[Impact Insight] The Rise of Climate Tech and Future Opportunities
In 2020, greenhouse gas emissions in the U.S reportedly declined by about 10% compared to the previous year[1]. This, without a doubt, is due to COVID-19. Most countries with high levels of industrial development probably witnessed a similar pattern. This isn’t surprising, as people’s movements were drastically limited and the economy became stagnated by the pandemic. This decline in greenhouse gas emissions is reportedly the largest drop since WWII. In spite of this, 2020 was the second hottest year in recorded human history[2]. The hottest year was 2016; 2020 was only 0.01°C behind, rendering the ranking rather meaningless. The past seven years have been the hottest in history. Even though wars and massive economic downturns may have caused minor fluctuations, since the 1900s, our planet has steadily been heating up. This is the result of human beings continuously pumping carbon dioxide into the atmosphere since the Industrial Revolution. In May 2020, as many places in the world entered lockdown, the carbon emissions graph started declining for the first time in a long time. During this time, the CO₂ concentration in the atmosphere reached 417ppm, the highest recorded level. When comparing with pre-Industrial Revolution levels of 280ppm, our current atmospheric CO₂ levels have increased by 50%[3]. 417ppm is an accumulation of CO₂ emitted in the past. The problem that lies before us is one left by previous generations in the past 100 years; it is a problem that we are intensifying and passing onto the future.
This is not the only reason Yellowdog has decided to make ‘climate change response’ a top priority in our investment area.
Through the Paris Climate Change Agreement (“Paris Agreement”) in 2015, the international community has resolved to keep the average rise of global temperatures within 2°C. In 2018, the Intergovernmental Panel on Climate Change (IPCC, the UN-affiliated body of nation-states against climate change) adjusted the goal, reducing the target temperature from 2°C to 1.5°C. According to IPCC analysis, in order to achieve this goal, we must reduce CO₂ emissions by 45% by 2030, compared to total emissions in 2010. By 2050, we must reach “net zero,” or carbon neutrality. This signifies the full-scale decarbonization of our economic and social systems. IPCC estimates that reaching net zero in 2050 will require an annual investment of 2.4 trillion dollars. While this poses a huge challenge for humanity, it also signifies the opening of a huge new market, equivalent to 2.5% of the global GDP.
Signs of new markets and this massive transition are already apparent. To begin with, more companies are declaring that they will reach the net zero required by the 1.5°C target before 2050. The net zero declaration is essentially a public pledge to keep atmospheric levels of CO₂ from increasing. Since it’s impossible to completely eliminate emissions, including from the industrial manufacturing process, product delivery, even employee business trips, the pledge indicates that companies will reduce emissions as much as possible, while practicing ‘negative emissions’ to re-absorb CO₂ from the atmosphere, eventually reaching the total sum of ‘zero.’ Since the Paris Agreement, the number of companies declaring net zero has increased one by one. But in 2020 in particular, numerous companies competed to participate in the pledge, as if the pledge was the basic premise of business sustainability. According to Accelerating Net Zero[4], a report released in September 2020, 1,541 companies have committed to the net zero goal. Their sales total 11.4 trillion dollars, or over half of the U.S GDP. Google and Amazon have promised to reach net zero by 2030 and 2040, respectively, and BASF, Siemens and Schneider Electric have also set 2030 as the deadline. Even oil companies, one of the leading causes of climate change, are no exception. Repsol, the world’s 10th largest oil company, and British Petroleum (BP), the world’s second largest oil company, have also declared that they will achieve net zero by 2050. The increasing number of companies aiming to reduce carbon emissions and reach net zero means that the demand for decarbonization solutions will continue to grow.
Consumers, as well as businesses, are responding more sensitively to the environmental agenda. In 2015, Nielsen surveyed 30,000 consumers in 60 countries around the world, with 66% saying they are willing to pay more for a product with a higher potential for sustainability. This is an increase from 50% in 2013, and if we pose the same question now, the percentage will probably be even higher. This rising trend is more pronounced among younger generations, with as many as 73% of millennials willing to pay more for highly sustainable products. This millennial generation is enthusiastic about Tesla, eating Beyond Meat or Impossible Burgers, and wearing Patagonia.
The venture capital (VC) market is also responding to this trend. According to a recent PWC report[5], between 2013 and 2019, cumulative investments in climate tech totaled 59.5 billion dollars, with an annual growth rate of 84%. This is the result of a growth that is five times faster than the total VC investment (18%) over the same period, but it is still only 6% of the total VC market. Given the severity of the problems ahead of us and the scale of the markets that will unfold, investments in climate technology will, and should, grow in the future.
There are many skeptics, saying that the growth of climate tech investments may be a passing fad. The main reason behind the skepticism is the VC industry’s clean tech boom in the late 2000s, which left the market in bitter ruins[6]. Between 2006 and 2011, 25 billion dollars of VC funds were invested in the clean tech sector; but about half of the money dissipated. Because of this failure, clean tech was a realm that most VCs did not pay attention to, until ‘climate tech’ emerged as a new keyword in the late 2010. So what is the difference between the clean tech boom and the rise of investments in climate tech? There are countless analyses about ‘what was wrong then but right now,’ now that there is over double the amount of capital invested in the latter, compared to the clean tech boom. We can name a number of reasons, but Yellowdog believes in the following three reasons, that show that the current growth is irreversible, and will only accelerate.
First, and most importantly, since the clean tech boom 10 years ago, the carbon concentration in the atmosphere has increased, and consequently, the climate crisis has begun to become more visible. 10 years ago, ‘melting polar ice’ characterized climate change. Now, images that pose direct threats to our lives, like ‘inextinguishable wildfires and rainy seasons with an unpredictable ending,’ demonstrate the immediacy of the climate crisis. The time when climate change was seen by some as a ‘controversial hypothesis’ has gone. In 2020, the Davos Forum invited Greta Thunberg as a speaker. In 2021, BlackRock, the world’s largest asset management company, said in its annual letter, “Climate risk is investment risk…. We also believe the climate transition presents a historic investment opportunity.”
Second, the now-visible climate crisis demands for solutions and applications in climate technology that are not limited to specific sectors, but applicable across all industries and societies as a whole. Clean tech in the 2000s was mainly called as an alternative technology for the energy industry; it struggled to escape the confinement of having to prove its competitiveness and commerciality based on the prices of fossil fuels. Consequently, the rise and fall of clean tech was inevitably affected by fluctuations in crude oil prices. Over a decade later, not only has the cost competitiveness of renewable energy become incomparably higher than in the past, entering a completely different era, climate tech is also becoming a keyword. Climate tech encompasses decarbonization solutions, not just in the energy sector, but societies and economies at large. Notable are the food sector, which accounts for a quarter of the total amount of global greenhouse emissions, and the mobility sector, led by electric vehicles. As we see more examples of successful businesses, selected directly by individual consumers, the spectrum will continue to expand for possible investments in climate technology businesses.
Third and last, humanity has made many more innovative (or ground breaking) technological advances in the past decade. The cost of bioengineering platforms has decreased significantly; sensor and imaging technologies have also progressed rapidly, allowing for the easier monitoring of carbon emissions. Above all, the development of AI technology has enabled the development of various solutions for operating distributed energy resources and optimal energy use. As the fields have expanded for the application of climate technology, the breadth and depth of technological tools, which can be used by climate tech, have also expanded.
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From capital markets to large corporations, VCs and startups, the responses to the climate crisis are forming a fierce current. But South Korea is still slow to change. Only four companies have declared net zero[7]; and the climate technology sector has also failed to become a major investment area for VCs. With capital markets demanding public companies to increase ESG performance, many large corporations are starting to make efforts to reduce environmental damage and strengthen environmentally friendly activities. But very few companies have committed to fundamental changes to adapt to a decarbonized economy, nor embarking on fundamental reforms. Yellowdog believes that the pace at which Korean companies respond to climate change will speed up rapidly in the next five years. There would be few companies who have the luxury to observe from a distance the new market opportunities, or crises, that will arise from the changes in the global regulatory landscape. To accelerate the forthcoming trend, Yellowdog has been actively exploring decarbonization solutions based on innovative technologies, both at home and abroad. Climate response has been one of Yellowdog’s major investment areas for the past three years; as of March 2021, 8 out of 29 companies in Yellowdog’s portfolio are creating an impact to contribute positively to the climate response. While eight companies isn’t a small number, it’s also true that we haven’t invested in enough climate-responsive startups as needed.
The 2020s will be a time when the climate crisis, which has already begun to become visible, will become increasingly prevalent. We will see our capital markets, industries and social systems accepting climate change as the new premise for operation. We look forward to seeing more entrepreneurs, full of ambition for the enormous climate market that will open up in the coming future. We look forward to various institutions — governments, regulatory bodies and large corporations with vast resources — moving faster and more boldly, to transition to a decarbonized economy. Yellowdog will make every effort to be a positive partner for entrepreneurs of climate technologies, and act as a catalyst to transition into a decarbonized world.
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[1] Kate Larsen et al., “Preliminary US Greenhouse Gas Emissions Estimates for 2020”, Rhodium Group, 2021.
[2] Chris Mooney et al., “2020 rivals hottest year on record, pushing Earth closer to a critical climate threshold”, The Washington Post, January 14, 2021.
[3] “Rise of carbon dioxide unabated”, NOAA Research News, June 4, 2020.
[4] “Accelerating Net Zero”, Data-Driven EnviroLab & NewClimate Institute, September, 2020.
[5] “The State of Climate-tech 2020”, PwC
[6] Dr. Benjamin Gaddy et al., 「Venture Capital and Cleantech: The Wrong Model for Clean Energy Innovation」, MIT Energy Initiative, July 2016.
[7] Shinhan Financial Group, SK Securities Co. Ltd, SK Telecom, DGB Financial Group. sciencebasedtargets.org
