Even as the impact of climate change becomes increasingly apparent across the globe, investment in climate tech is also gaining pace. A number of VC funds and major corporations are pouring money into companies to develop solutions that help solve environmental problems.
Southeast Asia, in particular, has received great attention considering it is among the world’s most vulnerable regions when it comes to the effects of climate change.
“About 80% of global GDP is now committed to net zero. But guess what? There are not many solutions out there for them. So we think there is a huge opportunity in this sector,” said Sui Ling Cheah, operating partner at Wavemaker Partners, during a panel discussion titled ‘Driving decarbonisation: How the startup ecosystem can take the lead’ at the Asia PE-VC Summit 2022 on Sept. 28.
Wavemaker Partners is a venture capital (VC) firm based in Singapore and Los Angeles. In March, it closed its fourth fund at $136 million as it looks to shore up investments in enterprise, deep tech, and sustainability startups in Southeast Asia. In October 2021, the firm launched its $25 million climate tech venture builder Wavemaker Impact.
“There are many opportunities for us to back startups that can help solve [climate change] problems. And the tech is already there. The problem we’re trying to solve is to back innovative business models that can help with adoption,” said Cheah.
Even for mainstream VC funds, investments in sustainability-focused companies are becoming more important. “We examine the ESG [environment, social, governance] profile of every company. At least, they should not do any harm to the environment,” said Pui Yan Leung, partner at Vertex Ventures Southeast Asia & India, at the same panel.
She added that when it comes to climate change technology, market sentiment, and regulatory framework have evolved significantly, compared to a decade ago. “We see sustainability as an opportunity as more companies are now in a better position to disrupt the market with innovative solutions,” said Leung.
At the panel discussion, Cheah and Leung were joined by Caroline Wee, investment partner, Asia at Circulate Capital, and Grace Sai, co-founder and CEO at Unravel Carbon.
Circulate Capital is an impact-focused investment management firm, dedicated to preventing ocean plastic pollution. The firm secured the third close its second fund Circulate Capital Ocean Fund I-B (CCOF I-B) in July, bringing the vehicle’s total commitments to $53 million. LPs leading the investment included the World Bank Group’s IFC, which committed $10 million, and Proparco, which committed $5.6 million.
Meanwhile, Unravel Carbon is a Singapore-based enterprise software firm that helps companies track and reduce carbon emissions.
Reflecting investors’ sentiment, Unravel Carbon’s Sai said that some of the most progressive VCs in the region have approached her company to help measure the carbon footprint of their portfolio companies. “I find that fascinating because VCs would pay for that measurements. While they have a duty to return capital to their LPs, they’re also investing in non-financial performance,” she said.
ESG is non-negotiable
While ESG principles continue to gain currency among corporations and investors, smaller or early-stage startups may not always have clear ESG plans. However, all companies nowadays — even those who are not related to climate tech — need to adopt some elements of ESG into their business strategies, investors believe.
“Everybody is moving towards that, many consumers are willing to pay extra for climate-friendly products, every business conference talks about decarbonisation. You have government support, policy, and customers. If founders don’t think [ESG] good for business, they are not smart founders,” Cheah continued.
To investors, it is no longer enough for founders to talk about financial return projections. Founders also need to mention ESG consideration as a way to evaluate overall business risks. “As the company gets bigger, at some point they may want to list on reputable exchanges and many public exchanges now require companies to report their sustainability or ESG progress. So it’s always good to start early,” said Leung.
Circulate Capital’s Wee said that ESG is a value-creating element where companies create multiplying effects for communities. “Before making investments, we make sure that there’s gender equality in terms of the management, we also ensure that the workers are well compensated,” she said.
Wee added that this is increasingly important in the waste management sector where some startups work with waste collectors on a freelance basis. “When people collect waste, we ensure that they are properly and timely paid. It is a big ecosystem, founders can help create a lot of impact on society, in addition, to gain profit for themselves,” Wee said.
Bullish about profitability
One of the most frequently asked questions for sustainability-focused businesses is whether they are able to deliver profits. For industry players, this niche sector has ample opportunity waiting to be explored.
“Regulators all around the world are mandating the disclosures of companies’ carbon footprint. The supply chain measurement in the US alone is a $23 trillion market,” said Unravel Carbon’s Sai.
“That will open up a market size for platforms like ours to win. It’s really not about profit versus purpose anymore. The entire planet is converging, and we are going to put in money from sovereign funds, LPs, pension funds, all to move the needle here [in climate change],” she continued.
All investors shared Sai’s optimism. Since all major Fortune 500 companies have committed to net zero, startups focusing on climate tech can partner with them to deliver the solutions they need.
Wavemaker’s Cheah gave an example of one of its portfolio companies, ecoSPIRITS, which provides a closed-loop distribution system that nearly eliminates packaging waste in the premium spirits supply chain. “Every year, there are 70 billion single-use glass bottles that get manufactured just for the wine and spirits industry. A lot of them end up in landfills. So, this is a new revenue opportunity for startups as they can help big companies and governments solve their net zero commitments. It’s really good business,” Cheah explained.
Circulate Capital’s Wee was also bullish on the prospect of climate tech-related startups. “There is profitability in this sector. There are a lot of opportunities for young companies to work with major corporations as the latter now investing more in this area. On top of that, you make an impact on the environment and society,” said Wee.