Clearing the Air: Misconceptions of Investing in Climate Tech

In this interview we speak with Geraldine Mupandanyama, Founder & Managing Partner, Darena Ventures , to uncover the definition of climate tech and the prevalent misconceptions surrounding climate investment, offering clarity on how these misunderstandings can influence investment decisions and potentially hinder the sector’s growth.

1. Tell us about yourself and Darena Ventures in a few sentences.

I’m a Zimbabwe-based seed stage investor in Climate Tech start-ups in Africa, with 20+ years of operational experience in the agriculture, energy, environment, and investment banking sectors among other industries. The focus of Darena Ventures is to invest in under-served founders like women and local entrepreneurs as well as the untapped countries in Sub-Saharan Africa who are providing solutions for the climate change crisis. We have segmented climate tech into three broad categories which cover more than 50 industries, that is Environment, Clean Energy and Green Infrastructure. We developed a simple impact measurement and reporting framework for our portfolio companies that is aligned to the UN SDGs which we use to meet the impact goals of our LPs.

2. Can you provide a clear definition of what constitutes “climate tech” in today’s rapidly evolving landscape, and how it differs from other sustainability-focused sectors?

Climate tech refers to technologies and innovations that address climate change and reduce its impacts. These innovations can encompass a wide range of sectors and solutions, including renewable energy, electric transportation, sustainable agriculture, carbon capture and storage, and more. Climate tech is primarily focused on developing and deploying cutting-edge technologies to mitigate or adapt to climate change, with a strong emphasis on innovation and scientific advancement.

Sustainable investing, often referred to as ESG (Environmental, Social, and Governance) investing, involves considering environmental, social, and governance factors when making investment decisions. It can encompass a wide range of asset classes, including stocks, bonds, mutual funds, and alternative investments. The primary goal of sustainable investing is to integrate sustainability considerations into investment decisions and encourage responsible corporate behavior.

3. In your experience, what are some of the most prevalent misconceptions surrounding the climate tech sector? How do these misunderstandings impact decision-making within the industry?

Misconceptions and myths surrounding the climate tech sector can negatively impact decision-making within the industry. Some prevalent misconceptions, their potential consequences and the true state of the sector are:

• Misleading information: What comes to mind when most people hear about climate tech is technological climate change mitigation solutions for facilitating the removal of Green House Gas (GHG) from the atmosphere, or reducing the amount of GHG entering the atmosphere, commonly referred to as carbon sequestration. They then conclude that climate tech is over-hyped in Africa because the continent lacks such technological advancements. While these solutions fall all under the climate tech sector, there is more to it. Some adaptation measures are not specifically related to climate change but are essentially sustainable ways to improve the management of resources and communities. According to the HolonIQ there are more than 50 industries that fall under the climate tech sector, including common sectors like Agritech, solar energy and waste management..
• Risk-return trade-off: Some investors mistakenly believe that investments in climate tech necessarily come with lower financial returns. This myth can deter investors from allocating capital to these sectors, despite growing evidence that responsible investments can generate competitive financial returns. In reality, sustainable investments can offer attractive risk-adjusted returns, making it essential for investors to understand the evolving landscape of financial performance in this sector.
• Lack of scalability: Some believe that investments in the climate tech sector are inherently niche and lack scalability. This misconception can discourage larger institutional investors from participating in the sector, potentially slowing down innovation and the deployment of critical technologies. The climate tech sector is solving real problems that the continent is facing such as energy supply and food supply just like how the fintech sector has been successful by solving the problem of the unbanked.

Addressing these misconceptions is vital for the climate tech sector’s growth and the achievement of sustainability goals. Investors, policymakers, and industry stakeholders should engage in education and awareness initiatives to ensure they have accurate information and can make informed choices that align with both environmental and financial objectives.

4. What future developments in the climate tech sector do you hope to see, and how might a better understanding of these concepts contribute to more effective and impactful investments in this field?

As the climate tech sector continues to evolve, several key trends and developments are likely to shape the industry. A better understanding of these concepts can indeed contribute to more effective and impactful investments in the field:

• Technological Advancements and Innovation: Continued innovation in climate tech is expected, with advancements in renewable energy, energy storage, carbon capture, and sustainable agriculture. Understanding emerging technologies in the sector and their potential applications can help investors identify high-impact opportunities.
• Decentralized Energy Systems: The transition toward decentralized and distributed energy systems, including microgrids and renewable energy installations at the community level, is gaining momentum. Investors who grasp the potential of these systems can participate in the transformation of the energy sector.
• Circular Economy Solutions: Climate tech is increasingly focusing on circular economy principles, emphasizing the reduction of waste and the reuse or recycling of materials. Investors who understand circular economy trends can support businesses that prioritize resource efficiency.
• Climate Resilience and Adaptation: Investments in climate resilience and adaptation technologies, such as flood mitigation infrastructure and climate-resilient agriculture, are expected to grow. Recognizing the importance of these solutions can contribute to more resilient and sustainable communities.
• Policy and Regulatory Drivers: Governments in Africa, like the rest of the globe are implementing policies and regulations to combat climate change, including carbon pricing, renewable energy mandates, and emissions reduction targets. A strong understanding of these regulatory frameworks can guide investment decisions.
• Evolving ESG Standards: Environmental, Social, and Governance (ESG) criteria are becoming more standardized and integrated into investment practices. Understanding evolving ESG standards and rating methodologies is critical for making sustainable investment decisions.
• Impact Measurement and Reporting: Improved methods for measuring and reporting the environmental and social impact of investments are emerging. Investors who can accurately assess the impact of their investments can allocate capital more effectively to projects with meaningful outcomes.
• Consumer and Market Demand: Growing consumer and market demand for sustainable products and services is driving investments in climate tech. Understanding consumer preferences and market dynamics can inform investment strategies.
• Climate Data and Analytics: Climate data and analytics are becoming increasingly sophisticated, offering valuable insights into climate-related risks and opportunities. Investors who leverage data-driven insights can make more informed decisions.
• Investor Activism and Engagement: Shareholder activism and engagement are on the rise, with investors using their influence to push for greater sustainability within companies. Understanding how to engage effectively with companies can drive positive change.
• Green Finance and Impact Investing Instruments: The availability of green bonds, sustainability-linked loans, and impact investment funds is growing. Familiarity with these financial instruments can facilitate investments aligned with climate tech goals.

A better understanding of these trends and developments can contribute to more effective and impactful investments by helping investors identify opportunities that align with their goals, navigate regulatory and market dynamics, assess risks and returns accurately, and engage with stakeholders effectively. It can also enable investors to contribute to the ongoing transformation of the climate tech sector, addressing critical environmental challenges while achieving financial objectives.

5. How can investors and stakeholders better educate themselves on the sector in order to make more informed decisions?

Investors and stakeholders can take several steps to better educate themselves about climate tech and, enabling them to make more informed decisions and avoid common pitfalls:

• Stay Informed About the Climate Tech Landscape: Regularly read industry reports, news articles, and research publications related to climate tech. Familiarize themselves with emerging technologies, market trends, and key players in the sector.
• Attend Industry Conferences and Webinars: Participate in climate tech conferences, seminars, and webinars. These events often feature expert speakers who can provide valuable insights into the latest developments and investment opportunities.
• Join Sustainable and Impact Investing Networks: Connect with organizations and networks focused on sustainable and impact investing. These groups often offer resources, webinars, and networking opportunities to help investors deepen their knowledge.
• Engage with ESG and Sustainability Ratings Agencies: Learn about the methodologies and criteria used by ESG (Environmental, Social, and Governance) and sustainability ratings agencies to assess companies’ sustainability performance. This knowledge can aid in evaluating investment options.
• Seek Guidance from Experts and Advisors: Consult with financial advisors or experts specializing in sustainable and impact investing. They can help tailor investment strategies to align with your specific goals and risk tolerance.
• Diversify Your Portfolio: Diversification is essential in any investment strategy. Consider building a diversified portfolio of climate tech and sustainable investments to spread risk and capture opportunities across different sectors.

By taking these steps and continuously learning about climate tech, investors and stakeholders can make more informed decisions, support environmentally responsible initiatives, and contribute to positive social and environmental outcomes while also achieving their financial goals.