Direct-to-a-Billion: A Climate Tech Primer (Part I)
Exploring the Fate (F8) of Climate Tech in India
From the air we (barely) breathe, the emissions we (endlessly) transmit, the fossil fuels we (consistently) burn, the cattle we (often) mistreat, the food we (over) eat, and the groundwater we (precariously) deplete, our climate undergoes irrevocable shifts, day-in day-out, without as much as a single consideration of how it affects our short term well being let alone the future of mankind.
Our climate is in dire straits. Even our distinct evolutionary traits fall short of expectations when they are faced with the unprecedented nature of effects climate change is causing, including but not limited to rising temperatures, melting glaciers, increased droughts, frequent wildfires, hurricanes, heat waves, rising sea levels, and flooding let alone the catastrophic indirect effects these changes will have on biodiversity, agriculture, infrastructure, the health and wellbeing of us, our children, our children’s children… and so on.
The Fate (F8) of Earth lies within collective climate consciousness, through perspective, action, and redemption. The action required is now beyond the cumulative, hereditary, and even mystic learnings of any homo sapiens that lived before us or the cyborgs that will continue to live after us.
Experimental Advisory, in its second edition, explores the state of Climate Tech in India, its performance so far, and its ensuing future. Here’s a humble jab, albeit an experimental one, on what single-handedly defines our future
Note: There are multiple hypotheses listed in this primer. These hypotheses represent learnings, mental models, and frameworks that may or may not apply in any given condition. Reader discretion for such implicit content is advised. (#iykyk)
Index
Climate Change: The Basics
Climatocracy
The VC Dilemma
F8
Climate Change: The Basics
Definition. परिभाषा.
“But isn’t the climate always changing?” some of you reading this may ask. We did too. The answer lies primarily within these two parameters:
Climate ≠ Weather
Weather is a precursor and primary determinant of climate, such that the difference between weather and climate, per NASA, is a measure of time. Weather represents conditions of the atmosphere over a short period of time, and climate is how the atmosphere "behaves" over relatively long periods of time. Thus, the variance behind it being “hotter” today vs “colder” yesterday doesn’t hold as much significance as much as the combination of those events over hundreds and thousands of years. But “Hasn’t the earth warmed and cooled throughout its history?”Natural cycles vs Human interference
While historically Earth has followed natural climate cycles resulting in what we popularly refer to as Ice Age(s) or Interglacial cycles, these cycles have largely occurred without any human interference. To put this in perspective, paleoclimate data and models suggest that when the ice ages ended, it took about 5,000 years for the planet to warm between 4 and 7 degrees Celsius. The warming of the past century—0.7 to 1.1 degrees Celsius—is roughly eight times faster than the ice-age-recovery warming on average.There is no such thing as free lunch, given that human interference is paying the price for its continued obsession with the industrial era and the underlying impulsiveness of the information era.
*Hypothesis: Continued dismissal and delayed mitigation of climate change today are inversely proportional to the life expectancy of future generations.
Before commencing further, it is imperative for an exploration of this level to define what we’re going to probe. The fact sheet provided below provides the necessary context. Beware, some terms come across as anagrams with bizarre connotations, compiled straight out of cryptography, but hold as much importance as the term next to them.
Fact Sheet
Source: US EPA, UNFCCC, IPCC, NASA, UC Davis, The Climate Reality Project
SRI vs ESG vs Impact Investing
SRI (Socially Responsible Investing)
SRI takes into account the somewhat subjective but often infallible human conscience to create social and responsible investment assets, vehicles, attitudes, etc. Socially responsible investing involves applying moral standards to investing, often involving the practice of including or excluding areas based on ethical considerations. For example, an ESG fund deploying an SRI strategy would consciously avoid investing in Weapons manufacturing companies or alcohol and tobacco companies, etc.
SRI Investing is democratized - available to all investors, whether individual or corporate investment strategies, options are plentiful.
*Hypothesis: Adopting SRI investment strategies is (ironically) like gambling
High risk, low probability of rewards, and any winnings are observed as moral (having fun) and sometimes as financial (ROI) gains
ESG (Environment, Social, and Governance)
ESG refers to environmental, social, and governance criteria/factors for screening, filtering, and evaluating potential investments and corporate behavior and governance. Even when broken down further, ESG comes across as a broad term covering datasets/factors/metrics around the aforementioned areas as much as a standard philosophy for potential growth and diversification avenues for companies.
In India, the Nifty 100 ESG indices have adopted a robust ESG framework based on 52 indicators:
Impact Investing
Brookings Institute defines Impact Investing as Investments made to generate positive, measurable social and environmental impact alongside a financial return. It is distinct from purely social-driven activities or profit-driven investing, impact investing offers the marriage of the two. It requires the deployment of private capital to create a positive impact beyond financial return.
Practically, the sectors for India’s Impact Investing (2021) include Agriculture (~13%), Education (~11%), Financial Inclusion (27%), Healthcare (18%), Climate Tech (9%), signaling some priority to the Climate Tech in the last couple of years, but significantly down the pecking order (for now?).
Climatocracy
Climate + Democracy = Climatocracy
Greenhouse gases, namely: carbon dioxide, methane, nitrous oxide, ozone, chlorofluorocarbons, hydrochlorofluorocarbons, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride (a few others…) are responsible for the warming of our climate. Carbon and Methane are the usual suspects.
However, each of these gases can remain in our atmosphere for different amounts of time, ranging from a few years to thousands of years. More importantly, the cumulation of these gases, while continuous and ongoing, will be prevalent in our atmosphere long enough to become mixed - suggesting that the amount measured in the atmosphere is roughly the same all over the world.
For example:
Industrial livestock farming in the USA, producing unruly amounts of methane from industrially-fed and processed livestock leads to significant changes felt around the world. While we mass-kill these animals, these animals mass-kill us. Remember, there is no such thing as free lunch.
Deforestation of the Amazon forest in Brazil has huge implications considering forests are our natural defense to regulating carbon. These forests, once cleared, pave way for Agriculture, which in itself produces a substantial amount of GHG emissions. Agriculture does not nearly get enough attention as Energy. Both arguably have a net negative impact on emissions in the long run.
Global coal consumption will peak at 8 billion tonnes + in 2022. China alone accounts for 50% of this consumption, with India second at 11-12%. Imagine that, a region comprising nearly 3 billion people (~37.5% of the world’s population) consumes 62% of the world’s coal consumption.
Therefore, we present the case for Climatocracy: A social contract between world economies, their citizens, their businesses, and future generations. A social contract that fundamentally revises incentives, both monetary and social, alters the status-quo nature of resource dispersal, but primarily follows mitigation over adaptation, in everyday life.
Climatocracy is a call for perspective and not empathy.
Easier said than done.
Inequality amongst Equals
Numerous reports suggest Indian consumerism is riding tailwinds towards sustainability, climate consciousness, accountability, social responsibility, corporate responsibility, corporate social responsibility, corporate social accountability, climate positive corporate social sustainable responsibility. Meh. Easy to get lost and conclude we’re collectively better if it’s being “reported”
Are we collectively better? When was the last time you purchased an item from Amazon or Flipkart knowing it was “carbon-positive”? Even if it was, how do you know it’s not the product of greenwashing? Regardless, in 99% of cases, our utility trumps our collective climate consciousness.
*Hypothesis:
If utility is defined as:
--> Convenience (Example: 10 min grocery),
--> Comfort (Example: OTT Platforms), and
--> Connectivity (Example: Social Media)
(And if our utility trumps climate consciousness) who trumps out of our utility? Given the air pollution crisis in New Delhi or the water crisis in Chennai, even short-term utility seems frail.
While the true value of our utility is questionable, what is unquestionably and universally true, is that the poorest of economies contribute the least to carbon emissions but are affected the most by its consequences. The data supporting this is staggering. The richest countries represent only 16 percent of the world population but emit almost 40% of CO2 emissions. On a per capita basis, emissions are about 20 metric tons of CO2-equivalent a person a year in the United States — almost 10 times the amount in India.
“All animals are created equal, but some animals are more equal than others” - George Orwell
However, sustaining the energy and food requirements of a billion people is no joke. The Indian economy is on steroids and hustle culture is rampant. Growth is to be expected at all costs. Even though coal was foisted onto us by colonialism, a step to immediately drastically reduce coal consumption (source of 70% of our energy) is a luxury that only the rich can afford.
What’s your take on Climatocracy?
The VC Dilemma
Sector Performance
India today ranks 9th in the global race for climate tech investments. While this is encouraging, the performance of venture-backed climate-tech startups has been dismal over time. At best, Climate-Tech accounted for only 1-2% of overall VC funding in 2021 ($0.4-0.5bn/$38.5bn) Figures for the first half of 2022 are significantly better, with Climate-Tech accounting for nearly 7% of overall VC Funding in H1 2022 ($1.5bn/$19bn)
Chart_1: History of Climate-Tech VC Funding in India
Source: Holon IQ
Climate-tech funding is largely dominated by early-stage funding rounds (pre-seed/seed) with the vast majority of those deals materializing in the last 2-3 years. The composition is skewed with 85% of deals accounting for only 15% of total capital raised. Even after discounting standard attrition, these figures have presented a dismal case for Series A/B/C stage investments. A variety of factors are at play here:
Long, uncertain, and often capital-intensive gestation cycles from product development to proof of concept.
Most funds don’t have a climate-tech thesis and the lack of patient capital, given the risk-return profile of these funds is evident.
Chart_2: Break up of deals, with respect to stage and investment range (2021-2022)
Source: Impact Investors Council, India
Compare this with the US (~$20bn), Europe (~$8bn), and China (~$7bn), we’re miles behind. It should be a competition because we are in a race against time. Recall that the F8 of our Earth lies within collective climate consciousness, through perspective, action, and redemption. Unitus Capital estimates India’s climate finance requires nearly $1 Trillion over the next decade, a 400x increase from where we are at today. A complete list of climate financing options can be accessed here. (cc: Climate Tech VC)
Chart_3: Estimating India’s Climate Finance Requirements By 2030
Source: Climake, Unitus Capital
The Taxonomy
Chart_4: Emerging areas of innovation within Climate Tech (2021-Present)
Source: Holon IQ
Clean Tech 1.0 vs Climate Tech 2.0
Clean Tech: Defined as business models or technologies that increase the performance, productivity, and/or efficiency of production while minimizing negative impacts on the environment. This includes clean energy, clean air, water treatment, transportation, recycling, waste reduction, and more.
Climate Tech: Defined as any new business model and technology that mitigates the impacts and drivers of global greenhouse gas emissions (i.e. climate change). This includes new technologies in sectors such as clean energy, which focuses on reducing our reliance on GHG-producing fossil fuels. Eg Transportation, Built Environment, etc.
Clean Tech 1.0 (2006-2011) was a brief but significant period in VC history where approximately $25bn was shelled out in clean tech projects and startups. Clean Tech 1.0 was a failure - cumulatively over 50% of the capital was lost. By the end of 2011, Clean Tech was down and out. Strike 3. Red Card. A combination of factors was behind this downfall, including the 2008 financial crisis which led to a further decline in oil and gas prices around the world. But, more intuitively it was a failure of expectations - the first incidence of difference in the risk/return profile of venture investors. This resulted in a capital crunch and many venture-backed businesses failed to raise successive rounds of funding. Most famously, Solyndra, a solar tube manufacturer, filed for bankruptcy in 2012 after receiving a $500million loan from the US Government.
Climate Tech 2.0 (2020 - Present) is a resurgence from Clean Tech 1.0, a stronger, more nuanced stream, with the added metric and moral high ground of carbon reduction as its north star metric. Given we’re undergoing an overall market correction, Climate Tech 2.0 finds itself in an eerily similar position as Clean Tech 1.0. Will history repeat itself? Clean Tech gained momentum just before 2008-2009 similar to Climate Tech in 2021-2022.
While the dry powder from VCs is still somewhat available for early-stage startups, there is some hope for the availability of risk capital, with newer fund mandates and verticals being launched constantly. In western markets, Climate Tech SPACs rose sharply, which is proof of investor sentiment, but the group of SPACs has lost an incredible amount of their value already, which makes these investments (specifically asset-heavy) incredibly risky and further emphasizes the need for a correction of expectations.
Ultimately, It boils down to the cost of capital.
The Cost of Capital
The cost of capital refers to a combination of factors that determine the value and behavior of capital being deployed. The flow of capital from one edge to the other is dictated by interest rates, exchange rates, market-exchange policies, and many, many macroeconomic conditions that dictate the “availability” of said capital. All meaningful capital is effectively borrowed at interest rates in environments and repayment periods that are continually tried and tested, every minute, every second.
Climate Tech investments over the past 2-3 years have generally benefitted from the deployment of low-cost capital, defined as the ability to pick up low (and sometimes risk-free) interest rates in friendlier repayment environments.
*Hypothesis:
High Capex Low Opex = Higher chance of a return for low-interest capital invested (Particularly in climate tech)
The spread of low-interest capital portfolios is better hedged against other neutral sectors where Capex and Opex are largely equally balanced. Giving Climate Tech availability of more risk capital.
Source: Catalyst w/Shayle Kann
Emerging Forms of Climate Finance
Given the significant amount of capital required, climate finance will need to evolve to generate flexible, non-dilutive capital and transparent capital.
Recently, ReFi has emerged as an interesting alternative. ReFi is a movement focusing on the power of blockchain and web3 to address climate change, support conservation and biodiversity, and create a more equitable and sustainable financial system.
ReFi Projects/Examples:
A complete list of climate financing options can be accessed here. (cc: Climate Tech VC)
Parable Of The Broken Window
The VC Dilemma can be summarized by The Broken Window Fallacy. Written in 1850 by French economist Frédéric Bastiat, The Broken Window Fallacy addresses a very important question: Do natural disasters create or destroy wealth?
Here’s how the story goes: James Goodfellow is a storeowner whose son breaks a window in his store. Obviously, this is a cause for concern. After all, a broken window is not good for business. James’ neighbor asks him to look at the bright side: money spent on fixing the window creates jobs for glassmakers, who in turn create jobs for bakers, winemakers, shoemakers, etc. The catch here is that the neighbor did not take into account that money spent on fixing the window could directly go to a shoemaker, winemaker, baker, and then a glassmaker in any order. The concept here to note is Opportunity Cost: The value of the next-highest-valued alternative use of that resource.
The Broken Window is Earth. VCs are the storeowners and the ones paying for the broken window, in hopes that it creates wealth not just for themselves but for the extended community around them. What could possibly be of higher value and importance than saving Earth? Given fund mandates, theses, and fiduciary duties to LPs, VCs not only need to recalibrate their risk/return expectations from climate tech but also need to consider the value of the next highest alternative.
F8
Fate. F8. 8.
What is the fate of Earth? The academic consensus on this question is rather underwhelming and morbid. In about 7.5 billion years, Earth will be absorbed by the Sun. Habitual life may cease to exist much before, some 1.5 billion years from today. For context, Earth is about 4.5 billion years old. We’ve been here for a while and something has to give. (Recall… there is no such thing as free lunch)
The F8 key on the keyboard is typically used to enter Safe Mode. Safe Mode allows you to Repair your computer, with a variety of options that are proportional to the problem at hand. Safe Mode refers to a state where the program is loaded with default settings.
Before permanently altering the Earth’s climate for the worse, there is still time, specifically 8 years from today, for us to reset to our default setting and enter Safe Mode. Safe Mode is not by any means a permanent state. Rather, it is the only stop-gap solution, until it gets too late. Through a combination of perspective, action, and realistic climate consciousness, the tide can be turned, allowing future generations to continue living life without evolutionary disadvantages.
Thank you for spending the time to read through this edition. We hope you enjoyed consuming our content, as much as we enjoyed creating it. Stay tuned for Part II!
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