Climate Intelligence: The Digital Fabric for Climate Action
The Looming Crisis and Awakening Opportunity
2020 was a brutal year and 2021 has been off to a rough start. While there’s reason to have hope for the future with multiple vaccines promising the end of the pandemic, we unfortunately have an arguably larger global crisis looming. If you’re in the US, your 2020 likely included living through record-breaking temperatures, hurricanes, and/or wildfires, as the academic warnings of climate change quickly became a reality (my personal experience was Blade Runner in SF). With these recent events only being a precursor for what is to come, I would say our future actually looks pretty bleak unless we start taking large-scale action.
Fortunately, leading actors in both the public and private sectors seem to be catching on. Larry Fink’s 2020 Letter to CEOs, where he explicitly named climate risk as a “defining factor in companies’ long-term prospects,” was followed by an avalanche of climate commitments across industries throughout the year (see Microsoft, Shell, Unilever, and on). The trend only looks to be intensifying in 2021 with Larry reinforcing his message and companies like General Motors, the largest US automaker, planning to phase out vehicles with internal combustion engines by 2035.
Our new administration has also taken a literal 180, rejoining the Paris climate accord we previously withdrew from and working to reinstate many reversed environmental regulations. Even during the past administration, state- and local-level climate pledges across the country continued to grow, with two-thirds of Americans (across party lines!) believing the government was doing too little to reduce the effects of climate change. With all of these signals, it is becoming increasingly difficult to deny an awakening to our looming crisis (finally!) and a growing appetite for the solutions to do something about it.
As always, the venture community is eager to participate in the blooming opportunity this demand represents. According to recent reports, VCs invested $60B in climate tech between 2013–2019 with an 84% CAGR in capital deployed, with no signs of slowing in 2020 (see below). Brand name venture funds including Sequoia, Union Square Ventures, and Y Combinator have also publicly shared their interest in backing these solutions and/or have raised specific funds to back climate companies.
At Better Ventures, sustainability has been a core pillar of our investment thesis from the beginning. With a focus on outsized impact and returns, we recognize the incredible opportunity climate tech presents: to invest in solutions that will help avoid (or at least temper) our looming crisis. Thus far we have made investments towards reducing the climate impact of our food, industrial production, and energy systems, and we are eager to make more.
As the window for meaningful climate action narrows, we can no longer afford for our efforts to be uninformed, uncoordinated, or unquantified. This is why we are particularly interested in backing Climate Intelligence companies — those building the digital fabric to effectively inform and direct climate action. Startups in this space, across Data Generation, Insight Engines, and Applications, make it possible to level up our mitigation and adaptation efforts, while also creating opportunities for impactful venture investment. We believe this category is an excellent fit for the venture model and absolutely essential to building our new carbon economy.
What is ‘Climate Intelligence’?
Business Intelligence is the use of historical and current data to provide actionable insights to drive immediate and future business decisions. Along those same lines, Climate Intelligence (CI) is the historical, current, and predictive information on our natural and built systems to power insights for climate mitigation and adaptation. In other words, CI can be defined as the data analysis of climate information to understand what affects climate, how climate is changing, and how those changes affect our society and economy.
Climate Intelligence companies are typically focused on one or more of the following: generating data on our natural and built systems (e.g. Planet); deriving insights from climate data (e.g. Descartes Labs); or, building climate mitigation or adaptation solutions by applying insights from climate data (e.g. Silviaterra). These companies can serve nearly any sector of our economy because, simply put, every sector impacts and is affected by climate. Any decision-maker looking to abate their climate impact and/or minimize their risk to climate change is a potential customer. (More on the CI landscape and market opportunity below.)
Why Climate Intelligence?
Some of you may recall the boom-and-bust cycle of clean tech from 2006–2011. It is well documented and well remembered by the investment community. There has been a lot of discussion about if and how the recent climate tech hype will be any different (see here, here, here, or here to start). In short, present climate tech solutions are just a better fit for the venture model compared to clean tech solutions of the past, particularly when it comes to Climate Intelligence.
VCs are great at investing in capital-efficient, highly scalable, high margin businesses. Technological advancements in the past decade, funded with some amount of venture dollars, have given birth to a new generation of climate companies that now fit this VC mold, especially true in the realm of Climate Intelligence.
The first enabler for CI has been the availability of data. Through developments in remote sensing technologies such as drones, micro- and nano-satellites, as well as ground truth sensors for land, air, and water, an unimaginable amount of data is being captured on our natural and built environment every day. Costs for collecting this data have also plummeted thanks to sensor hardware innovation, making the data more accessible than ever.
However, these raw data are not particularly useful for the average customer. The real value of this information comes from the insights, the generation of which is made possible by artificial intelligence and machine learning. Through recent computational advancements, enormous amounts of data can be aggregated, combined, and analyzed to produce useful insights faster than ever before. With the ability of ML to bring large scale datasets down to the local- and asset-level, as well as use historical data to build predictive models for the near- and long-term future, previously ambiguous generalized information can now be targeted and relevant.
This is the burgeoning Climate Intelligence opportunity — a new layer of high-quality, high-granularity understanding built upon key technology innovations of the past decade. And instead of being limited to capital intensive decarbonization hardware, companies building this digital fabric for our new carbon economy are offering the capital-efficient, highly-scalable, high-margin climate solutions venture investors have been waiting for.
The Climate Intelligence Landscape
So what does the startup landscape for Climate Intelligence look like? While there are some well-funded early movers who built the foundation of CI, the number of startups commercializing insight engines, as well as applications on top of these insights, only continues to grow. We have broken down the market into three categories: Data Generation, Insight Engines, and Applications. While individual companies can and do span multiple categories, we hope this simplified segmentation is helpful in distinguishing the tech, business models, and customers for each segment.
Data Generation. These are the companies collecting data on our natural and built environments and making that data available for use. They are creating “digital twins” of the earth and brand themselves as “data refineries” focused on providing unique, proprietary datasets to their customers. These data-as-a-service companies typically develop and operate hardware, such as satellites, drones, and/or ground sensors. Startups in this category are typically more established players who have developed data assets other Climate Intelligence can be built upon. Representative companies include:
- Planet (Series D | $386M raised | $1.8B valuation): satellite imaging platform, imaging the entire Earth every day.
- Saildrone (Series B | $86M | $260M): wind- and solar-powered autonomous sailing drones collecting and relaying real-time ocean data.
- Aclima (Series B | $67M | $160M): hyperlocal air quality and greenhouse gas measurement to reduce emissions and protect public health.
Insight Engines. The core value proposition for companies in this category is analytics — mapping various data sources onto each other and turning them into specific insights for customers. Whether calculating carbon storage, quantifying climate risk, or building predictive models to inform disaster planning, these companies are taking raw data and creating dashboards, reports, or APIs to guide customers’ operational and/or financial decisions. Typically public, open-source datasets are used in combination with proprietary ones (from the company and/or the customer), with AI and ML performing the data aggregation, translation, and modeling. Representative companies include:
- Descartes Labs (Series B | $58M | $220M): satellite imagery for forecasting, monitoring, and historical analysis. Partnership with Cargill to forecast corn production.
- Jupiter (Series B | $43M | $78M): data analytics platform to understand physical climate risk. Flood risk product used for investment decisions, vulnerability assessments, and infrastructure resiliency planning.
- Overstory (Seed | $1.8M raised): automated analysis of satellite imagery for vegetation management for electric utilities to reduce wildfires.
Applications. Companies in this category are differentiated by what they are offering customers — instead of insights being the product or service, it’s the derived climate mitigation or adaptation. With Insight Engines, the value proposition is in empowering the customer to make informed decisions, while Applications are applying this knowledge to allow end customers to act to reduce their carbon footprint or minimize climate risk. This category is relatively more nascent and yet to be proven out at scale, but the ways companies are innovating to create and capture value is unlocking a new, exciting piece of the Climate Intelligence puzzle. Business models also vary in this category from carbon offset marketplaces to underwriting platforms for insurance. Representative companies include:
- Arbol (Series A | $9.2M raised): AI-powered parametric weather insurance. Initially focused on agriculture, insuring against extreme rain, snow, and temperature events.
- Pachama (Seed | $9.2M raised): AI and remote sensing platform to verify and monitor carbon capture by forests to finance conservation and reforestation. Pachama operates a marketplace to sell offsets to customers (see their partnership with Shopify).
- Kettle (Seed | $4.7M | $19M): AI-powered reinsurance platform to provide accurate risk predictions to reduce loss ratios. Kettle provides reinsurance to insurers, then holds and transfers risk to buyers.
While these distinctions are helpful, they’re definitely not exhaustive or absolute. Many companies have both data generation and insight capabilities, while Application startups base their products and services on proprietary insight engines. And companies that start in one category may expand into another as they grow (e.g. Orbit Insights GO). But hopefully this lays out a framework through which to understand the Climate Intelligence landscape, its evolution, and its potential.
Why Now?
Possibly the most difficult question to answer in climate tech investing is timing. But I may be bold enough to argue markets for Climate Intelligence (and climate tech solutions more broadly) are on the verge of exploding. For decades, sustainability and ESG initiatives have been championed by fringe do-gooders and tree-huggers, or those who were comfortable spending more money today for a vague promise of a better future tomorrow. But now, with global warming knocking on our door, the case for mitigation and adaptation solutions is making more and more financial sense.
This is particularly true for the Climate Intelligence space, where urgent needs for the data, insights, and tools for decisive climate action are beginning to surface. Some examples include:
- The insurance industry incurred an estimated $83B in global insured catastrophe losses in 2020, by some measures nearly 50% higher than in 2019. Total losses as a result of natural disasters have trended upward since the 1980s, putting the entire insurance industry at risk. To date, insurance and financial organizations have relied upon predictive risk models based on historical trends. As global warming leads us into uncharted territory, new models combining historical events with forward-looking climate scenarios are now needed to more accurately predict future risk, creating an opportunity for a new class of Climate Intelligence solutions.
- Poorly maintained electrical utility infrastructure has sparked an increasing number of wildfires across the globe. PG&E alone has been responsible for 1,500 California wildfires in six years, including the Camp Fire for which it owed an estimated $18B in damages causing the utility to file for bankruptcy. Because of global warming, our natural environment is also hotter and drier than ever before, making fires caused by failed power lines more likely and extreme. These wildfires in turn release an incredible amount of carbon dioxide into the atmosphere, only furthering this vicious cycle. So for both climate mitigation and adaptation reasons, utilities are now looking to Climate Intelligence companies to help direct targeted infrastructure maintenance and vegetation management.
- The Task Force on Climate-Related Financial Disclosures (TCFD), chaired by Michael Bloomberg, created recommendations to standardize and improve the disclosure of climate-related risk information. The number of companies voluntarily reporting on environmental risk is rapidly increasing and regulations making this type of disclosure mandatory are beginning to be written into law. For example, as of January 2021, premium listed companies on the London Stock Exchange are required to report climate risk, moving towards economy-wide regulation in the UK by 2025. Plug-and-play tools for this type of disclosure, as well as risk management, are now becoming more of a necessity.
In these sectors, Climate Intelligence solutions are quickly transitioning from nice-to-have to need-to-have, and the forcing functions of this change are only going to keep intensifying. With natural disasters made more severe and frequent by global warming, disruptions and costs to our economy will continue to grow. And while policy should rarely be counted as a key market driver, for climate tech it has proven to be a significant catalyst (see the history of solar and wind for proof). With our new administration, we can expect strides to be taken in both national and global climate policy (fingers crossed) that will also help to unlock key markets.
While not all industries have an immediate financial- or operational-driven need for climate solutions, there are many that are on the cusp. Forward-thinking early-adopters in these sectors are serving as first customers, while CI companies are positioning for these larger, soon to be realized opportunities. Some examples of these second-order Climate Intelligence markets include:
- Source-specific emissions tracking to comply with regulated and voluntary emission reduction goals, with the ability to monitor the effectiveness of initiatives over time.
- Information needed to anticipate and respond to climate-related supply chain events. The pandemic exposed a significant lack of resilience in our supply chains and climate change is only set to exacerbate these weaknesses.
- Carbon markets will likely remain relatively small until widespread regulation forcing emissions abatement and offsetting is in place. While the number of climate commitments keeps growing, the real inflection point in this market will come with large-scale carbon policy.
All of these signals point towards long term market shifts in which Climate Intelligence becomes integrated into our financial systems and the operations of our economy. The ability to take informed action in the face of climate change could be the deciding factor in determining the winners and losers in the decades to come. With stakeholders across the world waking up to this reality, many enabling CI solutions need to be built and funded as soon as possible.
Better Ventures’ Thesis
Given everything outlined thus far, I think it might be obvious we’re excited to invest in some Climate Intelligence solutions :) We believe the market is ripe and the technologies are in place to unlock real value and impact. Aligning with the rest of our investment criteria, we are looking to back mission-driven teams who are strategically commercializing their innovations in this space. As it relates specifically to the CI opportunity, we will be especially interested in the following:
- Teams with strong demonstrated technical know-how for dealing with climate-related data, balanced by a keen understanding that “if you build it, they will come” really doesn’t apply to climate tech.
- Solutions that are solving an urgent customer need and are well-positioned to serve growing market opportunities.
- B2B business models with high-quality revenue that resemble SaaS products more than the environmental consultancies CI companies aim to disrupt.
- Differentiation through a proprietary data stream (although we rarely invest in hardware), hard to replicate analytical engines, and/or focus on a niche, but large market opportunity.
The Biggest Opportunity of Our Generation
Scientists have made it abundantly clear we have very little time left to ensure Earth remains habitable for humans. To stay below the 1.5ºC warming threshold, we have to cut global emissions by 45% from 2010 levels by 2030, meaning we have just under a decade. The mitigation and adaptation solutions needed to get us there must be funded and scaled in the next few years to have any real chance. We believe this represents the biggest opportunity of our generation — to participate in and contribute to the cultural, political, and economic shift to a new carbon economy.
To ensure the most effective use of our resources and efforts during this limited time, Climate Intelligence solutions are becoming a necessity. They are and will be the digital foundation powering our transition to net zero carbon and beyond. If you are building a CI company, investing in this space, or want to discuss anything we’ve laid out here, please reach out. We would love to chat!
Other Notable CI Organizations & Initiatives
- Cloud Agronomics (Seed | $6M| $16M): remote sensing technology for real-time farm management insights, including crop disease outbreak protection. Developed a remote Carbon Index to quantify soil organic carbon as a tool to help verify soil-based carbon offsets.
- Silviaterra (Seed | $4M raised): uses satellite imagery to generate accurate, fast, and cost-effective forest inventories. Created the Natural Capital Exchange as a data-driven marketplace for forest carbon credits.
- Rhodium Group (Consultancy): independent research provider. Their Climate Risk Service produces localized impacts of climate change, sector-by-sector.
- Spherical Analytics (Context Labs company): environmental impact software for ESG risk mitigation, starting with climate. Their Climate Action Engine, developed in partnership with the Rocky Mountain Insitute, models and visualizes methane emissions from oil and gas, helping the industry understand how best to meet emissions reduction targets.
- First Street Foundation (Nonprofit): flood risk data provider. Identified 70% more US properties that have substantial flood risk on top of FEMA’s 8.7 million. Partnership with Realtor.com to integrate flood risk data.
- ClimateTRACE (Nonprofit): using AI/ML to combine existing data from multiple organizations, satellites, and sensors to track source-specific emissions in real-time, anywhere in the world, deploying almost no new hardware.
