has made remarkable progress on the first bucket of decarbonizing the energy sector (we still love our dirty coal though!). Now, we have among the highest amount of renewables addition, the lowest cost of this energy and the most ambitious targets for additional capacity.
Therefore renewable energy deployment, as of now, is a project finance game. One that doesn’t match venture returns and that is why clean energy requires massive amounts of investment to chase returns under 20%.
This is mainly because India’s electric grid isn’t smart, decentralized or financially solvent. That makes it harder to scale things like solar services businesses (so no SunEdison) and renders impossible business models like connecting EVs to the grid (so no Weavegrid).
Similarly, India’s fragmented agricultural sector makes it hard to find large buyers who can take a medium-term view of their agricultural holdings and the climate risk they face (no Climate.ai). Add to it India’s lack of regulatory framework (or the teeth) to mandate anything, including building efficiency standards (no 75F) an there is a lot that remains to be done.
The Indian consumer is also plagued with the inability to pay market prices for clean air & water after the distortionary subsidies we’ve become used to.
The Potential For Growth
If you look at global climate tech investments, you will find that over the last 6 years they have grown by over 5 times! So much so that they are now 6% of all global venture capital investments. However, around 63% of those investments went into only the most obvious spaces: Mobility & transport. Understandably it is easy to see the growth potential in electric vehicles thanks to the worldwide push for the electrification of transport. However, things are different in practice.
The venture-fundable activity in this space can be loosely called “climate tech”. Compared to the US and Europe, India is a significantly underdeveloped market for climate tech.
In India, we often conflate climate change with pollution. That tells us where we might find future consumer adoption and favorable regulation. Companies like Mozev which offer an electric bus fleet for operators fit the consumer adoption angle while a company like Three Wheels United which is financing play to substitute auto-rickshaws with electric ones checks off the favorable regulation box.
There is a lot of potential in building data infrastructure that the world needs. As industries find their legs in the climate space, there’ll be a massive hunger for data and the entire stack built on top of that. There is a strong belief in the industry that as ESG becomes an important lens for investing, sophisticated financial players (insurers, large asset managers) will need a near real-time auditing capability on the environmental footprint of their portfolio.
Something similar will happen as the global carbon offsets market takes off and India becomes a favoured destination for such projects. The world will need companies that can audit forests and soil on a real-time basis.
The Path Ahead
The segment of climate-woke individuals, especially amongst the younger demographics, is becoming a sizable segment. My company Terra.do is an online climate school that taps into the growing demand amongst individuals across the globe to figure out a way to use their skills to work on climate problems.
An astonishing percentage of our customers are from India. I can imagine climate-focused variants of Kickstarter, Stackoverflow and even Linkedin getting built out over a period of time as this segment becomes deeper. Education will be crucial in ensuring people with the right skills and training are out there to ensure climate focussed companies can grow at pace.
To conclude I would say that climate change’s transformational power goes even deeper than the Internet. It will affect how we do trade and politics within national & international borders. We're looking at a fundamental rupture with the old ways of doing things.
The key question to ask yourself is - at what level do you want to play? If this is just another sector for you, then you need to get smart about the space. Bide your time for the right opportunities and think in terms of portfolio allocation. If it’s a mission for you, then you’ll need to bring not just your cheque book but also your network, your skills and, if I may say so, your heart, into what will often seem like an impossibly heart-breaking struggle.
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