Technology funds management and advisory group SDGx and the UN Association of Australia (UNAA) have released new research that reveals deep tech venture capital (VC) may provide the most effective pathway to achieving a zero-carbon future.
The paper presents a brand new pathway for investors to achieve above-market returns and positive impact through portfolio exposure to the unprecedented and exponential growth in climate technologies, via a unique global blended finance VC fund focused on deep tech in energy, transport, and production.
It first outlines the time-sensitivity and magnitude of the problem, including that by 2050 there may be $8 trillion in annual climate-related damages along with 200 million people displaced.
It also notes that even with 197 parties signing the UN’s Paris Agreement on climate change, there is still a 97 per cent probability of the world exceeding a 2°C rise in global average temperature above pre-industrial levels, based on what countries are actually doing.
However, the paper then demonstrates that deep tech VC will be the most effective asset class to achieve both climate outcomes and outsized financial returns. This is because deep technologies offer the revolutionary, not incremental, innovation needed to reduce greenhouse gas emissions by 0.5 gigatonnes per year within 10 years to achieve net-zero by 2050.
Deep tech companies also hold very strong intellectual property, and IP assets accounted for 84 per cent of the total worth of companies in the S&P 500 index in 2015, while VC-backed startups with strong IP are also 6x more likely to generate a positive return on investment.
VC funds also create above-market returns, outperforming other asset classes across 5- (48%), 10- (38%), and 15-year (29%) periods, with smaller and earlier-stage VC funds generating better returns.
Finally, investments in climate-related companies are generating outsized returns for investors, with a median return multiple in Asia-Pacific PE-led exits from 2014 to 2018 of 3.4x versus 2.5x for other investments.
So deep tech VC ultimately empowers the companies with the best chance of addressing climate issues to scale their world-changing technologies, while providing investors with a unique balance of risk tolerance, portfolio diversification, and exposure to transformative technologies.
Jeremy Liddle, Founding Partner at SDGx, said: “Deep tech is the foundation for revolutionary innovation, including deep and strong intellectual property, that profoundly changes or creates new industries and markets, while improving lives.
“Incremental improvements are not enough. Deep tech companies that can reduce greenhouse gas emissions by 0.5 gigatonnes per year within 10 years are what we need to achieve net-zero by 2050, by completely removing our current circa 43 gigatonne per year output. So we must focus our resources on building and scaling such companies.”
The report also suggests that focus should begin on the energy, transport, and manufacturing sectors, given they are valued at $1.4 trillion, $5.1 trillion, and $13 trillion respectively and together generate 70 per cent of global greenhouse gas emissions.
Zarmeen Pavri, Partner at SDGx, says: “Private and institutional investment in deep tech has been accelerating as global capital markets consistently see higher and more sustainable returns.
“Alphabet, one of the world’s most valuable companies, is in an industry worth only $1.3 trillion. Deep tech companies in energy, transport, and manufacturing have the potential to simultaneously address climate change and become some of the largest and most valuable organisations in the world.”
Investing in renewable energy would deliver global GDP gains of $98 trillion above a business-as-usual scenario by 2050 by returning $3 to $8 on every dollar invested. It would also 4x the number of jobs to 42 million, and measurably improve global health and welfare scores.