Seasoned investors in the climate space believe that investing in climate innovation is not just a moral imperative, but a real investment opportunity.
With the renewables market becoming too competitive, investors are now looking at climate solutions innovated by tech companies, said participants at a panel discussion on “Breakthrough climate innovation: The future that can be” at DealStreetAsia’s Asia PE-VC Summit 2023.
The panellists included TRIREC founder & managing partner Melvyn Yeo, Decarbonization Partners director Jianrong Liu, and Aera VC partner Milena Nikolova.
“After investing in renewables.. wind and solar, we very quickly realised that our cost of capital is too competitive a market for us to be able to generate desired returns. So we started to look slightly earlier stage into energy transition by technology providers,” said Liu.
Decarbonization Partners, which invests in things like hydrogen fuel cells and battery technologies, is a 50-50 joint venture between BlackRock, the largest asset manager in the world; and Singapore state investor Temasek.
The firm invests in late-stage venture capital and early-stage growth equity companies targeting de-risked technologies across clean energy, electrification, green materials, and a circular, digital economy. It is actively deploying capital into six focus areas with a cheque size of about $50-100 million.
TRIREC’s Yeo said the firm is no longer looking at renewables because of its infrastructure. It is investing in early stages, pre-Series A to Series A companies with technology readiness levels (TRL) of six to eight.
The panellists believe that there are huge investment opportunities in energy transition by technology providers, with good returns.
Nikolova of Aera VC said, “I’ll be very honest. Looking at the returns that you can make in climate tech, it was a surprise to me. And I continue to believe that it’s one of the biggest investment opportunities of our generation,” she said, adding that the firm is interested in decarbonising industry and future food.
“We’re targeting 20%-plus returns and very importantly, we’re looking to create value with our portfolio companies by providing a solution that is better, faster, and cheaper…It’s not just about the green solution, it is also about innovating and making sure that we’re coming up with a better product and better service than what is the incumbent, which is usually a fossil fuel-based product,” said Liu.
Yeo, meanwhile, stated that the firm is raising its third fund after doing two funds with 20 deals across the world (50% sits in North America, 30% in Asia, and 20% in the rest of the world, Israel, and the UK), mainly focusing on the early stage.
The investors said that great entrepreneurs are coming into the space to do interesting things, and very interesting technologies are being developed or coming out from research institutions or universities.
Opportunities in sub-sectors
According to Liu, the market is seeing increased capital flow to other sub-sectors that are trying to replicate the success of solar.
“Another space is energy storage,” Liu said. He pointed out that renewable energy is intertemporal and intermittent; therefore, energy storage will help solve it. The firm is looking at alternative chemistries instead of lithium, nickel, cobalt, and manganese.
“We’re trying to spread that base of solutions that can ultimately solve the problem of energy storage,” he added.
Yeo, meanwhile, is looking at what are the different things that can improve the efficiency of the battery manufacturing process. “Today, there is a ready market for startups to convert the batteries back into productive resources,” he added.
For Aera VC, decarbonisation is a core focus as well, but that does not mean just energy. Nikolova said her firm is very much focused on the built-world carbonising industry, and future food is a big part of it.
Aera VC has eight portfolio companies out of 24 at the moment that are centred on the future of food. Nikolova indicated that food accounts for about 25% of CO2 emissions globally.
AI in climate tech
Investors in the panel also indicated that there are a lot of applications around artificial intelligence (AI) and the climate space, according to Liu.
He gave an example of a portfolio company that is a science-based carbon management platform helping several corporates with their GHG emissions measurement and reduction strategy reduction. One of the ways they do that is through policy using carbon offsets and carbon credits and how they incorporate AI into that.
“To do carbon accounting for corporates, we need to get the data we need to get that flowing seamlessly and AI is definitely enabling that and making it possible,” said Nikolova.
She also said that Aera VC has invested in a company that uses AI to identify naturally occurring microbes to create pesticides.
Although there is a certain uniqueness and differentiation between climate tech and general investing, the panellists said they are looking for the same thing that every tech investor does such as in consumer, transportation, and logistics.
“However, when we make an investment, the decision is this solution offers something that can move the needle very materially in reversing climate change. So we need an answer to that. If it is a yes, we look at the rest of the criteria. So, that probably is the key difference,” said Nikolova.
