Mapping the Climate Adaptation Technology Frontier

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What do investors think about when they think about climate adaptation technology?

It’s not the easiest question to answer. The space is new and ill-defined, and some tech companies that contribute to adaptation may not be actively positioning themselves as climate champions, preferring to frame their activities as responses to particular natural hazards, or as AI and data plays.

However, the scope and scale of current and future climate physical risks means climate adaptation technology (CAT) is primed to boom over the coming years. In a December report, Boston Consulting Group found that adaptation and resilience solution providers achieved median valuations of nine times revenue, with some generating valuations as high as 77 times revenue.

This knowledge has led venture capital (VC) and private equity (PE) firms scrambling to identify the technologies and sectors with the juiciest opportunities. After all, getting in on the ground floor of an early stage company that offers protection from the sort of climate-driven hazards that could cripple local, national, and international corporations could yield billions.

However, there are obstacles to overcome. “Attention, investment, and technological innovation in CAT is undoubtedly growing, yet CAT remains a disproportionately small slice of overall climate tech activity and even smaller fraction of overall venture activity,” says Alex Laplaza, an advisor at Lowercarbon Capital and vice president of strategy at Kettle, a climate risk analytics and insurance startup. “I believe a primary reason is that the business models are still evolving to more fully create and capture value from emerging CAT solutions.”

Herding CATs

Another major challenge is classifying and categorizing CAT investments. This is important for building market awareness of the opportunities out there, and making them appealable to different investor types.

One approach is to sort CAT opportunities by where they’re positioned in the “adaptation cycle”. There’s no one way to define this “cycle”, but a recent World Economic Forum (WEF) report divided it into three segments: understanding climate risks and opportunities, building resilience against future impacts, and responding dynamically when climate-driven disasters hit.

The Adaptation Cycle, World Economic Forum

Another is to categorize by first- and second-order adaptation challenges. Tech in the first group address immediate climate shocks, like predicting and fighting wildfires, dealing with floods, and handling extreme heat. The second group is more nebulous, encompassing tools and services for handling climate-induced migrations and evacuations, or the phased removal of fixed assets from encroaching seas. FastVisa could be an example of a second-order adaptation risk investment, focused as it is on streamlining legal immigration into the US. Vibrant Planet, in contrast, is a first-order adaptation investment, as it tackles wildfire risk through scenario planning and data modeling.

Water, Fire, Heat, Wind

Yet another option is to divide CAT opportunities by the type of climate hazard they protect against. This is the approach taken by Chicago-based venture capital fund Mazarine Ventures in their recent survey on CAT investing opportunities, which Climate Proof was able to preview.

Mazarine is laser-focused on early-stage technology companies that combat risks related to water and/or wastewater. It’s a niche well-suited to the CAT theme, considering the myriad water-related risks posed by climate change: including flood, drought, water contamination, and extreme rainfall.

The poll, which covered over 100 VCs, PEs, corporate VCs, and angel investors, asked respondents to rank their CAT investment priorities by type of climate risk: water, fire, heat, and wind. The findings offer an insight into how investors are mapping the CAT opportunity landscape.

Leading the field, two-thirds of respondents (66%) said their top priority are CAT investments that tackle climate-induced water risks. Seventeen percent said solutions that address fire risks are top priority. Few said the same of wind or heat risks, though heat was the leading ‘second priority’ response.

Unpacking the results, it turns out that water-related CAT opportunities extend far beyond the traditional “water sector”, which is dominated by utilities firms. “Water risk is number one. Within that agriculture, utilities — which includes wastewater and energy — and real estate are what people say they’re focused on,” says John Robinson, a partner at Mazarine.

This sector focus was replicated across CAT types. The survey shows 70% of respondents want to invest in adaptation for the utilities sector, while 65% said the agriculture sector is a top three preference. Forty-five percent said the same about the finance, insurance, and real estate sector.

As for what aspects of water risk investors want to tackle, Robinson says respondents’ answers surprised him: “The ‘too much water’ problem is more of a priority for money than anticipated. I thought it would be 90% of people being like: ‘we need to save water’ because that’s in the news. Actually, flooding turned out to be a higher priority for money.”

Another threat that respondents cited was compromised or impaired water, meaning the pollution of water sources via climate-related drivers. Think of extreme rainfall washing toxic agricultural runoff into lakes and rivers, or harmful algal blooms disrupting lakeshore tourism. Robinson calls the compromised water theme the “dark horse of climate adaptation”, one that smart investors will recognize has outsized financial potential.

The survey also asked respondents to identify the CAT implementations they’re focused on: hardware, software, or both. There’s a lot of buzz about how AI, earth observation, augmented reality, and the internet of things could be leveraged to enhance climate adaptation, as per the WEF report mentioned above. However, actual A&R solutions have to be built in the physical world to deal with physical risks. Of survey respondents, 43% said they are focused on hardware-oriented investments. Just 13% said they were solely focused on software offerings.

Robinson says respondents “preponderance for hardware” in the survey was surprising, since data and software solutions have, in his eyes, a vast amount to contribute to adaptation. “It’s the precursor to stopping the physical threat. You’ve got to understand what the probability and category and likelihood of that physical threat is in order to build against it,” he says.

“You want to help somebody? Give them the data and the intelligence about what’s happening to them,” he adds.

As for where in the capital stack CAT investors want to make their bets, 62% of respondents said they are seeking out young companies in the process of raising seed capital or Series A rounds. A sizable chunk said they are interested in pre-seed, pre-revenue companies, while somewhat fewer are hunting for growth companies with revenues around US$10mn. This breakdown likely reflects the bias of the VC respondents, who typically seek out opportunities among companies just getting started. And given CAT is an emerging field, it’s not surprising many of the entities operating in this space are newborns. 

More Than One Way to Skin a CAT

Though the Mazarine survey offers a useful snapshot of early-stage investor attitudes towards CAT, certain aspects of the landscape go unexplored. For example, respondents were not canvassed on their preferences when it comes to companies’ distribution models. Some may favor companies with go-to-market plays targeting other businesses, while for others direct-to-consumer models may be more attractive.

“Distribution is very B2B heavy right now,” says Seb Tranaeus, venture partner at Rally Cap Ventures. “A lot of startups are selling to businesses and governments. This makes some sense; there’s historical precedent for governments to be responsible for climate hazards, and forward-looking businesses are preparing for a changed climate. But as more individual consumers start to feel the unfortunate need to take matters into their own hands, expect more B2C plays. Think peer-to-peer apps that help neighbors coordinate in a disaster, or platforms that connect people navigating complicated policy (e.g. flood buyback programs) with individuals that have already gone through the process.”

Clearly, there’s no shortage of ways to slice and dice the CAT investment universe. Each investor will bring their own spin to the theme, one that aligns adaptation and resilience opportunities with their own convictions. For some, thinking about CAT by hazard may make the most sense. For others, the “adaptation cycle” may prove a more intuitive guide. What’s positive is the amount of energy going toward understanding the space.

Hopefully where knowledge leads, money will follow.