The world is changing in profound ways. The power to balance sustainability issues predominantly ESG lies with institutional and large investors (pension funds, foundation & endowments) with deep pockets to take long term bets.
While ESG and its practices can’t be stressed enough, this article will zoom into a critical issue, climate change.
Climate tech investments have been tracking at an annual rate of 10% for YTD’23 extending an upward trajectory in venture and private equity investments. And looking beyond startup investments, broader measures of climate related spending looks promising. Climate Action 100+, an alliance of investors managing US$40t+, coordinated by five global investor networks, including the Institutional Investors Group on Climate Change (IIGCC) – is engaging with 100 “focus companies” in the MSCI ACWI global equity indexes with the highest direct and indirect emissions, and an additional 61 firms that present high levels of climate risk or opportunity.
With the UN climate conference held in Dubai making history last month in bringing together about 200 nations with consensus to transition away from coal, oil and natural gas, the spotlight is fixed on UAE as potential key influencer for global climate concerns.
The Conference of the Parties of the United Nations Framework Convention on Climate Change (COP28) President Dr. Sultan Al Jaber expressed “AN AGREEMENT IS ONLY AS GOOD AS ITS IMPLEMENTATION. THIS HISTORIC CONSENSUS IS ONLY THE BEGINNING OF THE ROAD.” And rightly Dubai is taking necessary steps to move forward. The UAE aims towards “Zero Plastic” by 2026, with a 100% ban on single use plastic from 2024. UAE’s Green Agenda -2030 is undertaking several initiatives to achieve a green economy. Some of them are: aim to achieve zero flaring of oil and gas, green industries labelling program, implementing CCS technologies and achieving sustainability in everyday life to encourage industrial facilities to apply best environment practices for cleaner and healthier habitat.
In the more nascent MENA and Turkey market, climate tech startups attracted $650mn between 2018 and 2022. However, with growing climate change awareness especially post COP28, various VCs envision increased growth and investments in the region over next few years.
Nuwa Capital adds momentum to investments in climate tech space for early and growth stage in MENA region. Another renowned investor, Allianz Global Investors is focused on sustainable transactions is calling on investee companies to disclose information about their approach to climate change using the framework proposed by the Task Force on Climate-related Financial Disclosures (TCFD). The region marking the onset of robust climate tech ecosystem with EV and green infra emerging winners in this space.
- U-Drive, a car sharing service provider and first in Middle East to launch pay per minute for car rental service has ~1000 fleet today, focused on urban mobility. It addresses primary value vectors (a) Utility (b) Affordability (c) Quality (d) Serviceability while reciprocating transformative shifts to green energy in UAE by adding EV fleet. (aim to increase EV fleet size in coming years)
- NWTN, EV manufacturer and green energy provider forecasts uptick in emergence of renewable tech companies and its investments in UAE gaining from the regional energy landscape supporting abundant solar, wind and hydroelectric projects.
In addition, MNCs and conglomerates have also joined hands in taking environmental initiatives. IBM’s Sustainability Accelerator is developing an application to forecast water access in the MENA region. The financial sector is also proactive in taking initiatives one being Visa’s collaboration with Ecolytiq (startup providing sustainable banking solutions) to launch “Eco Benefits” partnering with Mashreq Bank in Qatar and UAE tracking carbon footprint per transaction. The breakthroughs are not restricted to a few sectors but extend to industrial, food & agriculture and hard infrastructure.
On a broad level inventors, investors and consumers need to align for accelerating the green energy initiatives. Though investments in climate tech see an uptick, overall investment growth is muted. With investors being crucial for sustainability/climate tech developments one needs to understand what drives their interest in greentech/climatech investments.
On speaking with VC friends, we felt mutual interest in companies that demonstrate a clear link between ESG efforts and financial performance within a reasonable time horizon. The major discomfort for investors is when non-financial indicators do not translate to financial metrics for a more value case approach.
Investors need reassurance that companies understand what it means to leverage ESG to drive hard business results. A real-life example, also a leader in innovative technology is Microsoft reducing carbon footprint and increased energy efficiency. The company has reported a $10bn increase in sales with ESG investments.
To put it in summary, while ESG and climate/green energy cannot be mistaken for a mere policy statement. Prudent investments and sustainability are not discordant but compatible. CIOs and/or Managers should do their part of adding more context to the intrinsic investors primarily focused on long term value creation, required to be highlighted in ESG framework/ metrics.
The distinguished investors reveal how understanding industry and ESG priority in the sector is crucial for the businesses. For companies in the technology, pharmaceuticals; and travel, logistics, and infrastructure sectors, investors consider social initiatives to be the most important. And for those in the financial and insurance industries, investors rank governance concerns the highest.
As for listed companies, stocks with ESG metrics perform as well as regular stocks, no tradeoff as per MSCI. In some cases, outperformance by ESG stocks. By investing in ESG we are doing two things – short term returns not compromised and insurance to reduce risk to our planet & economy.
Zooming out, Climate/ Environment and ESG is linked to equity story and differentiates from peers based on value impact indicators as management view on evolving market, company’s ESG strategy linked to financial performance, linked equity story incorporating downside protection and upside maximization.
At Dubai Cultiv8 we continue to actively work in the Greentech/ Climate tech sector and have investments in U Drive, Acacus and growing. We strive to be independent and innovative thinkers and love partnering with entrepreneurs who are as well.