Andreas Schwarzenbrunner | Image credit: Speedinvest
Investment in climate tech is staying hot. Despite a challenging investment environment, there’s been no shortage of capital heading for environmental or green innovations, with $10B invested in European climate tech businesses in the last year alone. So although there has been an inevitable slow down in recent months, there is still plenty of activity in the market, and entrepreneurs should feel encouraged. But can we do better?
Despite the relatively buoyant market, much of the focus on climate tech has come from vertical funds, whereby investors create dedicated climate funds, often with specialist teams. While these types of single-focus funds are undeniably effective – and we should encourage the creation of more such vehicles – they are not the only option.
Thinking outside the box
The danger of a vertical-only funding landscape is it risks developing a narrow focus and could lead to important innovations slipping through the gaps. A fund with a remit to find and back ‘climate tech’ may fall into a cycle where only some focused businesses qualify. The unintentional outcome could be that certain sectors become underfinanced, and businesses with a more subtle impact on the climate may miss out.
Through focusing only on explicitly climate-oriented solutions, climate-only funding teams can hinder VC’s ability to identify and back environmentally friendly investments in their other verticals. In that case, they are only providing a limited solution to the problem. Ideally, we need to promote climate consciousness across all sectors of the economy and be wary that we don’t miss innovations that may not fall into traditional ‘sector’ definitions.
A VC’s climate investments cannot be limited to just technologies directly combating climate change, like carbon capture. The fight against the climate crisis must also include companies and innovations that revolutionise other industries or processes to reduce emissions across the economy. In the end we need both!
In defence of interdisciplinary innovation
As well as the risk of missing out on brand new technologies that fall outside traditional sector definitions, vertical funds could miss out on innovations that sit deeply within existing industries. As with any speciality, investors can become underexposed to the potential of technologies outside their remit, and it is a constant challenge to encourage cross-pollination and the sharing of interdisciplinary expertise. Where the climate is concerned, we should be building cross-sector teams to ensure that existing specialist knowledge can be best utilised.
For example, there is a lot of climate-positive innovation in finding ways to improve efficiency and reduce waste or energy consumption. You wouldn’t necessarily think that a packaging startup could be a climate startup, but if we can reduce the quantity of materials required or change the type of material used, then the positive climate impact can be considerable.
Climate tech should sit ‘horizontally’ across a VC’s investment focuses as something that underpins everything the firm does and a focus for all investors. All teams should be leveraging their deep specialist expertise to identify and back the technologies and innovations that will make the biggest impact on the ground. This impact can range from deep tech teams investing in technologies and architectures that help improve the power consumption of computing and storage, through to industrial teams investing in material upgrades or processes to cut waste in the construction sector.
Building climate accountability
Another advantage of implementing a horizontal approach to climate investing is that it allows VCs to introduce standardised reporting and accountability processes across their portfolios. Tackling the climate must be a cross-industry effort, so we should be taking the opportunity to embed climate accountability into the core of all companies, whether through environmental policy standards or dedicated climate reporting.
In the same way that a vertical investment team risks missing out on less obvious climate technologies, a company adding a separate ‘climate policy’ can end up being performative rather than effective. Climate accountability should be applied across the board, by all companies in all departments and teams.
The best way to ensure that companies across the economy are building effective climate strategies is for their investors to lead by example and treat emissions reduction as a core horizontal target, applicable to all their portfolio companies and their own operations.
Building this horizontal approach begins with educating partners and employees across all vertical teams so that everyone is a climate specialist. Once environmental policy education and climate consciousness are “horizontal” principles across all teams, accountability can follow in investments and across the portfolio. As well as improving existing investments and portfolio companies, this holistic education will also enable VCs to ensure that crucial interdisciplinary innovation isn’t being missed.
Catch our interview with Paul Down, Head of Sales at Intigriti.
