Published by

Cecilia Manduca

Associate

September 9 2021 • 5min read

September 9 2021 • 5min read

The world may be hotting up, but so is the carbon industry: the opportunity for tech infrastructure that could solve the climate crisis

At Talis, we define the carbon industry as a multi-faceted, multi-stakeholder sector that aims to decarbonise the global economy, while creating a new way of life that doesn’t deploy our planet's resources.

— You can't argue with Thanos.

To put it mildly — the climate crisis is the most existential threat that humanity faces.

Of course, this won’t be news to anyone reading this. The climate crisis has been going on for as long as I can remember — as tragic as it sounds, the phrase has been thrown around for so long that it sounds almost mundane. That being said, the reality is far from mundane. In fact — we’ve been quoted less than ten years to make significant changes before we reach 1.5C in global warming by 2030.

Nevertheless, in the last couple of years, it feels like hope may be flourishing on the horizon. With consumers becoming increasingly environmentally conscious, governments taking real action in implementing climate regulation, and corporates finally publicly acknowledging that treating climate change as charity or CSR isn’t going to be enough to stop the inevitable after all, perhaps there is still time to revert mankind’s biggest mistake.

Investors are wising up to the fact that they have a significant responsibility to play in funding the innovation that could be the key to saving the planet. In recent years, we’ve started to see brilliant individuals, innovative business models and massive technological advancements meet to join forces, building companies that have the potential to crack the biggest challenge in the world’s history.

At Talis, we define the carbon industry as a multi-faceted, multi-stakeholder sector that aims to decarbonise the global economy, while creating a new way of life that doesn’t deploy our planet’s resources. As with any emerging sector, we’re excited to invest in the companies and the technology that will be the foundation of this industry: which we’re calling climate infrastructure.

Why climate and why now?

Climate change is the singular greatest threat to life on this planet. Even greater than the COVID-19 pandemic, which in the longer term, will seem like a drop in the ocean in comparison. Despite the fact that we stayed at home (protected the NHS, saved lives, etc.) for the vast majority of 2020, 34 billion tonnes of CO2 were emitted in that year alone. This CO2 will still be in the atmosphere for many generations to come, and will eventually become the problem of our great grandchildren’s generation. This release of CO2 (and other greenhouse gases) is having a disastrous cumulative effect: some of which are visible (like Greenland’s melting ice sheet), some of which are not (like our rising global temperature).

As stated upfront, the threat of climate change is hardly a novelty: there’s documented evidence on the warming effects of carbon dioxides since the 1960s. Since 1988, we’ve had consensus from the scientific community confirming the correlation between human-caused pollution, CO2 and climate change. Avoiding political conjecture as to why, climate action has, historically, been framed as CSR or charitable work, rather than a significant enough problem for corporates to prioritise (despite the fact that they’re largely the biggest culprits anyway, but that’s a conversation for another time).

But, times are changing: in the Greta Thunberg era, increased awareness from consumers — paired with the higher profile in the media of undeniable visible effects of climate change — are pushing everybody — governments, corporates, individuals — to take action for the climate and planet earth. Just in time to make a real impact with the looming deadline of 2030.

Consumers are choosing the planet with their money and lifestyle choices. A recent study showed that 72% of Gen Z state they would spend more money on a product if it were sustainably produced, and 87% of millennials say they’d be more loyal to a company that contributes to social and environmental issues. This can be seen in the rise of veganism and plant-based diets — made easier than ever with the commercialisation and availability of alternative proteins and products like milk and cheese — as well as fashion and retail companies with sustainability at their core, which have boomed in recent years. A decade ago, it’d be unimaginable that Oatly, the oat milk brand, could list on NASDAQ, but it’s the reality of the world we live in in 2021.

Corporates and governments are listening too. Nearly 300 companies have made Net Zero pledges (including Talis!) to demonstrate their commitment to the cause, while 120 national governments have made commitments to decarbonise their economy, as well as to work towards climate-friendly regulation, incentives and policies like the European Green Deal.

On top of that, technological advantages in ML, AI, hardware, IoT and cloud have shifted technology costs down and are enabling new business innovations at an unprecedented rate. For example, climate-related data generation is now cheaper than ever because open-source satellite units have driven down the cost of nano-satellites, and advances in ML can compute models with far more variables and data than ever.

So, as awareness of climate change rises, increasingly more capital is being thrown at companies that broadly fit into this ‘climate tech’ category. Rounds are accelerating in pace — and are dramatically increasing in size. In January 2021 alone, the EV manufacturer Rivan raised $2.65bn, the California-based ESG commodities marketplace XPansiv raised $40m, and the food waste app Too Good to Go raised $31.1m. The size of these rounds signals a breakthrough in a market that has, until recently, not been perceived as commercially viable. Investors have newfound confidence following the cleantech pop of 2006–2011, where investors ploughed $25B into the sector and lost half of it. In fact, a recent report from PWC and Dealroom shows that climate tech investing has grown over 3750% since 2013. To put this into perspective, this is three times the growth that AI saw in the same time frame. Climate tech saw $60bn invested from 2013 to 2019 and $16bn in 2019 alone — in over 1200 climate tech startups. North America is leading the way with $29 billion of investment, while Europe is third after China ($20bn) with $7 billion.

The building blocks of the carbon industry

We’ve identified three main subsectors within climate infrastructure that reflect the key objectives behind the majority of the companies we’re seeing in this space: climate analytics, climate intelligence and climate mitigation. Let’s unpack these…

Climate Analytics

  1. B2B Carbon Accounting

With consumer choices nowadays being generally skewed towards sustainability and carbon neutrality, and governments inciting the route to Net Zero, companies have quickly realised that the big task is not only offsetting and reducing their emissions but actually understanding where they come from in the first place. The information needed to do so is typically scattered, tiresome to collect and hard to interpret.

Enter carbon accounting companies: a new breed of software-based solutions aimed to help businesses measure, report and even reduce their emissions. The real advantage for these companies is their ability to automate the collection of typically siloed information, standardise data and encourage businesses to start viewing carbon emissions as a priority. While this process should be as automated and embedded in existing workflows as much as possible for the greatest efficiency, top-line decisions on sustainable impact and trade-offs require human leadership, well-versed in the challenges of sustainability.

B2B carbon accounting will soon become a must-have for most companies, and will likely become a huge market with a number of different players as a result. The challenges are likely to come in the increasing difficulty of measuring different emissions and pulling them into one comparable dataset. This includes logistics, manufacturers and supply chain companies, as well as including full Scope 3 analysis (any indirect CO2 emission associated with the product, including logistics, waste and many other factors) and lifecycle assessments and identifying areas for change. In addition, time-strapped SMEs with no “head of sustainability” are going to want an automated solution that they can plug-in.

The big opportunity for startups in this subsector lies in productising old-style and non-dynamic climate reporting and offsetting consultancy, moving from static surveys to embedding within a company’s various datasets (from accounting software to ERPs) and offer autonomous personalised recommendations and insights on how to reduce emissions. Because of the inherent differences between industries, we don’t believe in there being one winner providing a SaaS solution that is effective across all sectors. Instead, we are likely to see winners in multiple categories — from software supporting other SaaS, e-commerce and logistics companies (such as Plan A and Planetly) to others, like CarbonRE, tackling carbon reporting and reduction in hard industries such as steel and cement.

2. Consumer Carbon Tracking & Offsetting

In 2021, you can track your steps, your calories, your glucose levels, your intermittent fasting, your sleep — so why shouldn’t you be able to track your personal carbon emissions?

These companies are doing just that: enabling consumers to track their own carbon footprint and then providing solutions to offset it. Consumers have long wanted to put their purchasing power to good use, and these apps address that need, plugging into a consumer’s bank accounts to understand their purchasing behaviours, rewarding them for sustainable choices and give suggestions for improvements and alternatives.

This is a very nascent space, but we see the potential for these apps in creating a ‘carbon check-in’, where a consumer can check their personalised carbon score, look at their purchasing trends and get insights on how to improve. We see this becoming a social space too, to leverage the ever-growing power of the very active community of climate-conscious consumers.

3. ESG Reporting

The ESG reporting landscape is a landmine of complex regulations, different frameworks, geographical diversities and countless acronyms, from TDCF to SECR to SASB. While the current ESG regulation wave can only be perceived as positive, building investor-grade sustainability reporting is difficult — yet, is very high on the agendas of leaders of public companies. Hence, the need for companies like Nossa Data and Etainabl which focus on streamlining data captures and creating regulation-compliant templates for company ESG reporting. We believe that this sector is in its infancy for two reasons.

Firstly, the regulation landscape still needs consolidation. The EU is leading the way with the Sustainable Finance Disclosure Regulation (SFDR — which is a mandatory ESG disclosure obligation for asset managers, or requirement to explain why they are not compliant), as well as the Taxonomy Regulation (which sets a regional standard for what finance can be called sustainable and tries to stop greenwashing). The UK, too, will introduce mandatory reporting of climate-related financial information by 2025, and the US’ new political leadership might mean new ESG regulation is on the horizon, but there is still a long way to go until we have a globally accepted framework that companies can use universally.

Secondly, these players are generally focusing on the climate component of ESG, with a strong focus on data and reporting related to the company’s impact on the environment. However, ESG encapsulates far more than environmental impact, with S standing for Social and G for Governance. A big challenge for players in this sector will be, first of all, getting companies to think about data that communicates social and governance impact too, and then productise that into reports that meet all of the different frameworks. Ultimately, winners in this sector will be able to digest different forms of internal datasets and match them automatically with existing regulations for different geographies.

4. Carbon Offsetting & Trading

Along with reducing their footprints, companies of all sizes are looking to offset their emissions in a bid to become carbon neutral. This is usually done through carbon offsetting or carbon credits, which are tradeable instruments that represent ownership of one metric tonne of carbon dioxide equivalent. Companies have a carbon credit allowance, and if they use less of them, they can sell the remaining to increase another company’s allowance. Carbon credits trading started in 1997 as a result of the Kyoto protocol and it’s now a market worth over $175b per year.

Carbon offsetting is paying for a real reduction of carbon emissions obtained through a third-party project, which could be a biodiversity or reforestation project in a different country. Carbon offsetting isn’t new — we have come a long way from the first carbon offsetting project (a forest in Guatemala in 1989) to a global voluntary carbon market that saw $282m being poured in offsets in 2019 alone. While this is a hugely positive shift, these systems aren’t as efficient as we’d like them to be…

Verifying that carbon offsets projects are doing their job of removing carbon from the atmosphere is challenging; so is verifying the degrees of the efficacy of different projects (i.e. is a reforestation project in Scotland as effective as rainforest conservation in Peru?). Similarly, credibility and trust in carbon credits schemes are still low due to issues surrounding double counting (where multiple parties can claim offsets for the same emissions captured by one project, where there’s often no checks in place), fraudulent transactions and logging in credited forests. In 2020, a group of corporates, including J.P. Morgan, paid for carbon offsetting schemes that were going to preserve forest areas from being turn into timber. Alas, the original landowners never had any intention of cutting the trees down, having privately purchased the land and transformed it into a sanctuary! While there have been some pure scandals (such as this California-based non-profit that allegedly exaggerated the amount of logging possible on its forest to earn more credits by preserving the forest), most of the widely publicised issues (such as the recent enquiry in major airlines’ carbon offsetting schemes) derive from the lack of robust framework and standard measurement that allow carbon offsetting projects to inflate their carbon emissions reduction.

This is where tech can help. Some players in this space, like Pachama or Treeconomy, are leading the charge utilising Lidar sensors and satellite images to provide a vertically integrated, data-driven approach to create enhanced transparency in carbon removal and the protection of forests. NCX’s Natural Capital Exchange (NCAPX) platform allows landholders in the US to sign up for a carbon assessment and get an idea of how much they could be paid to preserve their forests. Sylvera is creating the first S&P-like rating system for offsetting projects, leveraging machine learning and satellite images. Companies like single.earth are leveraging blockchain to create digital twins of forest and emit tradable, transparent and unique tokens representing 100kg of CO2 emission.

An interesting spin to this sector is brought by players in the offsetting API space, such as PatchOffsetAPI and Minimum. Companies like these are linking offsetting verification projects with a company’s offsetting goals, embedding climate offsetting within a company’s workflows.

Technologies such as these are key to graduating the offsetting market from a voluntary, murky system to a fully functional, tech-driven marketplace that has accuracy and transparency at its core — which will be key as the market is poised to grow 15x by 2030.

5. Supply Chain Transparency

If you, like me, have spent a good part of your lockdown binging on Netflix almost-conspiracy documentaries (yes, Seaspiracy, I’m talking about you), then you too would have felt that your efforts to shop sustainably was all in vain. Labelling products that have complex supply chains as ‘green’ and ‘sustainable’ is ambiguous at best, and impossible at worst. Yet, companies still do it because, ultimately, sustainability sells.

In 2018 alone, the market for ethical consumption stood at £41b in the UK alone and the pandemic has increased sustainable consumption habits even further. But, as consumers become increasingly environmentally conscious, the trust between brands and consumers decreases as more cases of greenwashing (that is, marketing products as sustainable when they’re not) have also risen: as seen by Everlane and H&M.

So, as countries bring forward their regulating agenda to safeguard consumers, with Europe and the UK leading the way with anti-greenwashing regulations, this presents an incredible opportunity for startups in the supply chain transparency space. We are seeing companies leveraging blockchain to verify brands’ sustainability claims, such as Provenance, as well as other companies honing into a specific vertical — food, like Mondra, or retail, with Compare Ethics. The challenges to gain transparency insights into hyper-complex supply chains are immense, but we believe that every purchase should come with a full disclosure on carbon emissions and sustainable practices — which will ultimately push organisations towards becoming overall more sustainable. This sector is still nascent, but a big push will come from the convergence of technology that enables transparency, traceability and regulations that enforce them. Even then, it is still to be proven whether these are costs that will be borne by customers or by companies.

Climate Intelligence

Climate change has led to record damage and payoffs in 2020. Sadly, our current trajectory means that climate-induced natural disasters will only become more frequent, demonstrating the need for better climate analytics. Usually, when we think about climate-induced disasters, we imagine wildfires or out-of-the-ordinary flooding, but seemingly trivial factors such as weather and ‘cold air’ can have also damaging effects (see Texas in January ‘21). These more ‘trivial’ occurrences are predicted to cost up to 20% of global GDP each year, now and forever, according to the UN Environment Programme. Luckily, we are now in a better position than ever to gather data relating to our planet. Climate and earth observation technologies are better and more affordable than ever: from open-source satellite units driving down data generation costs, affordable Lidar scanners and other remote sensing technologies, to advances in data analytics and computational analysis. The timing couldn’t be better for companies in the climate risk and intelligence space.

This type of solution aims to give insights to predict how climate-driven factors can influence the natural and built world. They lend themselves to plenty of use-cases, from asset-level benchmarking, climate risk underwriting for insurances and lenders, to climate-aware business decision making. This is more topical than ever as institutions are starting to take serious actions around their climate risk: for example, the Bank of England recently launched Climate Biennial Exploratory Scenarios to calculate the financial risks of climate change across banks and insurers.

Some of these platforms focus on a particular type of risk, such as flooding (Fathom), temperature (ConstellR) and weather (DemEx), mapping the potential asset-level implications in the near or long-term future. Some others, such as CervestClimateX and Jupiter Intelligence act more as climate intelligence aggregators to quantify climate impacts on natural and built assets.

Ultimately, we see climate risk as one of the key risks business leaders of the future will have to take into consideration. Therefore, the winners in this space are platforms that can overcome the technological and computational challenge of not only accurately predicting risks without relevant historical trends, but also aggregating all variables (precipitation, meteorology, fires, hurricanes, flooding, and many more) at a specific-enough asset level.

Climate Mitigation

As mentioned in the recent IPCC report, capturing, storing and reusing CO2 might be our only chance of limiting global warming to 1.5’C while our energy and industrial systems become decarbonised and sustainable. This is because, whilst carbon offsetting methods such as tree planting and soil carbon-capturing are effective, they need require both larger scale and longer timelines — which the earth might not be able to work with. In fact, while direct air carbon removal devices can permanently remove 90 tonnes of CO2 per year, an acre of fully-grown trees can absorb in a year only just under 1 ton — the equivalent of a year’s worth of a car’s mileage.

Even if their effectiveness is now undisputed (and endorsed by the most recent IPCC report), companies in this sector face the most challenges among their climate tech peers. Firstly, solutions like direct air carbon capture or CO2 converting are extremely technically challenging. They are essentially moonshot projects, which require longer time horizons and patient capital — which makes it trickier for VCs. But most importantly, they require an economy being created around carbon capture, storage and re-use. Every carbon-capturing company requires a counterpart that does something with the captured CO2, as simply storing it underground will only solve part of the problem. Similarly, carbon repurposing companies need a steady supply of high-grade CO2 that can be turned into CO, mostly coming from carbon-capturing companies.

While the two sides of the marketplaces are being developed, we are seeing more capital being poured into the carbon capture sector, with >$330m being deployed globally(?) in 2020 alone in companies such as Carbon EngineeringClimeworks and Carbon Clean, as well as the Biden Administration earmarking $3.5b for carbon capture large-scale pilot projects and the Carbon Capture Demonstration Project. On the repurposing side, we are seeing companies trialling new energy-neutral ways of turning CO2 into CO, and then into historically fossil-fuel heavy products. LanzaTech, for example, focuses on jet fuels; Fairbrics focuses on polyester, and Carbix focuses on cement. We are also seeing companies like Ramora capturing carbon directly from its source (semi-trucks, in this case) as the likelihood of these trucks becoming electric is slim.

This is the most nascent, yet, most exciting sector. We believe in a future where historically fossil fuel-heavy products get produced by factories emitting high levels of CO and get captured before it hits the atmosphere. And it’s also the sector sceptics believe in the most — it is really utopic to believe that society will completely get rid of single-use plastic or use only sustainable or organic materials. Carbon capturing and repurposing have real promise in our futures as we transition to a low-carbon society.

Needless to say, metal straws and oat milk unfortunately aren’t going to get us out of this climate crisis alone. We either have to rethink the way our capitalist society works from the bottom-up: or, start pouring some capital into science and tech-based companies that can have a meaningful impact for the climate.

Investors and VCs worldwide are acknowledging the role they need to play in the battle against climate change, and this increased sense of responsibility is being paired with confidence that this sector could bear returns similar to traditional venture investments. Yet, when it comes to climate tech, the VC community mustn’t lose sight of the bigger picture. In Christian Hernandez’s words, this is to find ‘Gigacorns’, or companies that have achieved lowering or sequestering CO2 emissions by gigaton per year, while remaining commercially viable.

Despite the increase in funding we’ve seen in recent years, startups in the climatetech space still face incredible barriers to success, the first of which actually comes from the funding itself. Many of these climatetech startups are so-called ‘moonshot’ ideas, which will require an enormous amount of capital as well as much longer timescales than seen in traditional VC models. This is because of the huge technical uncertainty that is inherent to these new technologies being developed — new challenges, new technologies and new operating procedures will inevitably take time.

Regulation will be the key to kickstart this sector into making real tangible progress towards a low-carbon future. From there, the biggest challenges of this and the next decade will be to build commercially viable climate infrastructure fit for such an enormous technical and planetary challenge. We believe that out there, among the many brilliant activists, scientists and technologists, is the new generation that holds the key to creating commercial solutions that will move the needle on climate mitigation. And Talis is ready to help bring those solutions to reality.

Related
Research

Medbelle: a remedy to count on

Medbelle is Talis Capital’s first investment in healthtech and we are very proud to be joining signals Venture Capital, Mutschler Ventures, IBB and Cavalry Ventures in contributing to the Berlin-based company’s $7m Series A fundraise.

Research
Getting a slice of the action: why we backed chinese cooking multimedia platform DayDayCook

The Asian market — and the Chinese market specifically — is well ahead of the Western world in many ways; particularly when it comes the adoption of social and mobile commerce.

Research
TikTok for kids? We’re in. Here’s why we invested in Zigazoo

Zigazoo has created the first social streaming platform for kids, where social entertainment is also a learning experience that kids enjoy – and crucially, that parents trust.

Research