Climate Finance Targets the Wrong Industries| Trending Viral hub

To achieve net-zero carbon emissions by 2030, we have to increase the amount of capital invested in climate technology by 590 percent, says Daria Saharova, managing partner at VC World Fund, a European venture capital firm specializing in climate technology. While European funds, including the United Kingdom, manage €19.6 trillion ($21.1 trillion) and invested €19.6 billion in 2022, that is not enough. We need to invest at least 1 billion euros every year.

The good news? “Europe is the world leader in patent applications for climate technology,” she says. “Twenty-eight percent of all patents in this field originate in Europe, so almost a third of the technology needed is created here.”

The problem, Saharova warns, is the misalignment between emissions and venture capital. Forty-eight percent of venture capital investment in 2022 went into mobility technology, such as electric scooters. Mobility accounts for only 15 per cent of emissions, while the most polluting industries such as manufacturing, food and agriculture and the built environment are underfunded. “85 percent of broadcasters receive only 52 percent of the financing,” according to Saharova.

This is important, he explains, because changing personal behavior will reduce only 4.3 percent of emissions. Technologies already on the market will represent 49.8 percent, meaning that technologies under development and in need of investment will have to cover the rest. “46 percent of emissions will be reduced by technology that is yet to be developed, and this is the technology we desperately need,” he says. “And we need venture capital.”

Private equity has already burned its fingers in this area, he points out. “Between 2008 and 2013 there was a lot of investment and many failures. So right now, R&D represents 35 percent of investment, private equity 37 percent, and venture capital only 13 percent of climate technology financing.”

There is a huge opportunity for venture capitalists, as evidenced by the rapid rise of late-coming private capital. The return on new investments in climate technology between 2015 and 2019 is almost 22 percent. But how do venture capitalists choose the right areas of investment when they often lack the necessary skills?

“We need a crystal ball for the sales of a technology product, the target market, the influence of the technology on that market, its climate footprint and the interrelationships with other solutions, in particular, some serious climate science,” he explains. “That’s a long list.”

The Global Fund has developed a benchmarking system called Climate Performance Potential (CPP), which is gradually filtering into academia. It’s a combination of comparing the potential a startup has to avoid or reduce emissions, the willingness to ignore the startup’s own predictions, and its ability to look at the Total Addressable Market (TAM), which the Global Fund calls Total Avoidable Emissions. This combines a team’s ability to execute with a near-competitive product in a climate-effective technology pool to understand the order of magnitude your company can achieve.

“This model focuses more on technology than on the business, so it can also be applied to large organizations,” he explains. “It allows us to measure the carbon market of one technology compared to others by 2040. We need more private and public capital, and this model makes it easier for them to predict success.”

This article appears in the March/April 2024 issue of UK WIRED Magazine.

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