The Green Conundrum: ROI vs Impact in Climate Tech

We asked VCs how they balance the need for financial returns with initiating positive efforts for the environment and the need for climate adaptation tech.
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The climate tech industry boomed in 2021 following the “red-alert” on climate change published by the United Nations. Over 100 billion dollars were invested, followed by a minuscule drop in 2022 in the first three quarters. The climate market has been increasing ever since the Paris Agreement in 2016 and several VCs interested in the tech world are expanding their horizons, starting from Sequoia Capital, Y Combinator, and LightSpeed Ventures announcing their ambitions in the climate tech space. 

Most of the startups globally have been focusing on controlling carbon emissions. As of January 2023, there are 83 climate tech unicorns globally and ‘Ola Electric’ is the only Indian representative in the mobility sector. While renewables and EVs are one of the largest parts of climate tech, a new field of climate adaptation startups—rather than climate mitigation ones—is also emerging. 

With the growing concerns for the climate, a lot of large, climate-dedicated funds have started in the last five years but the interest in water-related startups has only picked up since 2022. “Climate mitigation is mostly a decarbonisation story, whereas climate adaptation is a water story,” Vinod Jose, co-founder of Callapina Capital, told AIM. Partnering with Anas Rahman Junaid, Jose is focusing on climate tech startups that focus on the water sector but the firm is also sector agnostic.

According to a Future Market Insights report, water scarcity and purity-related solutions is among the most important sectors to focus on. Jose has nearly a decade-long background of understanding the water industry and is also consulting in the industry as a Principal with Amane Advisors. He believes that investing in the water sector is now more an issue of our survival than it is an investment based on ROI. 

The Green Conundrum

Sanjay Srivastava, chief digital officer at Genpact, told AIM that the conversation about climate change is now part of a market-centric economy. What this means is that the shareholders are becoming increasingly discerning along with the consumers of the products. “College graduates do not want to work in a company that is not working for an important purpose,” Srivastava added. 

We asked VCs how they balance the need for financial returns with initiating positive efforts for the environment. Jose, from Callapina Capital, said that a fund always focuses first on making a profit for their LPs and then eventually focuses on the impact metric. “We will launch several funds after this but for that we need to have a track record first, and that will be gained only by maximising profits for the LPs,” he added. 

Jose adds that most of the climate tech companies are just startups and are not like B2B or SaaS companies that expect a massive return within a year or two. “Most of the startups that we have spoken to care about the impact more than making money, and we identify this by the teams and the dreams they tell us, instead of greenwashing.” Callapina Capital invests in early-stage startups and, therefore, Jose believes that asking companies that are still nascent in their climate journey about their impact on the environment is relatively pointless. 

Shauraya Bhutani, founder of Breathe Capital, also shared concurring views and said that by prioritising financial returns while investing, it is becoming increasingly easier to invest in the space. “Some other VC might say that they are doing it for the environment, but the absolute reality is that now the space has become aligned to invest for financial gains, just like any other space,” said Bhutani.

Increasing Incentives

According to PwC, out of the total global VC investments in the first three quarters of 2022, climate-tech startups accounted for more than a quarter of the share. Further, a recent report claims that the market is expected to grow at a CAGR of 24.2% till 2032, reaching $147.5 billion—with the Indian market expected to register a CAGR of 18.3% for the same duration. 

The rise of climate tech startups and investments in India in the last 2–3 years is also driven by the global push for carbon neutrality, along with top-down directives from the Indian government. Even then, climate tech startups only account for 5% of the VC funding in India. Sovereign wealth funds and DFIs are providing funds and directing the VCs to make investments in climate tech a priority. A similar push is coming from the LPs, as confirmed by both Bhutani and Jose. 

VCs are recognising the need to invest in the climate space. Along with Breathe Capital and Callapina Capital, funds like Speciale Invest, Merak Ventures, Orios Ventures Partners, Avaana Capita, among a few others are increasingly tilting towards building a climate-tech-focused portfolio. In the context of the unprecedented advent in technology and the push from the market, VCs are actively adding large funds for investing in the climate tech space and the shift towards climate adaptation is a much needed one. 

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Mohit Pandey
Mohit dives deep into the AI world to bring out information in simple, explainable, and sometimes funny words. He also holds a keen interest in photography, filmmaking, and the gaming industry.

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