What is the decarbonization tech stack?

A recent blog post by Emerald investment manager Madjiguène Ndiaye addressed the prospect of another winter setting in across the climate-tech investment landscape. It asked whether the correction in valuations and drops in funding rounds portend huge losses akin to the bust of 2011–12. The answer was a resounding “no”, for reasons relating to sector dynamics, business models and policy support. 

Specifically, the post compared the relatively narrow focus of the 1.0 boom to the much broader set of opportunities investors currently see in climate-positive technologies. From agriculture to materials to operational efficiency to carbon capture and storage (CCS), the contribution of virtually every sector to winning the climate battle is becoming clearer. 

This, however, raises a question: how do we categorize and make sense of this diverse collection of technologies? If we think of climate-tech as a stack, akin to other forms of enterprise technology, what exactly comprises that stack? 

Software vs. hardware 

Emerald typically looks at different layers of this stack along two different axes, with substantial overlap. The first—software vs. hardware—is a common feature of assessments of mainstream technology markets. Software firms have traditionally attracted venture capital (VC) due to their low overhead costs and potential to scale rapidly. When it comes to climate-tech, software is a vital top layer of the stack, with its potential to optimize and accelerate existing decarbonization processes and—in the age of artificial intelligence—potentially discover entirely new pathways. 

Still, climate change is fundamentally a matter of physics and chemistry, meaning that the most impactful technologies will be in hardware. This is where innovations like new battery chemistries, engines for electric vehicles and form factors for renewable energy technologies will be crucial. One of Emerald’s key strengths lies in its focus on hard science—in funding companies working to solve thorny questions in materials, thermodynamics and more. The deep layer of the climate-tech stack working on these problems is thus a perfect fit for our expertise. 

Marginal vs. deep 

The second axis of analysis looks at what kind of decarbonization a climate-tech company is engaged in. The two poles of this spectrum could best be called “deep” and “marginal”. In the latter, small, technologically-driven tweaks to everyday processes result in greater efficiency, smoother operations or other benefits. At an individual unit level, these benefits only result in marginal emissions reductions, but added up over millions of units could produce big savings. 

Our portfolio company eologix is a good example: it makes sensors that help detect wear and tear on wind turbine blades. Each sensor provides only a tiny snapshot of blade condition, but add them together and they can make a big difference. As anyone working in the energy transition knows, the better wind turbines run, the more emissions reductions they can lead to in the long run. 

On the other side of the ledger is deep decarbonization. Companies in this camp are looking for novel solutions to reduce emissions from deep within industrial supply chains, usually via significant paradigm shifts. They are usually either working on a relatively untested innovation or adapting established technologies to still-nascent sectors. We are looking into companies that have invented new ways to identify underground sites suitable for CCS. As more industrial companies employ CCS to deal with their hardest-to-abate emissions, such start-ups have ample opportunity to cater to this b burgeoning market. 

A constellation of categories 

Of course, not every company working on climate fits neatly into these categories. But these definitions are helpful when thinking about the innovations that Emerald supports. The scale of the climate challenge requires thinking about decarbonization from every possible angle.