Climate tech investment is a top priority in achieving net zero emissions
Achieving net zero emission globally by 2050 is critical to tackle the climate crisis and help to save our planet for the next generation. Global temperatures have risen 1.1°C since 1901, due to an excess of emissions from burning fossil fuels. Negative effects of climate change are mounting, such as extreme weather patterns and rising sea levels, all of which threaten the entire species of plants, animals, and even the human population. The impacts of climate change on different sectors of society are interrelated, such as poorer health, food insecurity, and rising costs of living.
Scientists predict the situation will worsen if the global average temperature rises more than 1.5°C. Thus, most countries have pledged to reduce greenhouse gas (GHG) emissions by 45% by 2030 and reach net zero by 2050 in the Paris Agreement. Currently, more than 70 countries, including the largest emitters that cover about 76% of global emissions – China, United States and the European Union – have all set targets to achieve net zero emissions, and are taking immediate steps towards decarbonization.
Southeast Asia is one of the world’s most vulnerable regions to climate change. The archipelagic countries of Southeast Asia host massive coastal populations that are at immediate risk from rising sea levels and extreme weather events. Severe climate hazards will displace millions of people and have a harmful effect on agriculture, which employs about half of the region’s population. Eight of ten countries committed to net zero targets, including Indonesia, which is categorized as the world’s top ten emitters. This commitment has to translate to tangible actions from the government as the policymakers and across corporates, investors, and regional consumers.
For that reason, climate tech investment is burgeoning in this region. According to 2022 Southeast Asia’s Green Economy Report by Temasek, Microsoft, Bain & Co, a total of US$ 15 billion has been invested by investors into the green economy since 2020, with around 45% deployed in the last three quarters (from Q3 2021 until Q1 2022). Further, US$ 11 billion has been deployed by corporations in Southeast Asia, focusing on renewables and the built environment.
However, this is still a small investment compared to the significant emission and investment gap that exists to meet the 2030 promises. Around three gigatons emission gap exists and requires US$ 3 trillion cumulative investment in climate solutions to limit rising temperatures to under 1.5°C by 2030.
East Ventures to double down on climate tech investment
As the first venture capital in Indonesia that signed Principles for Responsible Investment (PRI), supported by the United Nations, East Ventures sees an urgency to double down the investment in climate tech in supporting Indonesia and Southeast Asia’s target to reach net-zero emissions.
The momentum is manifested in the investment value by private equity and venture capital investors in the region to be sustainability-focused, with a focus on startups scaling next-gen solutions.
In addressing the climate crisis, East Ventures has a number of portfolio companies in climate tech and will continue to invest in climate tech solutions. We see a lot of opportunity in this sector, with around 13 times cumulative growth in the number of startups founded, from 2015 to 2021. Most startups are still in the early stage, and need more capital and support to grow. A momentum for East Ventures to leverage the investment and value creation levers towards carbon neutrality.
There are several climate tech sectors that we believe contribute to GHG abatement and mitigation.
1. Nature & carbon ecosystem
According to the International Union for the Conservation of Nature (IUCN), nature-based solutions are defined as actions to protect, sustainably manage and restore natural and modified ecosystems to address societal challenges effectively and adaptively to provide both human well-being and biodiversity benefits.
This solution may include forestry, peatland, mangrove observations, water, sustainable packaging, and some carbon ecosystems. The 2018 global survey revealed that businesses specializing in reforestation and tree planting saw revenues grow tenfold yearly.
Meanwhile, Indonesia has the world’s second-largest expanse of tropical forests and is the potential market for nature-based solutions. According to the report, Southeast Asia’s nature-based solutions will potentially be worth US$ 20 billion in annual revenue by 2030. Moreover, carbon tax and trading, which will likely be implemented in 2025 for all companies, will unfold investment opportunities for investors and the startups that offer these nature-based solutions.
2. Food and sustainable agri
While the global population is growing and changing diets are driving up the demand for food, securing production is challenging as crop yields drop in many parts of the world due to the degradation of natural resources, including soils, water, and biodiversity. FAO stated hunger affects 8.9% of the global population, or nearly 690 million people. In just five years, world hunger has increased by 60 million. Agriculture is a complex aspect in climate change. The sector is highly exposed to the effects of climate change but is also a significant contributor to the problem. As an example, rice cultivation is the second-largest source of GHG emissions in agri-food. It is responsible for up to 33% of Southeast Asia’s methane emissions, with methane having over 80 times higher global warming potential than carbon dioxide. Food loss and waste is a big part of the food security issue and contributes to environmental stress.
To address these problems, investing in food and sustainable agri-focused startups is crucial. Precision agriculture and farmer service platforms are the most attractive opportunities due to regulatory support, market adoption readiness, and an enormous addressable market. Precision agriculture uses technology to help farmers to increase crop yields and profitability. Both vertical businesses are estimated to drive an additional US$ 8-16 billion in revenue from yield improvement.
In this sector, East Ventures’ agritech portfolio company, ARIA, supports farmers to improve productivity and save costs through drone technology. For example, watering the farm by manual or traditional system usually takes 2-4 weeks, but using ARIA’s solutions, the same land will only take 20 minutes for watering. Besides ARIA, East Ventures also invested in TreeDots, a marketplace for surplus and imperfect food supply, tackling the issue of food loss and waste during distribution.
3. Renewable energy
Renewable energy (solar and wind) is one of Southeast Asia’s top carbon abatement levers. Solar will drive the largest impact on energy transition, representing US$ 20 billion in annual revenue by 2030 and US$ 10 billion for wind energy. Besides solar and wind, some renewable energy emerged and became alternatives, including geothermal, bioenergy, and hydropower.
In solar energy, East Ventures has invested in Xurya since the early stage. Xurya, Indonesia’s renewable energy startup focusing on rooftop solar power plant rental, recently received additional series A funding, with a total of US$ 33 million following the raise.
4. City & mobility solutions
Rising seawater threatens hundreds of cities and communities, including the capital cities in the region. Indonesia’s Jakarta, Thailand’s Bangkok, and Vietnam’s Ho Chi Minh City are among the most affected. Globally, the World Bank estimates that more than half of the world’s population lives in cities, where more than two-thirds of the world’s energy is consumed, accounting for more than 70% of global CO2 emissions.
Reflecting on current conditions; not every population can afford a good quality of living in cities; millions of people live in vulnerable places along river banks, canals, hillsides, and areas that will be exposed to the harmful effects of environmental damage.
Reducing the risk posed by the climate crisis requires strengthening the city systems or so-called urban resilience through building city solutions. Some solutions are district energy solutions, green building products, real-time traffic management, water system, waste management, and other smart technologies that enable cities to be more efficient and reduce contribution to global warming.
East Ventures has invested in the waste management startup, Waste4Change, that has managed more than 8,400 tonnes of waste as a city solution.
Key drivers and challenges in climate tech
Some believe climate tech investment may be transitory, as reflected in some green tech startups that went bankrupt in the past decade. However, today’s condition is different from the past. First, the cost of technology for green solutions have dropped significantly which makes them commercially viable today compared to fifteen years ago. For instance, the price of residential photovoltaic systems has dropped more than 70% from ten years ago, costing around US$ 50,000.
The commitments from all stakeholders, including government and business groups, toward net zero, are becoming more real and scientifically driven, including in the form of Nationally Determined Contributions (NDC) targets and Science-based Targets initiatives (SBTIs). We believe that collaborations and providing each other support can advance the innovation and adoptions of climate tech solutions in the region.
Another driver is the changing mindset of customers, especially millennials and GenZ, demanding environmentally friendly products and services as they become more concerned about the climate. The COVID-19 pandemic also exacerbated concerns on health and protecting the environment for the current and future generations.
Despite those support, climate tech businesses need to find ways to make their solutions more commercially aligned with existing ones. Many still assume that being sustainable or environmentally friendly requires a premium. While it is still true in many cases, the goal is for the solution to become more affordable, scalable and efficient. Therefore, climate tech should offer solutions that not only positively contribute to climate resilience but also help customers or businesses reduce costs and increase yield. The most exciting solutions and opportunities we find are where we can replace incumbent services or products with more sustainable solutions at affordable prices.
As a pioneer in venture capital investing in Indonesia, the largest market in Southeast Asia, East Ventures will continue to explore investment opportunities in climate tech and strengthen our commitment in achieving a more sustainable and inclusive future.
By Avina Sugiarto, Partner at East Ventures