Software's role in the journey to net zero

By Adam Chirkowski

Climate Tech

Posted
November 30 2023

There was a time (not actually that long ago) when the majority of people on the streets were aware of climate change, believed it to be an issue, but didn’t really pay it much heed.

Fast forward to the present day and the situation is somewhat different. As we saw footage of Rhodes and Maui on fire this summer it became yet more apparent that tomorrow’s problem is now today’s most pressing global issue and that it really needed addressing yesterday.

The fact that the planet is literally on fire before our very eyes is one of the many factors that has led to ClimateTech becoming a hot topic over the past couple of years. Combine the increasing prevalence of extreme weather events with regulatory tailwinds, government and corporate commitments, investor demands and the general societal shift towards sustainability, and the result is that ClimateTech has been one of the fastest growing investment spaces globally (according to Net Zero Insights, at the end of Q1 2023 it accounted for c.20% of all venture capital tech investments).

A lot of that investment has been directed at hardware or asset heavy segments. According to CTVC, Electric vehicles, renewable infrastructure projects, agriculture and the like have been responsible for c.80% of investment into ClimateTech over the past three years. Areas that have large capital requirements and often long development timelines.

And it’s easy to see why. If we break down the climate change problem into its component parts of mitigation, removal and adaptation, across that chain there are integral roles for hardware which will directly impact the amount of carbon in the atmosphere. Developing direct air capture technologies actively removes carbon from the atmosphere. Building resilient infrastructure helps to ensure that the world is fit for purpose for the new climate reality we’ll be faced with.

Big solutions, trillions of dollars of investment required, we have to keep going with them to have a chance.

What about software?

But what about what about the 21^st century’s darling of the venture capital world? There’s an argument that says software investment in ClimateTech is wasted investment. Software can’t stop emissions. Software can’t remove carbon. Using Software as a tool to address climate change is simply putting lipstick on a pig.

An argument that is, for want of a better word, nonsense. The role that software has to play in the transition to net zero is both far reaching and immediate. Now that software has eaten the world, it is in a very real position to play a pivotal part in helping to save it.

Afterall, the software space covers everything from food to finance, trends such as big data and AI, and is only going continue.

Software’s potential for rapid development and instant global deployment are crucial given the tight timelines and the size of the challenge we’re facing. Afterall the critical net zero halfway point of 2030 is now just over six years away, so speed is of the essence.

Software tools have developed over the past 20 years to a place whereby launching new start-ups and products across industries is easier than ever and available to all. Not to mention the more recent developments in AI, and it’s potential in predictive analytics, data and machine learning. ClimateTech can and must leverage these advancements across the software world to help with what is the most rapid physical world development in the last century.

The climate space is much like the software space in that, it is not a sector in and of itself per se, but an overarching theme which touches almost every part of the global economy
Adam Chirkowski, Investment Director

And, although software in ClimateTech is more often tied to the physical world, if we look at two different climate subsegments, these exemplify how software can be an enabler and accelerator beyond just control tools that can have very real, if indirect, impacts to getting to net zero.

The Energy Transition

McKinsey forecasts that global renewable energy capacity will triple by 2030. For the UK, the battery energy storage system has set out the requirement for increasing offshore wind capacity by a factor of three by 2030 and solar capacity by a factor of five by 2035. But simply building generation assets isn’t enough. The grid also needs to double in size in the next 25 years (it took 90 years to get to this size), in order to be able to get the power from those decentralised generators to the end customer.

Such an increase in scale in such a short period of time requires levels of efficiency in design, planning, coordination, execution and operation that can only be delivered with the help of software solutions that dramatically reduce both the time and resource requirements involved.

At the same time, the entire system needs to be able to deal with the complexities of this transition from the centralised, baseload generation that the grid was set up to deal with. This follows right through to the end customers and the ability to access, and importantly rely on, this renewable energy to match sustainability goals with commercial needs without being exposed to both pricing and supply risks.

Ofgem has identified coordination and optimisation as two of the key challenges to develop the future energy system and unlock the potential opportunities from the transition. For it all to work in harmony requires developments in everything from planning and workflow tools, data analytics, management and optimisation tools, through to dynamic energy marketplaces.

In short it requires software. Software may not be directly replacing fossil fuels to reduce emissions, but without it we haven’t a hope of transitioning successfully to an electrified system that works without stepping back in time to the blackouts of the 1980s.

Climate data analytics

One of the key differences between the ClimateTech space of today and CleanTech bubble of 15 years ago has been the genuine shift towards sustainability by society at large. That has led to significant commitment from corporates worldwide to take action towards net zero which didn’t exist even 10 years ago.

That’s great but commitments mean nothing without action, and action that has genuine long-lasting impact. In order to achieve that, companies need to understand and quantify what risks they are exposed to, what steps to take and the impacts those steps will have externally but also for the company’s operations and results.

That understanding requires planning, modelling, simulation and forecasting before their implementation, as well as tracking, measuring, benchmarking and reporting post implementation. Without that process, companies are being exposed to very tangible financial risks, both from the physical and transitional impacts of climate change.

The issue here is one of data, analysis, actionable insights and quantifying outcomes (and not just environmental outcomes), otherwise stakeholders are flying blind. But if the top 50 corporates in the world successfully moved to net zero in short order, the potential impact in emissions reduction would do more than just move the needle. The network effects have the potential to filter across industries and down supply chains. Getting them to do so is where software products and their analytical capabilities are able to provide real value to both the bottom line and to the planet.

Climate change is a problem caused by capitalism which capitalism must solve. That means the biggest impacts, on the largest scale, in the shortest time are those software products which are able to demonstrate genuine, quantifiable impact. But even those products face challenges.

The Go-To-Market challenge

With ClimateTech having become such a hot topic over recent years, you’d be forgiven for thinking these are mature markets. And some parts of it are. Some of those hardware assets like generators or electric vehicles are reaching levels of maturity that bring with them big funding rounds, large banking facilities and IPOs.

However, when we look at the software space, many of these markets are still nascent. On the one hand it means a landscape of opportunities to create category leaders across multiple verticals with few winners declared so far. But it also comes with challenges, and one of the biggest I currently see is in the go-to-market motion, especially in the B2B world.

Climate change is now a board level topic but the range of stages that companies are at in their net zero journey is wide. The upshot of that is, in many instances, net zero commitments are being made with no firm grasp of how they’ll be achieved. Mix that together with a rapidly evolving regulatory landscape, and an ecosystem of start-ups growing by the second offering thousands of different products, and it paints a very confusing picture for decision makers.

That leads to businesses often testing the water with pilots but not fully committing to the solutions, which in turn can make sales cycles long. In short, founders can struggle to be able to evidence that early stage holy grail; product market fit. Ultimately, how do you get product market fit if the market doesn’t know what product it wants or needs?

The Beatles of ClimateTech

This is where the real disruptors have their opportunities. Afterall, people didn’t know they wanted the Beatles until they heard them. Then it changed the world. Just like the Beatles, if the offering is good enough, massive outcomes are possible.

This brings me on to AlbionVC’s ClimateTech software thesis. What we look for when trying to discover the Beatles of ClimateTech.

1. Markets

Given ClimateTech touches pretty much every other sector in some way, that opens up massive market opportunities. We look for companies that have the potential to create big global outcomes. I say potential here because with such a rapidly growing space, the niche of today could easily be the mainstream of tomorrow. Market growth, just like company growth, needs to be considered and the best teams are able to adapt and expand as these markets evolve.

2. Products

The solutions should be addressing real, high value pain points for enterprises. In order for mass adoption of a product, they need to have monetary and planetary return on investment. Commercial impact with rapid scalability, backed by regulatory tailwinds is the place to play.

They also need to be fundamentally differentiated. In short order, the ClimateTech spotlight has already created noisy spaces where it’s difficult to see much genuine differentiation and therefore long-term sustainable competitive advantages. When I have 20 pitch decks in my inbox all claiming to be differentiated in the same way, it’s going to be hard to invest in any of them.

3. Founders

The most crucial piece. Founders that have the vision, drive and abilities to build those big outcomes. The market disruptors. The category leaders. This of course is highly subjective but experience in the start-up journey and the adaptability and resilience it brings, the ability to hire well, with a commercial and technical mindset mixed with the sense of mission are traits which we’ve often seen breed success across all investment types.

Deep domain knowledge is also something we look for. Some of the biggest market opportunities are actually driven by relatively small, complex, insular worlds. The energy markets are a great example. Trillions of dollars worth of value but eye wateringly complicated and opaque that only a relatively small proportion of people truly understand. That’s why they haven’t been disrupted in the past 50 years. Technology advancements and macroeconomic tailwinds are starting to drive more potential for that disruption, but without the knowledge of how they’re working in the first place, it’s a hard nut to crack.

And where do we see opportunities that fit the above bill? That’s the beauty of software, they’re across the spectrum. It’ll come as no surprise that the energy transition and climate data analytics are two but there are multitudes of opportunities across property and construction, circularity, FinTech and insurance and many more.

The role of investors

For one final thought on whether software can play a positive and impactful role in this challenge, I wanted to look inwards at us as investors. The reality is that different investors have different mandates, focuses and expertise. At AlbionVC, our expertise is investing in B2B SaaS opportunities. If software investment in climate is a wasted one, what should we do in the meantime? We can sit on our hands and hope that a solution comes along, or we can do what we can in the here and now with the resources at our disposal.

There are also significant returns to be made which should not be shied away from. Success breeds success and one of the best ways to attract the amount of capital that’s required into the ecosystem is to continue growing the success stories in the space as fast as possible.

Software has a role to play here given the speed with which software unicorns have historically been built. The more the space is seen to offer attractive returns, the more money the entire ecosystem will attract (although the flipside is
Software has a role to play here given the speed with which software unicorns have historically been built. The more the space is seen to offer attractive returns, the more money the entire ecosystem will attract (although the flipside is also true and big failures can be inversely damaging).

The billions that have been raised and deployed over the last few years into ClimateTech is a start, but they’re a drop in the ocean of the trillions needed over the coming decades. Therefore it would seem a little premature to start advocating that any funding taps currently open for climate investment be turned off.

Surely any money spent with even the potential to have an impact should be spent, whether it’s on hardware, software or anywhere else. I’m not suggesting money should be hurled without thought, but there’s a lot of smart money in the software world with experience in the scale up journey across other sectors over the past 20 years, which has the potential to do a lot of good.

Conclusion

We’re currently going through the third industrial revolution at a speed and scale which is mind boggling (and ironically enough aimed at undoing the effects of the first one). Software has a huge role to play in that revolution as an accelerator and enabler of change, of take up, of investment and, with the hope that we’ll be sitting here in 30 years’ time without the need for SPF 500, of net zero itself. No one solution, be it software, hardware or any other ware, will be a silver bullet. They all have a role to play.

Perspectives