If you’re looking for a partner to address the costs of climate change and build a great climate tech company, share your story with us on our website’s pitch page, and you will get connected to Samuel Nahusuly from our investment team, who is passionate and focused on finding the next big tech startup solutions for the environment in Southeast Asia. 

This article features contributions from investment team intern Jean-Anne Marie Wang, who has also been focused on climate tech, especially renewable energy and alternative batteries. The article was also edited by Insignia Business Review editor Paulo Joquino. 

Highlights

1. Diversified supply chains for supplies and components, along with increasing capital influx into the sector have brought down development and commercialization costs for climate tech solutions, especially for hardware. 
2. Regulation will drive costs of compliance, either driving up the prices of unsustainable business practices, or requiring companies to spend on making the switch to more sustainable practices. In some cases, governments could also subsidize these costs. 
3. Costs of driving adoption vary across sectors and can be differentiated based on emissions, value proposition, and whether the solution is more software or hardware-based.
4. Costs of driving adoption vary across markets as well depending on the regulation and resources available in the market. 
5. More capital being put into the sector but for VCs especially, allocation strategy may need to be adjusted to fully partner with climate tech companies long-term. 

In the world of venture capital, ESG (Environmental-Social-Governance) initiatives and SDGs (Sustainable Development Goals) have been taking up a huge spotlight in recent years. One concrete way this has manifested has been in the resurgence of climate tech as a “sunrise sector.”

Check out the newly launched, in-house developed Insignia ESG Survey on our website, which does not just cover environmental sustainability but also social diversity and robustness of governance. If you’re on the management / executive team of a company and would like to get your company’s ESG score, you can just input your company name and click on the button to answer the survey. 

We use the word “resurgence” here because this is not the first time climate tech has had its moment in the sun. From 2008 to 2010 there was a flurry of activity around solutions for “cleaner alternatives”, primarily for energy. From this generation arose the likes of Tesla, although this hype simmered down primarily because of the costs of developing, commercializing, and driving adoption for cleantech solutions. 

At the same time, since that cleantech boom more than a decade ago, there has been greater pressure to recognize the costs on the other side of the coin — the costs of worsening natural disasters, pollution, climate change-induced health risks, etc. It has also expanded to go beyond renewable energy and now covers a plethora of sub-sectors from alternative proteins to alternative construction materials.  

In this evolution of climate tech as a venture backable space lies the central question around this renewed investor interest: what are the costs? 

While climate tech has been covered extensively from different angles, especially in terms of impact, we believe this angle doesn’t receive as much attention as it should. If we want these climate tech solutions to have a significant impact beyond the headlines and “pat-on-the-back” awards that truly meet the urgency of environmental issues, costs need to be accounted for and addressed in a way that allows these companies to scale adoption sustainably. 

And these costs are not always borne by the company. Some costs have to be taken on by governments, by the consumer, and of course, because we’re talking about venture-backed companies, the investors as well.

In this article, we cover five types of costs that need to be considered when investing in climate tech solutions across the entire spectrum of sub-sectors: 

1. Cost of Product Development and Commercialization: How much does it cost to build and scale these solutions? 
2. Cost of Regulatory Change and Market Shifts: How much does it cost for regulators, institutions, and the big MNCs to adopt these solutions and shift market behavior?
3. Cost of Driving Adoption Across Sub Sectors: How much does it cost to drive adoption for certain sectors versus others? 
4. Cost of Driving Adoption Across Markets: How much does it cost to drive adoption of certain solutions in some markets versus others?
5. Cost of Funding: How much does it cost to fund these solutions over time? 

Cost of Product Development and Commercialization

From 2008 to 2010, the first cleantech boom saw many solar companies and EVs make their attempt into commercialization, but ultimately many of them failed due to the costs of scaling hardware production, with the notable exception of Tesla. 

More than a decade later, it is now 3-6 times cheaper to build cleantech startups with the lowering costs of the hardware itself. When it comes to solar in particular, this trend has been going on for decades, with the cost per watt decreasing 400x since the late 1970s. Broadly speaking, the cost drop can be attributed to more diversified supply chains for raw materials and components, and greater scale in their production globally.  

Exhibit 1. Solar is getting cheaper, and is cheaper than status quo options gas and coal, especially when there is revenue support involved. Graphs taken from freeingenergy.com (Left) and carbonbrief.org (Right).

Along with cheaper production and usage costs, there is also more capital. Compared to the US$25 billion that went into cleantech in the six years since the 2008 cleantech boom, more than US$32 billion went into climate tech in the last 10 months of 2021. For the whole 2021, climate tech funding totaled US$53.8 billion. In Southeast Asia in particular, more green funds have emerged, not just to invest, but also to build new ventures from scratch. Non-endemic VC funds have also begun to turn their sights to climate tech, even those traditionally consumer-focused, but as we discuss further in this article, it’s not as easy as simply deciding to commit capital. 

Cost of Regulatory Change and Market Shifts 

One of the key insights we’ve learned from our research is that regulation will determine much of adoption costs, especially on the part of enterprise-level solutions. This is the “compliance cost”, and the reason this is important for the climate tech sector as a whole is because of the concept of network effects and FOMO. If bigger companies and suppliers are incentivized or even mandated to commit to certain standards and spend on more sustainable solutions, it will be easier to convince other players in the same value chain to also make the switch, especially when the solution directly impacts the product produced by this value chain. 

One of the reasons climate tech had its “resurgence” in the past few years has also been the public commitments made by MNCs and investment made into the space by big tech beyond software. 

The case of higher carbon pricing to incentivize renewable adoption:  

A specific example of how these regulatory or government-mandated costs could incentivize adoption is in carbon pricing. In theory, higher carbon prices can create more incentives for companies to invest in energy efficiency, alternatives and renewables. It also introduces more carbon equity into the disparity between developing and developed countries, as the former will benefit more given their relatively lower carbon footprints and the carbon dividends will outweigh the carbon expenditures.  

Another example of regulatory initiatives is that of Japan Stock Exchange’s recent moves to require disclosure of scope 1 (direct / tied to company’s business) and scope 2 (indirect / covering other company operations) emissions from companies on the bourse. This forces public companies to take on the compliance cost of monitoring their scope 1 and scope 2 emissions, by either building the technology to do that in-house, or more likely, becoming customers of a climate tech company specializing in emissions monitoring. 

Exhibit 2. ETS and Carbon Taxes are a prime example of regulation-driven costs, and while this has been mostly adopted in developed countries, we can see developing countries in Southeast Asia on the road to implementing these initiatives. In 2021, these initiatives from 45 national jurisdictions have been projected to cover 21.5% of global GHG emissions. Data taken from the World Bank’s Carbon Pricing Dashboard. 

Cost of Driving Adoption Across Sub Sectors

Not all sub-sectors are equal when it comes to the costs of adoption. 

There are many ways to slice and dice which sub-sectors are low-hanging fruit and have more impact and which are not as needle moving or will take longer to mature (i.e. need more regulation, market education, infrastructure, etc.) 

We can look at it in terms of emission sources, where it is actually the construction materials that produce the most carbon emissions, even more than electricity and energy or mobility. At the same time, driving adoption for alternative construction materials could be more productive, but are there regulatory incentives in place and are businesses comfortable with making the switch given the costs of adoption? 

Exhibit 3. It is actually the production of cement, steel, and plastics that contributes the most to GHG emissions globally. That said, what is the cost of commercializing alternatives versus the other sources of GHG emissions? Data taken from Bill Gates’ “How to Avoid A Climate Disaster”; 2021. 

Another way to look at sub-sectors in climate tech is dividing it between software-based solutions and more hardware-based solutions. Initial venture-backed sectors will be software-based, monitoring (carbon, air, waste, agriculture) because it’s easier to scale and integrate into business operations. These solutions would also be relevant considering the need to meet regulations. Deep tech applications will still be funded, like alternative proteins, but it will take a longer time to scale and commercialize.

A third way to frame the sub-sectors in climate tech is by looking at the value proposition. By and large, most climate tech solutions either primarily monitor / measure / analyze or make (alternatives). For the former, it’s all about making a more consolidated, real-time source of truth around specific metrics accessible to users and relevant stakeholders. With the rise of more regulatory initiatives around setting standards, coordination with regulators for this value proposition will be important. 

As for the “making” type of solutions, it is all about making the product functionally better while still keeping it more affordable than the status quo options. It is not just about selling the environmentally friendly aspect. Though there is already a captive market for that “green” pitch, it may not be enough especially for markets where most people have not even fulfilled the foundations of their own “Maslow’s Hierarchy of Needs”. A good example of this is the B2C commercialization of alternative proteins, which has historically found difficulty in emerging markets largely because of cost. Some food tech companies have gotten around this by taking a B2B2C approach, working with mass-market food chains and restaurants to co-develop alternatives, but the same question exists — does it taste good? And is it affordable vis-a-vis the rest of the menu? 

From an investment perspective, taking these different costs of driving adoption across these sectors into account will be critical in figuring out which types of solutions are more needle-moving for both the planet and faster to get into the market. It also paints a picture of how these seemingly disparate solutions are in fact related and connected. 

Cost of Driving Adoption Across Markets

Apart from looking at the costs of driving adoption across different sub-sectors within the climate tech, investors also need to look at these costs across markets as well. This is an exercise that should already be inherent to any Southeast Asia investor. 

In Vietnam, we’ve seen a greater focus on renewable energy implementation and coal phase-out. This has even tied into the supply chain diversification that has been impacting (and benefiting) Vietnam in the past two to three years, with the likes of Lego building a US$1 billion sustainable plant in Ho Chi Minh. According to the toymaker in its December 2021 announcement, “it’ll be the company’s first carbon-neutral plant with solar panels and solar parks creating enough renewable energy to “match 100% of the factory’s annual energy requirements.” 

Meanwhile in Indonesia, there’s a lot more opportunity for alternative batteries with the significant supply of nickel in the country. In August 2021, Forbes covered Hyundai’s and LG’s plans to build an US$11 billion EV battery plant in Indonesia precisely because of this. 

And of course in Singapore, deep tech incentives (e.g. incubators, commercial partnerships) and resources (e.g. R&D talent) remains a key strength for the city-state even when it comes to climate tech. In 2021, Singapore announced the launch of SAIL, an agrifood innovation lab to connect food tech startups to global commercial partners. For example, through the program, global agri-commodities merchant Bunge is able to explore collaboration with plant-based startup Float Foods, as mentioned in the press coverage. 

“Through Sail, Bunge is working with NTU’s Food Science and Technology programme, and exploring a collaboration with local food-tech start-up, Float Foods, to investigate plant-based product solutions,” shares Singapore’s Minister for Trade and Industry Gan Kim Yong. 

In the realm of EVs, we’ve already seen Tesla re-entry into the city-state, as well as financing initiatives like that of Carro’s to make used EVs and hybrids more accessible to drivers.

Across markets in Southeast Asia we see specific specialties, either by virtue of regulation or resources (human and material), and this should also be a key consideration in building or backing climate tech ventures.  

Exhibits 4. Indonesian nickel production has continued to increase over the past decade, and EV manufacturers are looking to tap into this supply. Data from Statista. For reference of scale, research from Sherritt shows that a projected EV production of 15 million units in 2025 will add between 300,000 and 900,000 tonnes per year of incremental nickel demand, which represents an increase of between 10% and 40% in refined nickel demand.

Cost of Venture Funding

Finally, there’s the cost of investing in these companies, especially from a venture capital standpoint. Private equity funds have already been investing a lot in green energy. One to note is Vietnam’s VinaCapital as they also fully seeded and built their own solar company SkyX. 

For VCs in Southeast Asia, while there are already dedicated green funds or firms focused on climate tech, we can expect more agnostic funds to take part in this innovation wave. At the same time, with the traditional VC fund life versus the time it would take to grow many of these climate tech companies, we can also expect a variety of approaches to growing these companies from a venture standpoint. For example, more PE funds going earlier to fund these deep tech solutions at an earlier stage, or as we cited earlier, building them from scratch. There may also be more VC exits to PE funds already investing in these climate tech sub-sectors, or multiple, progressive investments in a single company across different funds from the same VC to lengthen their commitment and support. 

Regardless of the approach, it is clear that VCs, in particular, may have to make adjustments in terms of investment and allocation strategy in order to dive into the space given that it is not the usual internet tech or platform company that most VCs have become accustomed to backing. That said, it is worth noting that historically the so-called OG investments of VC were in these types of high CAPEX, frontier technologies.   

Exhibit 5. VC funding into climate tech has been on the rise globally and in Asia, the most significant jump happening from 2016-2017. Data taken from Traxcn. 

Costly if you do, costly if you don’t

It is clear that costs abound, beyond the usual ones we think of in internet tech companies, when it comes to developing and scaling climate tech solutions — from product development to commercialization costs and regulation-driven costs. Costs to drive adoption will also vary across sub-sectors and markets. 

While this might seem discouraging, one only needs to think of the costs on the other side of the coin. Globally climate change-induced disasters have cost more than US$1B, and even beyond disasters there are more indirect impacts to human health and societies that will also create a lot of extraneous costs for economies globally. And if we are unable to get close to net-zero or reduce global temperatures 1.5 degrees by 2050, we can only expect these costs to increase. 

No such thing as a free meal, the adage goes. In the case of climate change, we also get charged for not getting the meal. The question is, how much are you willing to pay?

The good thing is that climate tech companies do not have to go at it alone to tackle these costs. Partnerships between investors and larger institutions will be valuable in this regard, as we have emphasized throughout this piece. 

Similarly, this is something our founding managing partner echoed in a Straits Times article on combating climate change back in 2019, and it is all the more relevant today. 

Venture capital firm Insignia’s founding managing partner Tan Yinglan said that such [investment and partnership] platforms are crucial for collaboration between start-ups and larger institutions “to get the best ideas off the ground and create real impact, especially when it comes to climate change. Start-ups are at the forefront of climate change action. They have the flexibility to implement innovative solutions and the persistence to make these solutions happen.”

If you’re looking for a partner to address the costs of climate change and build a great climate tech company, share your story with us on our website’s pitch page, and you will get connected to Samuel Nahusuly from our investment team, who is passionate and focused on finding the next big tech startup solutions for the environment in Southeast Asia.