Warsaw Equity Group

Climate Tech Investments on the Rise: AI, Circular Economy, and Smart Buildings Lead the Way

Author: Arvin Khanchandani, Investment Manager, Warsaw Equity Group

In my My Company Poland article published in December last year, I predicted that the impact investing market will continue to grow in 2023 in line with the trend of recent years. This is despite the slowdown in the global investment market and limited access to capital this year. I define impact investments as those with a positive and measurable social and/or environmental impact.

This observation applies in particular to investments in the so-called Climate Tech, i.e. innovative technologies that can help combat climate change by reducing, mitigating or offsetting greenhouse gas (“GHG”) emissions.

We’re now more than 4 months into 2023 and – based on my observations so far – I believe that the 3  areas within Climate Tech that have been and will continue to be particularly attractive to investors this year will be AI, the Circular Economy, and Smart Building.

Artificial Intelligence

Artificial Intelligence (“AI”) has firmly replaced NFT and Web 3.0 as the new flavour of the month (year?) in the popular media tech hype cycle. Everyone and their mother has played around with Open AI’s Chat GPT-3 and read at least a dozen articles speculating about when exactly their job will be made obsolete by AI.

But AI is more than just a buzzword. BCG put together a framework showing some examples of how AI can be used to combat climate change.

Thanks to AI, we are getting better at mitigating the effects of climate change. To start with, it can make the measurement of emissions more accurate, which is necessary for informed decision-making. It can also help reduce GHG emissions, for example by improving energy efficiency. It is estimated that AI can help organisations reduce their GHG emissions by 5-10%. Finally, it can be applied to bolster our carbon removal efforts, such as carbon capture and storage (CCS), and forestry.

As climate change progresses, it will lead to more unpredictable weather events such as extreme heat, wildfires, floods, and hurricanes. Such events will increasingly wreak havoc on society and make entire regions less habitable. AI can also help us adapt to the effects of climate change and strengthen our resilience by better monitoring, modelling, and anticipating such events.

More broadly, AI will help us in fundamental areas such as climate research and modelling, climate finance, and climate education. For example, think of accurate personalised tools that calculate an individual’s or organisation’s carbon footprint and make realistic recommendations on how to reduce it.

In terms of investment, I believe that both Climate Tech and AI are long-term plays with the power to change the world for the better. For this reason, I believe that the successful startups in both areas will be rewarded with massive valuation premiums.

But if both Climate Tech and AI can be combined, which is starting to happen more and more frequently… Well, I predict that a lot of investors will want to jump on this (zero-emissions) train!

Circular Economy

The Circular Economy has been and will continue to be one of the key themes of 2023. A number of different market drivers contribute to the growing investors’ interest in the circular economy.

Firstly, a linear economy requires continuous and ever-new processing of materials. This leads to ever-increasing consumption of raw materials and other resources such as energy and land extraction. This has the combined effect of accelerating GHG emissions.

The ongoing global scarcity of raw materials is putting both the established and new (think rare earth minerals used in wind turbines and electric vehicle motors) supply chains at risk. This is causing manufacturers to rethink their single-use business models.

The end game is to recycle end-of-life products so that the recovered material can be reused, closing the circular loop and ensuring the stability of supply chains. Fortunately, this new model is becoming increasingly viable due to technological advances in material recovery as demonstrated by several exciting startups in the waste-to-value space.

Furthermore, the cost of doing business has risen significantly due to high inflation, and rising energy and commodity prices. Companies are increasingly looking to reduce costs, and using recovered materials is often more cost-effective than using virgin materials. Material recovery also means more local and transparent supply chains, reducing logistics costs.

Similarly, regulations such as Extended Producer Responsibility mean that manufacturers are now responsible for managing the whole life cycle of their products including the disposal phase. Managing waste streams is a net cost to the business. But it doesn’t have to be if end-of-life products can be recycled or upcycled (i.e. transformed into something more valuable).

Finally, I think that we may finally be reaching a tipping point in our society. More and more people are aware of climate change and the risk it poses.  The demand for sustainability from both society and business underlines the need to make the entire global economy more circular. This is of course supported by advancing ‘green’ legislation, particularly in the EU.

The Circular Economy plays into all of these themes as it has the ability to turn problematic waste streams into value, bringing obsolete products and materials back into circulation while significantly reducing our carbon footprint. It’s a winner for me.

Smart Building

Smart Building should be broadly understood as new technologies that increase the energy efficiency of buildings and the construction industry.

A big part of Smart Building is automation. Automated building operations reduce facility management costs as automated systems efficiently regulate the operation of building functions such as HVAC and lighting. Automation in buildings can significantly reduce overall energy consumption, by as much as 50%.

In addition to automation, Smart Building is also about new materials and technologies that can help reduce the carbon footprint of building construction, operation, and renovation. For example, a lot of innovative projects focus on decarbonising concrete (production of cement is responsible for ~8% of all GHG emissions globally), steel (~5%) and aluminium (~3%).

According to Eurostat, the building sector is responsible for almost 100 million tons of GHG emissions per year in the European Union. In fact, this sector accounts for 40% of total EU energy consumption and 36% of total EU GHG emissions.

Other large net emitting sectors include Energy, Industry, Transportation, Agriculture and Land, and Water and Waste. However, in relative terms, much more money is being invested in these sectors to reduce their carbon footprint than in the building sector.

In this context, investing in the decarbonisation of the built environment appears attractive in terms of the ratio of the money invested and the potential ‘environmental return’ (reduction in GHG emissions).  This year, investors are finally starting to understand this and are more willing to allocate capital to Smart Building.