Are climatech startups looking to solve problems or are they looking for money?

Every year, the leaders of 200 countries gather for a global climate summit, with the goal of coordinating joint measures to combat the ecological crisis. In recent years, many countries have set ambitious targets in order to align with scientists' warnings: they are promising to eliminate their greenhouse gas emissions by the middle of the 21st century in order to limit global warming and prevent the devastating consequences of climate change: heat waves, fires and storms, animal extinction, and the rising sea level.

Over 70 countries, including China, the European Union and the USA, have already joined forces and shortly before the climate conference held in Glasgow in 2021, Israel also surprisingly announced that it would align itself with developed countries in the field. However, some of those statements are accompanied by an asterisk. Senior government officials who participated in the most recent climate conferences explain that most of the countries that set the ambitious goal do not know how to achieve it and assume that 50% of the emissions reduction will rely on technologies that have not yet been invented or are in the early stages of development. "Therefore, we decided to adopt this goal in Israel as well. And like everyone else, we also don't know how to achieve it," said one senior official.

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These statements spurred the private market, sending it into a sort of "arms race" for new climate technologies. Startups in the field have become more and more popular for investment among venture capital funds, and many countries around the world have also increased funding for research and development in the field. However, while the sector is developing, researchers and experts warn: politicians are clinging to hopes for technologies that have not yet been developed, in order to deal with problems for which solutions are already available. By the time new technologies are available, affordable and working well, it may be too late, potentially leading to an ongoing climate disaster.

A study by Prof. Jacob Moscona from Harvard University, published in October of last year in the Quarterly of the Journal of Economics, points to the complexity of the matter, and to the fact that the expectation that new technologies will moderate the economic consequences of climate change are not in line with existing data. In the agricultural sector examined in the study, innovation has offset 20% of the potential losses in the value of agricultural land in the U.S. due to harmful climate trends since 1960, and can offset 13% of the predicted damage by 2100. Even if this is an important achievement - it does not come close to the hopes humanity has placed on the technological front.

According to a study by researchers from the British University of Lancaster published two years ago, over-reliance on promises of new technology to solve climate change is only hindering existing solutions. According to researchers, "For 40 years, climate action has been delayed by technological promises. Contemporary promises are just as dangerous." Their article describes a history of technological promises, which created an expectation of possibilities that would become available in the future, thus enabling a policy of avoidance, reservation and insufficient action in dealing with climate change. The economic price of such a policy could also be heavy: according to a recently published Deloitte report, inaction on climate change could cost the world economy $178 trillion by 2070, about 7.6% of global GDP.

The assumption according to which innovation will solve everything and provide us with a better and more advanced world with a higher standard of living, is encountering a rapidly advancing reality. According to the latest report of the United Nations Intergovernmental Panel of Scientists (IPCC), countless effects of climate change have already become irreversible, due to the damage humanity has caused to Earth's systems. Researchers indicate that if we continue in the same fashion, we will be heading towards a global warming scenario of an additional 3 degrees Celsius from the moment measurements began, well above the 1.5 degree threshold, which upon crossing will significantly increase the probability of extreme, prolonged and more frequent climate events - and a heavy cost in human life.

In order to face the magnitude of the challenge, humanity must cut 45% of its greenhouse gas emissions in the current decade, mainly through a drastic reduction in the use of coal, oil and gas - the main factors contributing to the creation of the climate crisis.

If Bill Gates said that humanity should invest a lot of money in "miracle" technologies, the climate researcher Mark Jacobson from Stanford University claims that solar and wind energy can already provide 100% of the required energy today, and excessive involvement in other technologies such as carbon capture and storage, biofuel, and new nuclear technologies, is a waste of precious time, to the point of being a dangerous distraction. According to Jacobson, 95% of the technologies required for solutions already exist, while the remaining 5% are intended for long-distance planes and ships, for which hydrogen-powered fuel cells are currently being developed.

Beyond that, reports and studies indicate that today investments in the field are not optimally routed to the most important areas for reducing emissions. Instead of routing the investments into existing technologies that have been proven to work, most of the investments are routed to technologies that, in some cases, will make it possible to continue sustaining high-emission industries.

While the high-tech sector is experiencing difficulties, layoffs and a decrease in hiring, climatech investments have remained stable, and have even grown. Venture capital investments in climate technologies increased in 2022 by 89% compared to 2021 according to HolonIQ, with more than $70 billion invested from January to December. According to the consulting firm PwC, climate technology financing will represent more than a quarter of every venture dollar invested in 2022, but not all investments are directed to the channels most required for significant emission reductions. Only about 50% of the investments flow to the sectors that are aiming to solve 85% of the emissions, and a significant part of them are directed at technologies such as capturing emissions from the air, which have yet to prove their feasibility. Technologies to reduce food waste or improve solar energy (which have high and proven potential) remain lacking.

"Growth is not the goal. We need the sector to grow in a healthy way, and that's not what's happening today," says Morielle Lotan, CEO of Mile Ventures, and partner entrepreneur in the Climate 180 initiative. "There are immediate problems for which capital money is suitable with the help of teams that know how to penetrate the market. The problem is that the funds lack experts who can do proper due diligence in this field. In the U.S. and Europe, government programs pour money into the field, and startups are popping up like mushrooms after the rain. But they often direct essential money to ventures that are not always needed, making it harder for really good solutions that have a chance at succeeding to stand out. This is not a game of 'the more solutions the better'. In order for the field to flourish, we need new models that match today's challenges and not just venture capital. For example, investments by large corporations that know how to invest for the long run. If we want quick results, then we will only see more noise and more solutions of the same type that do not bring significant change."

And what is happening in Israel? Investments in 2022 decreased, but the market share in the ecosystem grew. The outgoing government highlighted the climatech sector, and during his tenure as prime minister, Naftali Bennett promised the world that Israel would become a leader in the field and would help the entire world reduce emissions. For now, investors are not flocking to the sector, and no significant international funds are investing in the Israeli market. According to SNC and the SNPI research institute, 2022 was the second best year for Israeli climatech since 2019, with companies raising almost $1.5 billion in 139 rounds, while investments in high-tech as a whole decreased by 27% in 2022 compared to 2021.

The Israel Innovation Authority also invested less in startups in the field over the last two years, both in the number of companies and in the scope of the investment, due to the difficulty of finding sufficiently mature companies in the local arena. Last year, the government decided to invest $860 million (equivalent to NIS 3 billion) in promoting climate innovation until 2026, but did not allocate a single additional dollar to the authority, leaving the actual implementation of the plan to the new government.

The Ministry of Finance explained that the decision whether to implement the plan is now in the hands of the government ministries themselves, according to the priorities in the upcoming budget. Unlike the rest of the world, Israel does not even have a budgeted government plan to accelerate the transition to a zero-carbon economy.

The government program, among other things, depends on the ability to locate mature startups and provide them with an infrastructure for testing and implementing technology. Israel is not a climatech powerhouse, and the field does not have growth infrastructures such as the ones that benefit cyber entrepreneurs. The road to achieving our goals may still be long, and will require expensive investments by the government in R&D.

Dror Bin, CEO of the Innovation Authority, believes that Israel still has a great opportunity to shine globally. According to Bin, "a great many of the solutions will come from electronics and software, and these are areas in which Israel is very strong. If we know how to divert these entrepreneurs and employees to deal with climate problems, then there is an asset here that can be leveraged. In my opinion, we will also see an improvement in the quality of the projects. Seven years ago there was not a single foodtech company in Israel and today the sector is flourishing. We hope this will also happen in climate related projects."

One of the main barriers he identified in Israel is the moment that comes after the investment, during the early stages, which is critical for the development of new ventures. "The main barrier requiring treatment is specialized investors: investing in energy technologies is not like cyber. In cyber, success or failure comes within two or three years. In energy, seven years is the short course. There are 15 years here in which you have to invest money. It's a different model of investment, it’s a marathon, not a sprint."