Investors are only interested in startups that will provide them a lucrative return on their investments. Therefore, only those startups that can present a business case promising strong returns will receive the investment they need to succeed in highly competitive markets. This system does not leave much space for environmentally-driven startups to emerge, so a layer of green policies is required to change the rules of the market and make environmental responsibility a prerequisite to doing business, and therefore a necessary measure to generate the profits and returns that attract investment. Enacting strong environmental policy is slow, however, and climate science has made it clear that we do not have time to waste.
“Five years ago, when we started PassiveLogic, we went to investors and pitched the environment or energy-efficiency side of this [business], and it was clear that it was a way uncool thesis in investing. We quickly buried the slides about efficiency, and just focused on the product as a technology product,” said Troy Harvey, CEO of PassiveLogic, an occupant-based digital twin platform for building systems control. “Somewhere around January of 2020, all of a sudden, that whole [environmentally driven] investment market came to life.”
In 2020, retail giant Amazon created a $2 billion “Climate Pledge” venture fund, while Microsoft, Unilever, and Bill Gates’ Breakthrough Energy Ventures all announced environment-focused funds worth at least $1 billion each. In 2021, the Cisco Foundation announced a ten year $100 million commitment to help reverse the impact of climate change, while Toronto’s Greensoil PropTech Ventures announced the launch of its $100 million Fund with the goal of “investing in technologies to make the real estate industry more profitable and sustainable.” Across the investment landscape, tackling climate change has suddenly become cool.
January 2020 may be best remembered as the month before COVID-19 became a global pandemic. We already look back at this last pre-COVID month as a simpler time before the world changed into what we have experienced in the past year or so, and the inevitable long-term impacts of this crisis. While coronavirus first emerged in December 2019, it did not become a life-changing problem for the wider world until February 2020, and therefore did not influence the recent rise of environmentally driven investment decisions. The root of that change came from environmentally responsible consumer demand that has been growing in recent years.
“The big headline is that early stage investment into climate tech is growing fast. We see a new generation of investments that covers a broader range of sectors, and distinctively has (in the main) lower startup costs and clearer paths to scale,” explains PWC’s The State of Climate Tech 2020 report. “The first class of climate tech unicorns have emerged – with companies like Tesla, Beyond Meat, and Nest showcasing how disruptive companies delivering critical sustainability gains can also become billion-dollar brands.”
In fact, over the last seven years, total funding for climate tech companies, rate of startup creation, and the average size of funding, has been rising. According to the PWC report, early-stage venture funding for climate tech companies was about $418 million in 2013, but by 2019, total venture funding had increased to $16.1 billion, that’s an increase of over 3750%. For perspective, that is three times the growth rate of venture capital investment into artificial intelligence (AI) in the same period, a period that has been largely defined by interest and investment in AI. Clean tech in buildings has been central to this rapid investment trend.
“What’s changed is that proptech has come into its own as an investment category. A lot of energy-efficiency technologies have matured and advanced, such that the real-world applications and the return on investment have improved. So, the deployment of these technologies has become much more feasible,” said Christopher Yip, partner and managing director at RET Ventures. “What we’re seeing now is that the commercial case for energy-efficiency investments is becoming attractive enough that you have property owners doing this of their own accord, or have stakeholders pushing them to do this. That’s what’s driving this groundswell toward climate- and sustainability-focused proptech.”
The impact of buildings on the environment has been well documented and the carbon footprint of each building has been incorporated into the green reputation of their enterprise tenants. Consumers increasingly demand that the products they buy come from environmentally responsible companies, talent increasingly considers the environmental record of employers when choosing a job, and these factors lead to enterprise tenant demand for greener office buildings. Green buildings, therefore, attract better tenants and become more profitable than buildings with poor environmental performance. As a result, investment funds are switching their focus to the more profitable green building and clean tech opportunities.
“As an industry, we can no longer abide by outcomes where construction and real estate consume more than 40% of the energy, produce 40% of the emissions, and generate 40% of our landfill waste,” said Heather Widman, principal at Building Ventures, in an interview with the Commercial Observer. “Technology can have a massive impact across the entire lifecycle of a building. Between dedicated funds like ourselves and our peers, climate impact funds, and generalist funds becoming increasingly interested in both the built environment and the impact it can have on our planet, more money is being funneled this way daily.”