Why ClimateTech is Bound to Blow Away Cleantech

Cleantech was a rebrand of greentech, which failed out of the gate at the turn of the millennium. In two decades of cleantech, there have been ups and downs. The new kid on the block is called ClimateTech. Is it a rebrand, a sub-sector, or something new and dramatic? We’ll scan the space from an investor’s perspective, fast-forwarding through a couple decades of history. We’ll evaluate the distinctions as well as the common ground of cleantech and ClimateTech, their relative risks and potential rewards.

Why did Cleantech 1.0 fail and can its successors do better?

“Greentech,” from the 1990s, failed to deliver returns to investors, riding mostly on popular sentiment and the promise of government support. “Cleantech” was invented around 2002 as a catch-all for ‘green and clean’ technologies that VCs, burned from the collapse of the first internet bubble, hoped would turn out to be the next big thing in tech investing. It was, as Wal van Lierop called it, a “bright shiny object” that would perhaps be a more solid investment vehicle than the software bubbles that popped as the millennium turned. But beyond scattered solar, wind and biofuel initiatives, the space was fairly sparse and not many investors really had much of a clue either. Some quipped that it was believed to be tech for making better laundromats and dry cleaners.

The space was hyped by Al Gore’s Oscar-winning movie, An Inconvenient Truth. Kleiner Perkins chief John Doerr soon after announced his firm’s push into cleantech, taking Gore onto his board, eventually resulting in some twenty investment rounds into cleantech companies. The industry as a whole was buoyed and artificially bolstered by massive government cash injections, which multiplied as the Obama Administration came to power. The initial focus was on renewable energy generation, expressed primarily by large investments in wind farms and solar panels. But it wasn’t enough.

Cleantech crashed and burned soon after the 2008 economic collapse. An influential MIT paper from 2016 reported that fully half of the $25 billion in VCs funds invested in cleantech had evaporated, concluding that VC was simply a bad fit for funding clean energy. The bankruptcy of Solyndra, which alone received more than half a billion in government subsidies, was emblematic of the failure. The near-failure of Miasole, another Kleiner Perkins portfolio company, didn’t help matters, “tarnishing” Kleiner and Doerr. Cleantech, as van Lierop noted, had become a dirty word.

Cleantech 2.0, Meet ClimateTech

In the last decade, however, as going green has become more mainstream and no longer a novelty, the space has experienced a resurgence. Some have dubbed it Cleantech 2.0. In 2020, investors piled a record $17 billion into just over a thousand firms in the Cleantech category. From the outside, it might seem to be the heady days of the mid-2000s all over again. But many things have changed since, with the field and the tech maturing and often encompassing what is really a distinct field, commonly called ClimateTech.

ClimateTech is a far newer term, emerging only in the last few years. While cleantech addresses humanity’s impact on the environment generally, ClimateTech focuses on the mitigation of greenhouse gas emissions, a major driver of climate change. Is that a big enough problem to drive a new industry at scale? A lot of powerful people and organizations are betting on it. ClimateTech has a unique set of priorities driven by the urgency of addressing a monumental, global challenge that threatens the future of humanity.

The jury is still out, but greenhouse gases and humanity’s huge carbon footprint is not going away anytime soon. In terms of government and NGO attention, and increasing innovations and initiatives in the private sector, ClimateTech is demanding the world’s attention and seizing top billing as pandemic becomes endemic.

Net Zero: Two Words Propelling ClimateTech Momentum

The sharp focus on net zero emissions and its relative newness are big drawing cards for potential investors, including the biggest. What is net zero? The goal is to emit no more carbon dioxide than one removes from the atmosphere. That’s not going to emerge overnight. The shared commitment is to achieve this by 2050, a threshold intended to keep global warming below what is considered the disruptive level of 2ºC.

Although climate risk has for years been taken into account and priced into securities, Larry Fink, Blackrock CEO, wrote in an influential letter to stakeholders that this is the beginning of “a long but rapidly accelerating transition” likely “to unfold over many years and reshape asset prices of every type.” With the downside of climate risk comes an upside, he thinks: “ the climate transition presents a historic investment opportunity.”

Fink also raises the prospect of investment firms assembling a “climate-aware portfolio” leading to sustainable index investments enabling “massive acceleration of capital towards companies better prepared to address climate risk.” Such climate index portfolios could make such investments accessible to a far broader group of people towards sustainability-focused companies. Fink calls it a “tectonic shift” with “dramatic impact on how capital is allocated,” causing every management team and board to take climate factors and climate innovation into account.

A salient indicator of the ClimateTech global transformation is the emergence in many countries of a commitment to net-zero. Even with a decades-long runway, change needs to accelerate immediately to meet that mark. Companies which don’t prepare themselves rapidly will see their businesses and valuations suffer if stakeholders see companies failing to prepare for dramatic changes. How dramatic? To reach the net zero goal, emissions need to be cut by 8-10% annually. This doesn’t bode well for carbon-intensive large indexes like the S&P 500 or the MSCI World. These indexes, comprising many heavy fossil-fuel producers and consumers are on trajectories incompatible with the net-zero mark, literally running hot.

Planetary Decarbonization Gathers Global Gale Force

So the net-zero goal demands both technological innovation, careful planning, and a lot of cooperation between private and public sectors. ClimateTech, then, is the sector that will be instrumental in making this transition. With the U.S. commitment to rejoin the Paris Agreement, 127 governments – accounting for more than 60% of global emissions – are considering or implementing commitments to this goal. The impact on the global economy will be dramatic and massive.

General Motors this year announced its intention to end the manufacturing of gasoline and diesel-fueled vehicles by 2035. In February, Aussie mining magnate Andrew Forrest of the Fortescue Metals Group starkly predicted: “In 15 years’ time, the world energy scene will look nothing like what it does now. Any country which does not take green energy very seriously, but clings to polluting energy, will eventually get left behind.” This would not be gentle, evolutionary change.. “The journey to replace fossil fuels with green energy has been moving at glacial speed for decades — but is now violently on the move,” he said. Even British Petroleum admits that oil production has passed its peak. Oil- and coal-based energy is yielding to renewable energy powered by solar and wind energy, and there’s no going back.

In more ways than one, then, ClimateTech is cool. But it’s also dramatic and world-changing. Olafur Ragnar Grimsson, former president of Iceland and chair of the Global Commission on the Geopolitics of Energy Transformation, says that the fast-moving transition to clean energy will give birth to a new geopolitics. “As fossil fuels gradually go out of the energy system . . . the old geopolitical model of power centres that dominate relations between states also goes out the window. Gradually the power of those states that were big players in the world of the fossil-fuel economies, or corporations like the oil companies, will fritter away.”

That sea-change creates an unprecedented space for start-ups and growth companies to fill the vacuum, along with opportunities for savvy investors. Innovations emerging from this rising sector will be instrumental in achieving a global transformation that brings together nations and creative minds to solve a problem essential to preserving our shared planet.

Risks and Rewards of the Coming ClimateTech Hurricane Season

Alternative energy generation is just part of the picture. There’s also the need to better measure emissions and compliance, to apply to carbon — in all its forms — the same rigor and transparency that we have applied to money. We need to assess sustainability, and that requires better data and analysis. risks requires that investors have access to consistent, high-quality, and material public information.

Major multinational efforts are already underway. The Task Force on Climate-related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB) set out some of these material sustainability factors. Companies are bound to make these reports and commit to TCFD. These standards help investors assess climate-related risks and how companies manage them. Every company should be thinking about how it will contribute to a net zero economy. And investors will need to make their choices with these factors central to their decisions.

Here, again, the need is to take into account both climate risks and growth opportunities in cleaner energy arising from this global transformation imperative. In effect, everybody will need to start “taking the temperature” of investments and the assets under their management and influence. The market may be hot, but the winners are likely to be the ones who will keep their cool.

The weather metaphors may wear thin, but the current investment climate is comparable to hurricane season. The economic and environmental forces collude to create the conditions conducive to the formation of a perfect storm. Whether the present gale-force winds rise, and how high, remains to be seen and if so, to which intensity level is anyone’s guess. But investors and entrepreneurs alike would be wise to keep careful watch on which way the winds are blowing to reduce risks and maximize rewards. Value is not in the eye of the beholder, or the still-forming storm, but in the volatile and complex calculations of the nascent ClimateTech marketplace.

About the Author: Nolan Gray is a Silicon Valley SaaS exec turned ClimateTech entrepreneur and investor. American-born and based in London, Gray was selected in 2020 for Forbes 30 Under 30 in Europe. He is co-founder of Svea Solar, a pan-European digital energy innovator that has eliminated millions of tons of CO2. The company has generated $130 million in revenue, while raising $31 million, with more than 500 employees. Previously, Nolan served as CMO at Jobscience, a San Francisco-based SaaS company sold to Bullhorn, owned by Vista Equity Partners, for $50 million. He has helped raise over $80 million for multiple SaaS and ClimateTech startups in the U.S. and Europe, and has made a series of impact investments.

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