Updated: Jul 28, 2022
The Decarbonization & the Adaptation 'Sides' of ClimateTech
The industry generally known as ‘climate’ is evolving, creating opportunities for a growing segment of investors who are beginning to recognize that the technology vertical in climate (“ClimateTech”) goes well beyond solar, batteries, carbon capture, and electric scooters.
Mazarine’s Point of View (PoV) is that there are 2 equally important components of ClimateTech:
1. Limiting, and ideally reversing the decades-old trend of atmospheric warming;
2. Adapting to the consequences of the changes in climate patterns we are already experiencing, and preparing for the changes predicted by climate models
"In order to limit global warming to 1.5 degrees Celsius above pre-industrial levels, scientists recommend that by 2030 global emissions should be cut by 4 percent compared with 2010 levels. According to current national commitments, however, global emissions are set to increase by almost 14 percent during the rest of the decade." Source: Progress Towards Sustainable Development Goals- Report of the Secretary-General
One of the most significant impacts of changing climate patterns is the impact on precipitation, which in turn directly affects the quantity of water, be it too much (i.e. flooding) or not enough (i.e. drought). Furthermore, water quality is indirectly impacted by the changing weather patterns and increasing surface temperatures, be it by changing the aquatic ecosystem (e.g. invasive species, algae growth etc.) or forcing individuals and industry to find alternative water sources that need to be treated before being used.
A disrupted hydrological cycle results in aridification/drought, sea-level rise/flooding, and compromised water quality
Mazarine’s PoV is that (1) renewables, energy efficiency, and the long-tail of 'NetZero' will continue to present compelling opportunities for investors focused on ‘combatting climate change', the (2) climate adaptation side of ClimateTech deserves equal attention and presents many intriguing investment opportunities.
Investing in Adaptation
Climate adaptation is an overarching concept that points towards several general types of solutions both as it relates to water quantity and water quality. However, these solutions will vary between different markets and sub-markets; for example, the solutions for water re-use will look very different in mining, automotive manufacturing, and food processing, and even within a segment such as food processing subsegments such as cheese production, vegetable packing and meat processing will have different solutions.
"The adaptation 'side' of ClimateTech has remained elusive for many businesses and investors, and Mazarine hopes our framing and taxonomy (below) are helpful in understanding the technology verticals, adaptation markets, and where the opportunities are. "
~Anders Hallsby, Partner, Mazarine
When investing in climate adaptation technologies it is critical to understand both the big picture, as well as the nuts and bolts of the specific markets and submarkets a technology innovation is targeting. Often times the fundamentals of an innovation can be applied to multiple markets, it just needs to be tailored to the specific needs of the target market. For example, a technology for heavy metal removal will have use both in mining (for recovering metals from barren leach solutions), in pharmaceutical manufacturing (for removing trace amounts of metals from wastewater), and in point of entry water treatment, to secure the dwelling from elevated levels of lead or copper.
Mazarine’s PoV is that agriculture and protein production face the most daunting climate adaptation risks, followed by mineral processing, energy, and towns/cities. The FIRE sector (Finance, Insurance, Real Estate) also face significant climate adaptation risks via their indirect exposure to an 'uncertain water future'.
Mazarine’s taxonomy of Climate Adaptation Technology (‘CAT’) deals is straightforward and segmented into 3 verticals:
Technology Vertical 1: Seeing the Changes
Technology companies with innovations that enable their customers to ‘see’ what is happening, whether it is a change in the physical or chemical conditions of water, or up-to-date information on the status of a) natural infrastructure (lakes, rivers, coastlines), or b) human-made infrastructure (sewers, cisterns, sea walls, and roads). These deals include innovations related to Sensors and IoT, Computer Engineering, Information & Communication Technology (ICT), and earth observation tech.
IOT sensing, earth observation tech, and environmental lab testing enable industry and society to monitor a changed climate.
Technology Vertical 2: Forecasting the Future
Technology companies with innovations that enable their customers to ‘think’ about what they are seeing. Using tools such as Machine Learning (ML) and Artificial Intelligence (AI) these innovations help forecast risks and generate options for a proactive response. These deals include innovations that optimize the operation of wastewater plants, improve the reliability of desalination, provide property with insights that allow them to minimize water use, and help municipalities address quantity concerns, be it too much or not enough water.
Artificial Intelligence (AI) applied to precipitation, groundwater/snowpack availability, surface water quality, and economic impact enables industry and society to forecast and 'think' about near-future water-related risks in a changed climate.
Technology Vertical 3: Adapting to the New Reality
Technology companies that provide 'tools' that allow the affected party to ‘do’ something to adapt to the current and future state. The solutions range from process technologies that allow for the recovery of clean water from previously uneconomical sources to business model innovations that make it possible for previously sidelined stakeholders to take action against a changing climate.
Mitigating the risks of a changed climate points to innovations spanning multiple realms, including: earthworks, plumbing/appliances, biomimicry, new water sources, precision irrigation, emergency relief water, indoor agriculture/aquaculture, and treatment. All of these enable industry and society to 'do' something to mitigate risks faced in a changed climate.
Adaptation vs. Sustainability and Resiliency
Mazarine’s PoV is that the notion of adaptation offers a more effective ‘chassis’ for taking humanity forward to a future where the risks of a changed climate are managed. Whilst the goals of ‘being sustainable’ and ‘designing for resiliency’ are important tenets of adaptation, industry and society must invest in solutions to mitigate risks associated with a changed climate, as failure to do so would lead to loss of livelihoods and lives. And as for the word ‘sustainability’, Mazarine uses the definition ‘meeting one’s needs without compromising the ability of future generations to meet their own needs.' Climate Adaptation, on the other hand, frames the actions one needs to take to mitigate risks associated with a changed climate.
Climate adaptation is core to Diversity, Equity, Inclusion, and Accessibility (DEIA)
Disadvantaged and 'Base-of-the-Pyramid' communities around the world are increasingly waking up to a changed climate that is destroying lives and livelihoods. More electric bikes in Berlin, solar panels in Baltimore, or tree planting for carbon sequestration in Belgium, while well-intentioned in slowing global warming, will not offer near-term help relieve to small businesses and families facing devastating floods, droughts, compromised surface water (due to warmer temps). Additionally, climate-induced stress on agriculture results in increased food prices, which disproportionally affects lower-income households.
Decarbonization efforts necessarily must continue, but Mazarine's PoV is that the adaptation 'side' of ClimateTech is where more tangible wins can be realized in helping those most in need adapt to an uncertain water future. Investments in Climate Adaptation Tech are closely aligned with diversity, equity, inclusion, and accessibility (DEIA).
What about UN Sustainable Development Goals (SDGs)?
The adaptation 'side' of ClimateTech fits cleanly into SDG 13 (Climate Action); however, most efforts in that 'room' have centered around disaster preparedness planning and policies, with very little focus on technology.
Climate Adaptation Tech also fits into SDG 1 (eg: flooding and drought/aridification have a direct impact on a household's economic prospects), SDG 2 (flooding and drought/aridification are precursors to failed crops), SDG 3 and 6 (harmful algal blooms 'HABs' and other source water quality concerns are accelerated by warmer surface water temps, caused by warmer atmospheric temps), SDG 11 (if a city regularly floods, how that be safe?).
What's our Why?
As technology investors with an impact mandate, one of Mazarine's objectives is to catalyze sharing and learning opportunities for our syndicate and network. Whilst everyone recognizes that 'water is life' or 'water is everything', many are not positioned to see the technologies and deal-flow Mazarine sees, and we welcome the opportunity to share. Furthermore, we noticed that many investors are interested in the adaptation 'side' of climate, yet are not able to articulate a clear thesis and taxonomy. In this respect, Mazarine hopes this PoV is of practical use.
IN CONCLUSION, Mazarine’s PoV is straightforward: ClimateTech is at an inflection point whereby investors are starting to recognize the importance to consider a two-pronged approach to the so-called climate challenge. The decarbonization ‘side’ is mature and will continue to be important, but the adaptation ‘side’ is offering forward-thinking investors an opportunity to generate social and environmental impact by investing in companies with innovations that mitigate the effects of a changed climate, which in our opinion, is mostly a water story.
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