Our Predictions: Climate-tech in 2024

Photo by petr sidorov on Unsplash

We’re a few weeks late to the game, but, as per well-trod tradition, we at Rally Cap Climate wanted to add our esteemed army of venture partners’ 2024 predictions to an admittedly-already bloated panteon. Going beyond “AI will be big,” and “we’re hoping for a rebound,” our global team has tapped their experience and networks to unearth insights aligned with our fund’s adaptation software-centric thesis.

Much like we built and owned the early stage EM fintech infra angle during venture’s late heyday (RIP), we’re actively carving out brand space where we see the greatest fund return upside: we’re looking for founders building the software-centric SaaS and API solutions powering the global climate adaptation economy. You can read more about the thesis, likes and dislikes, and portfolio here.

Without further ado:

Emmanuel Caroit 🇧🇷 (Founding CFO @ MUSA, Climate Investor @ The Lightsmith Group)

In 2024, I remain very bullish on climate adaptation and I will be particularly looking at the following three topics:

• Weather derivatives and Insurance markets: these are the investment contracts whose payoff is determined by weather variables like temperature, precipitation, snowfall or wind. These will ultimately be one of the measures used by financial markets and operators to price climate risks. The higher these derivatives get priced; the more valuable climate adaptation investments should become. Last year, there was already a sharp increase in the use of those financial instruments on the CME.
• Health: health will become an increasingly relevant field within the adaptation thesis. It was almost off the radar of legacy climate investors and today several reports point out to the increasing correlation between climate change and some specific diseases. I am mostly bullish on tech-enabled diagnostic testing for vector-borne diseases and general surveillance systems.
• Water: As drought and flood incidences are expected to keep increasing in a significant portion of the world, water quality and quantity will remain a main climate adaptation challenge. I am bullish on technologies addressing water storage and harvesting as well as wastewater recovery and reuse.

Sebastian Tranæus 🇬🇧 (Senior Software Engineer @ CUR8)

Predictions:

• Adaptation segments with GTMs reliant on trials (e.g. wildfire fighting, floods, etc.) will continue to grow and remain fragmented — expect no big winners in 2024
• Established players in adaptation adjacent fields (e.g. construction) developing or acquiring adaptation-specific solutions (e.g. monitoring physical infrastructure under strain)

Spaces I’m keeping an eye on:

• Peer-to-peer software platforms that facilitate community knowledge sharing. E.g. dedicated forums that support homeowners going through flood buyback programmes
• Startups in managed retreat! Super interesting adaptation space.
• NCA5 publication’s continue to have ripple effects across policy and markets. Blue Carbon got a whole chapter to itself, curious to see if that presages increased hype around the space this year

Martin Srna 🇺🇲 (Commercialization @ Living Carbon)

My predictions for carbon removal/carbon markets:

• Demand for high-quality removals will continue to grow (I expect to see a lot more long-term offtake agreements announced) and so will the need for tech solutions for fast and accurate measurement and verification
• There will be more carbon registries and verification players coming up, but no more carbon marketplaces
• Demand for offsets / low-quality offsets (e.g. avoidance) will continue to shrink Fundraising: Correction happening at A and B rounds (flat or down)
• More acquisitions by oil & gas (see Occidental)
• Outside of CDR and perhaps more focused on emerging markets, I am excited about climate adaptation (both software and hardware) focusing on disaster prediction and prevention, and of course faster deployment of residential and utility-scale battery storage and genetic engineering (climate-resilient crops).

Ayodeji Okunlola 🇳🇬 (Co-founder @ Electrify Capital)

Predictions:

• More productive energy-centered mini-grids in sub-Saharan Africa would be financed through debt and local and diaspora crowdfunded equity. We are seeing some project developers take on this approach in Q1 2024 and more will be ramping up efforts in this direction to raise capital.
• There should also be Increased penetration of distributed solar technologies in emerging markets, especially in Africa and Latin America. The growth will be associated with limited capital for state-financed electrification projects, rising costs of conventional energy, and self-autonomy desired by commercial and industrial sectors to maintain competitiveness. This should, in turn, give rise to fintech-aligned services to ease the middle class’s purchase of solar PV products.
• One should expect that with extreme weather events becoming commonplace, there would be a resurgence of climate insurance-focused startups in North America, especially catastrophe forecasting solutions for insurance & reinsurance industries and asset managers.
• Electric vehicle growth in major cities within emerging markets as cost-parity is realized by EV automakers in China. This would give rise to B2B-centered EV infrastructure startups in Asia, Latin America, and a lower degree in Africa.

Major Contrarian take:

• I expect a ere a gradual slowdown of hydrogen-centred projects and technologies because extensive product-market fit remains elusive for many clean hydrogen applications.

Ricardo J. Pérez 🇪🇨 (Portfolio Account Manager @ BDev Ventures)

I’m bullish on:

• I am optimistic about the prospects of AI-powered grid optimization startups. The emergence of AI has unlocked new possibilities in the electricity sector, specifically in enhancing forecasting accuracy, seamlessly integrating Distributed Energy Resources (DERs) into the grid, reducing charging costs, and alleviating stress on the grid. With over 1 million electric vehicles (EVs) sold in the US last year and an 8% global increase in renewable capacity, the demand for electrification services continues to escalate, projected to double or triple by 2050. As the grid faces additional challenges from more frequent extreme events (2024 is expected to be the hottest year on record), the significance of AI-powered solutions capable of analyzing vast datasets to deliver actionable insights for superior results cannot be overstated.
• Despite receiving considerable media attention, both positive and negative, carbon accounting for less than 5% of total climate tech VC investment in 2023 and I don’t foresee it increasing more than that in 2024. The persistent challenge lies in the quality of carbon credits. The issue of permanence, a key metric for quality assessment, creates a divergence between proponents of longer permanence but less proven and scalable solutions such as DAC and advocates of shorter permanence but more available solutions like planting trees. Given that DAC’s cost remains 6–10x above the desired price of $100/ton (and it’ll probably remain that way for years, according to DAC companies like Climeworks), it seems like most buyers will continue facing limited options to buy high-quality credits for the foreseeable future, hindering the sector’s growth.
• VCs have $33B in dry powder to invest in climate tech companies, according to CTVC. Anticipating the FED cutting interest rates this year, even more capital will be available for climate projects, alleviating some of the challenges faced by wind farms and solar panels in 2023. While I anticipate a year-over-year increase in capital deployment to climate startups, I expect that it will likely remain below the levels observed in 2021.

Anay Shah 🇺🇲 (Ex-d.light, -Remitly & -Tala)

• Not controversially, climate catastrophes will not abate as weather will continue to be a news item in people’s daily lives.
• The most important outcome of 2024 for our climate will be the US elections.
• High quality CDR demand will continue in the voluntary markets. Investment and large purchase agreements will continue to flow towards solutions that appear to have greater conviction around permanence and additionality while more of the world understands we have to play the “both/and” game with mitigation and carbon removal. This means continued investment, development, and newsworthy demonstration projects launched.
• Climate tech investment in Industrials (steel, cement) will grow as the demand from developers remains and real estate markets open up with lowering mortgage rates
• Relatedly, with US real estate market picking up slightly, the interest in residential decarb solutions will continue (e.g. HVAC upgrades and access to rebates/tax credits)
• One year into the IRA, the tax credit transfer market will see more liquidity leading to more interest and more investment into larger project finance because the economics look that much better
• With climactic issues continuing, investment into insurance and climate intelligence products will grow and wild-fire risk management will lead the tech pack
• Food & Ag solution investment will continue to decline as companies working off of 2021 fundraises get cash strapped and struggle to navigate the complexity of the system
• With global EV sales continuing, EV ecosystem solutions gain adoption and relevance for consumers and fleet managers
• Water access and quality will be the tip-of-the-spear for the climate adaptation theme and potentially drive increased evidence of climate migration

Austin Evarts 🇺🇸 (Director of Climatetech @ Urban Future Lab)

• Climate adaptation “goes mainstream” as a climate venture capital theme. Not news to anyone here.
• More focus on how climate solutions impact frontline communities. The Department of Energy (DOE) is requiring Community Benefit Plans for those seeking federal funding through the Bipartisan Infrastructure Law (BIL) and Inflation Reduction Act (IRA). Community Benefit Plans are partly based on Justice 40, which directs 40% of the overall benefits of certain Federal investments to flow to disadvantaged communities