By Greg Wasserman, CFA, Head of Climate Innovation, Wellington Management 

Any views expressed here are those of the author as of the date of publication, are based on available information and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. All investing involves risk.

Climate change is the defining challenge of our time, with profound and far-reaching implications. While the projections are dire, the path to addressing the challenge is largely known and would represent one of the most significant economic transformations in history. In this article, Greg Wasserman, head of Climate Innovation at Wellington, explains why he believes venture capital will play a critical role in this transformation.

Q. First, can you talk about the climate-change challenge the world faces?

The root cause is, of course, the build-up in the atmosphere of greenhouse gases from human activities, such as energy generation, transportation and industrial activity. These gases trap heat and warm the planet, which leads to increased volatility and severity of heat, drought, storms, floods and wildfires. These weather events cause severe disruption to society by displacing people from their homes, causing food insecurity and interfering with supply chains, for example.

The effects of climate change are accelerating. The past five years have been the hottest five on record. In 2020, we saw record wildfires in Australia and California, a record number of named Atlantic storms, record high temperatures in the Artic Circle and record water levels in parts of China. According to the United Nations Intergovernmental Panel on Climate Change (IPCC), the world will reach an irreversible tipping point if the increase in global temperatures cannot be limited to 1.5 degrees Celsius, a level that would require “rapid and far-reaching” transitions in land, energy, industry, buildings, transport and cities.

Addressing this challenge requires a two-pronged approach, including measures to mitigate the causes of climate change and measures to help governments, businesses and consumers adapt to the climate-related changes we are already seeing.

Q. And how does this translate to an investment opportunity in private companies?

Clearly, the challenge is daunting, and the threat is existential. But that also means that the market opportunity for mitigation- and adaptation-related climate solutions is enormous and necessary. While some individuals and companies may be willing to make trade-offs for more climate-friendly solutions, society is unlikely to accept trade-offs at the scale needed to address the challenge. People are unlikely to stop travelling and consuming, and businesses are unlikely to stop producing. Regulation will play a role, but solutions need to be market-driven if they are to be truly scalable.

This creates a huge opportunity for innovations and technologies addressing climate change while delivering a superior user experience that doesn’t require major trade-offs. We believe private start-ups will play a critical role in developing these solutions, and they are likely to require substantial venture capital to do so at scale. We see all of this reflected in the growth of private climate deal activity.

We sense growing optimism and belief in the potential for innovation in the venture capital community as it joins with governments, scientists, consumers and companies to find real solutions to climate change. We also think several secular trends are supportive of disruptive climate-focused entrepreneurs. For example, as the list of countries and companies committed to “net zero” emissions continues to grow, we expect high levels of global infrastructure spending, creating a foundation for innovative, asset-light companies to build on. In addition, consumers are demanding transparency and choices that match their climate-related values, and companies are in search of innovations that can help them meet that demand.

Q. So what type of private companies are we talking about?

Essentially, they are what we call future-proofed companies in that they have an explicit focus on climate mitigation or climate adaptation and are entering fast-growing markets, which is one of the reasons why we believe climate investing is such a compelling opportunity. These companies now exist across a wide range of sectors, but primarily they are active in areas such as energy transformation, sustainable buildings and cities, transportation and mobility, industrial and enterprise efficiency and food and agriculture.

Q. How should investors think about technology in private climate investment?

Technology is pivotal and its role will only increase in importance. I have experienced this first-hand in the 20-plus years I’ve been focusing on private companies, with the vast majority of those looking at the point where technology and innovation intersects with climate change and sustainability. Immediately before joining Wellington, for instance, I was focused on blockchain technology and innovative ideas for applying it in enterprise use cases. I expect much of that technological innovation to be relevant for climate solutions over the next decade.

Q. What other trends are driving the development of investable climate solutions?

We’re certainly seeing positive trends in areas like renewables and electric vehicles, where costs are declining, and performance is improving. And there will be future climate solutions based on scientific discoveries and innovation — such as advances in solar materials and battery technology. These will be critical to the evolving market, but they also tend to be asset heavy and capital intensive.

Fortunately, there are also less capital-intensive solutions involving the application of existing technologies in end markets that can drive efficiency while also reducing carbon emissions or increasing resilience. For example, sensors, connectivity, computing/analytics, artificial intelligence and enterprise software and financing models can lead to smarter buildings and homes, connected and flexible energy grids, optimised manufacturing and supply chains, climate-risk analytics and more efficient food and agriculture production.


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