From adoption to impact: The next wave of the software evolution

To mitigate the ongoing climate change, every sector of the global economy needs to transform and radically decarbonise in just 30 years. The transition to net zero will require the largest reallocation of capital in history as people, businesses, and governments will all need new solutions and products to meet a more sustainable reality. And as it seems like everyone is holding their breath for technology advancements to take us forward, we want to peel the layers of tech in ‘climate tech’.

While we at the most serious levels recognise the developments needed in energy sources, storage, and materials, we also see much untapped potential in scaling immediate actions. Every consumer and business needs to do more: implement new solutions and adapt faster. Serving as the glue between fundamental technology advancements, data and end-users, rooted into our everyday lives – we are more excited than ever about the power of software products and their impact on our society.

In this article, we dig deeper into the climate tech wave, why we believe software will play a crucial role in battling our biggest challenges in the years to come, and how we at GP Bullhound categorise this significant investment opportunity.

Introduction

Hampus Hellermark

hampus.hellermark@gpbullhound.com

Nelly Tranaas

nelly.tranaas@gpbullhound.com

TEAM

FROM ADOPTION TO IMPACT: THE NEXT WAVE OF THE SOFTWARE EVOLUTION

An urgent challenge, a generational opportunity

The global economic model relies heavily on exploiting natural resources and emitting greenhouse gases (GHG) at a rate that our planet simply cannot handle.

To set the course for a more sustainable trajectory, the world’s collective climate goal has long been to limit the ongoing warming of the planet to 1.5°C. In March 2023, a new Intergovernmental Panel on Climate Change (IPCC) report stated that we are far behind in achieving this goal and are heading towards a 3.2°C warmer climate by 2100.

The results are projected to be devastating. The rise in sea level of at least 50cm will impact all coastal cities and extreme heat waves, flooding, and disrupted sea and planet fauna will impact the wildlife and lives of billions of people. As the world's population and middle class are growing at a rapid pace, our time is running shorter while the challenges grow bigger.

We still have time to change course. The actual outcome itself is not binary. If we upscale our efforts for a deep and rapid reduction in emissions, we still have a chance to avoid the more dire impacts of climate change. Although a warmer climate will be inevitable, today we should be doing much more to reach net zero by 2050.

This transformative shift will require new products and solutions, both to deploy new processes and to tackle the projected changes. These solutions will come from technology, representing an ocean of opportunities for the companies opting to develop these. The inevitable transformation in front of us is also highlighted by the demand push from stakeholders and the need for funding.

Because of our cumulative emissions, the world is 1.1°C warmer today than in the pre-industrial era

Today's global greenhouse gas emissions are tied to every aspect of our lives

Global per capita greenhouse gas emissions
by sector, 2019-2021

Definition

Net zero refers to a state in which the greenhouse gases going into the atmosphere are balanced by removal out of the atmosphere.

To reach net zero by 2050, global net human-caused emissions of CO2 need to fall by about 43% from 2019 levels by 2030, according to the IPCC. To cut almost half of our CO2 emissions, every sector of the global economy needs to transform and radically decarbonise in just over two business cycles.

global surface temperature

Sources: GP Bullhound Insights and Intergovernmental Panel on Climate Change (IPCC) report, March 2023

Sources: GP Bullhound Insights and Our World in Data CO2 and greenhouse gas emissions

FROM ADOPTION TO IMPACT: THE NEXT WAVE OF THE SOFTWARE EVOLUTION

We at GP Bullhound know that the demand for change is quickly intensifying. As we need to change almost every aspect of how we live and our day-to-day business to decarbonise, people now expect action from businesses as the new normal. Whatever end goal one may have, saving the planet or not, we will all be part of the transition.

We are witnessing increased attention to both mitigating and tackling climate change from various stakeholders. Green movements appear to have reached critical mass and have succeeded in pressuring governments and businesses to take serious action or at least promise to do so.

Companies: Of all Fortune 500 companies, 63% have set 2050 targets for emissions reductions – up 12p.p. in the last year, 47% have set more ambitious 2030 targets, and 93 companies have committed to net-zero targets, according to Climate Impact Partners.

Consumers: In a Nielsen survey, 73% of consumer respondents stated they would definitely or probably change their consumption habits to reduce their environmental impact.

Institutions and capital: In 2022, the World Bank Group set a record by delivering $31.7bn to help countries address climate change, representing a 19% increase from the previous year.

Legislators: As part of the EU’s goal to achieve net zero by 2050, the European Commission is pushing the new Corporate Sustainability Reporting Directive (CSRD), which is already impacting reporting practices for approximately 50,000 companies in the EU.

Stakeholders are pressuring companies to act, and regulatory and political uncertainty are some of the top climate issues facing businesses

To what extent does your company feel pressure to act on climate change from your stakeholders?

Market forces accelerating momentum toward needed change

Sources: GP Bullhound Insights and Deloitte CxO Sustainability report 2022

FROM ADOPTION TO IMPACT: THE NEXT WAVE OF THE SOFTWARE EVOLUTION

To get up to speed and achieve scale of greener solutions, critical steps towards commercialisation require capital. As we need to rebuild an economy in 30 years that originally took 200 years to build, aiming for net zero globally by 2050 will require the largest reallocation of capital in history.

The price tag? About $1.7tn in investments each year, according to author and venture capitalist John Doerr’s Speed & Scale initiative. While much is dependent on government budgets, private capital is also playing a crucial role to reach these capital allocation goals. VC and PE investments in climate tech ventures have increased sharply over the past five years, but capital allocation needs to rise significantly in the coming years.

The financial sector plays a pivotal part in steering investment flows towards a more sustainable economy, and with multiple studies establishing a positive link between ESG considerations and financial performance, embracing sustainability is not only a wise choice but also a lucrative one.

Reaching net zero globally to require c.$1.7tn in investments per year for 20+ years

Global climate tech VC/PE funding ($bn)

Source: Data from HolonIQ (2. Jan 2023), triangulated from Speed & Scale's goal of US VC to reach net zero at $50bn and HolonIQ's US proportion of global VC climate capital at ~40%

From adoption to impact: The next wave of the software evolution

Already leading the way for transformative change in the global economy, new technologies are the most critical part of the world’s decarbonisation toolbox. Climate technology refers to a wide range of products, services, and processes that are designed to reduce greenhouse gas emissions and mitigate the impacts of climate change. The fact that almost all our systems are built upon GHG-emitting processes makes the scope of climate tech tremendous.

Climate tech reducing GHG emissions and resource exploitation

However, climate tech should not be seen as a homogenous sector. From its broad coverage of our daily lives and processes, the term also gathers very different business models. We have chosen to notate them as "layers" that are highly intertwined, although not 1:1 dependent on each other.

From our expertise in software products and the belief that they are – and will be – the game-changers of our society, we are excited about the potential that lies in software that changes our operations and behaviours and enables the transition to a more sustainable world. There is significant impact potential in bringing innovative, more sustainable methods to a more commercial and wider scale.

By displaying data to the world about environmental footprints, insights and tracking improvements, software solutions will be powerful tools to change our processes and behaviour. “You can’t manage what you don’t measure” is still a great mantra and has been proven that the use of digital solutions for emission measurement improves reduction.

Climate or clean tech?

The clean tech bubble refers to a surge in renewable energy investments in the early 2000s. Investments were in the R&D phase and the technology was not cost-competitive with fossil fuels.

Climate tech goes far beyond ‘Clean tech 2.0’ as major evolutions in technology have changed how we live today today. Renewable energy sources are cost-competitive and market forces for climate change are much stronger, posing a more structural shift. In addition, the adoption of digital solutions and software tools enables transformative use cases and scalability.

Example: Solar energy cost c.$4/W in 2006 versus c.$0.25/W in 2021

Organisations that have automated digital solutions for emission measurement

Climate technology layers

Source: Co2 AI by BCG Carbon Emission Survey 2022

According to a McKinsey analysis on the net-zero pathway for Europe, 40% of the necessary emission abatement could come from technologies that are still in R&D or not mature. The remaining 60% could be achieved by scaling and widely deploying already proven technologies.

2.2x

More likely to measure emissions comprehensively

1.9x

More likely to reduce emissions in line with their ambitions

FROM ADOPTION TO IMPACT: THE NEXT WAVE OF THE SOFTWARE EVOLUTION

Software as a critical enabler to reach net zero future

Software has reached a point where its influence can be more impactful and will accelerate the decarbonisation of the world.

Why now?

Firstly, there has never been a better time to achieve impact with data, according to McKinsey Digital. Not only is there more data available, but the tools and technologies to turn it into insights and action, such as the recent advancement in AI development, have become game-changing.

Secondly, underpinning this progress has been a steady improvement in computational power, memory storage, and strong price decreases for all relevant parts. After spending the past 50 years building its foundation, software is now at a point where we can expect to see an increased impact on the overall society. The global reach and opportunities in battling our climate crisis are greater than ever.

Software is more efficient and accessible, and has never been more powerful.

Computing efficiency 1971-2015

Now is the perfect time to see the real impact of software

Sources: GP Bullhound and Our World in Data Technological Change

Computer power efficiency is at its best yet, allowing us to use software on increasingly smaller and portable devices

The hardware required for software has become so inexpensive that it can be integrated into any other technology imaginable

Together, these developments have made software so capable and accessible that almost every person owns a device used for running software globally

historical cost of computer memory and storage

Sources: GP Bullhound and Our World in Data Technological Change

share of US households using specific technologies 1992-2019

FROM ADOPTION TO IMPACT: THE NEXT WAVE OF THE SOFTWARE EVOLUTION

Foundation for impactful insights, decisions, actions, and results

Below we illustrate the power that data-centred, accessible, and automated software products can bring through the reinforcement loop.

Gather data: The technological advancements to gather, structure and combine different sources of data are still under rapid development. For the climate question, we need to combine and process data from hardware such as sensors in machines and electricity systems, research and science, user data, and online and external databases. Modern software and AI can compile and process data needed to address the complexity of the climate problem.

Set to life through a user-friendly product: Through an intuitive interface and compelling product experience, software products can serve as windows to understanding our ecosystem and engaging in desired actions. User-friendly software can accelerate the adoption and right usage of critical innovations. For example, visual content can make it easier to understand and engage in a new process for both consumers and businesses.

Present insights & analytics: To extract real value from data, we need to give it a voice. By using advanced analytical and processing capabilities of AI and machine learning algorithms, we can identify patterns and predict developments. From a climate perspective, this is valuable in almost every application and will be crucial to educating and improving our understanding of the Earth’s climate, as well as how current systems can be optimised to help mitigate and adapt to the impacts of climate change.

Improve decision-making: There is a valuable basis to identify the most effective strategies for mitigating climate footprints and/or maximising positive effects. AI can propose strategies and optimise decision-making, but this step is also where real-world perspectives can be enhanced by software products’ output to make the best decisions – with multiple stakeholders in mind.

Scale action: Scale is needed to move the needle in terms of wider adoption of climate actions and also through automation of impactful efforts. The use of machine learning algorithms allows automated decisions which would be labour-intensive if done case-by-case. In turn, the nature of software makes efforts less scarce and eventually cost-competitive. As an example, using AI to continuously optimise energy use in buildings or enable carbon accounting for companies without the capacity to do the required work manually.

market examples

Carbon accounting software companies such as Sweep, Watershed, Dcycle, and Normative gather data on a company's energy consumption and greenhouse gas emissions to calculate the company's carbon footprint, generate compliant reports, automatically track progress, and identify areas where further reductions can be made. This process is for many companies now only becoming possible through the use of software, enabling a wider adoption of emission measurement and reduction.

software impact flywheel, a reinforcement loop

Precision agriculture companies such as Cropin, Instacrops, and Ignitia combine AI and IoT with sensors on farming equipment to gather data on soil moisture, temperature, and crop health. The software integrates different sources of data using AI and can then identify patterns and optimise crop yields while using less water and fertilisers. The end-user platform gives actionable insights and recommendations for farmers.

Power utility companies can use software systems such as Oktogrid, Skyfri, and Arcadia to adapt to new electrification needs. By using machine learning algorithms to identify patterns, and anomalies in the data, and AI to manage distribution, enterprise software empowers energy companies with accurate, detailed data, allowing its operators to better understand and therefore improve the efficiency and reliability of power distribution.

FROM ADOPTION TO IMPACT: THE NEXT WAVE OF THE SOFTWARE EVOLUTION

Only first inning of adoption – CRM software comparison

Just as natural as managing your customer relations, we believe that in a few years ensuring sustainable processes and monitoring your climate footprint will be the norm. In this section, we illustrate the opportunity for carbon accounting software and electric and hybrid car sales compared to the CRM software adoption curve.

Today, only one-fifth of companies worldwide are taking decisive steps toward sustainability, according to the World Economic Forum. As previously outlined, all signs – regulatory forces, customer demands, and a planet in danger – indicate that this will not be the case in a few years.

A 2022 global study from Boston Consulting Group (BCG) revealed that as few as 10% of companies fully measure their emission footprint (GHG Protocol Scope 1-3 carbon emissions). This percentage is set to dramatically increase, driven by regulatory shifts and corporate net-zero targets combined, as well as the knowledge that measurement results in significant emission reductions and corresponding annual savings. In addition, the study found that as much as 87% of companies want to ramp up the scope of their reporting, but said they need better digital tools.

Carbon accounting software adoption curve

We expect carbon accounting software, with its cost and time efficiency, to be one of the digital tools that support emission measurement. As the regulatory forces are in place to accelerate the push, adoption has reached an inflexion point. The corporate digital toolbox looks very different today than in 2001, and as the adoption of technology innovation has dramatically increased, we expect it to be much faster than the 20 years in the CRM analogy.

While the list of opportunities we see for different climate tech solutions is endless, we also look at the decarbonisation of the car fleet, where products related to electrification, cleaner energy sources, energy supply, and demand management will support the shift.

CRM software adoption curve

Salesforce introduced its CRM software in 1999 and aimed to revolutionise how companies managed their customer relations in a single solution accessible through the cloud.

It became the fastest-growing software company ever to reach $10bn in revenue.

Today, CRM software is used by the majority of companies, with 85% adoption in Europe and the US, according to TechCrunch.

Salesforce illustrative example

“Measurements are crucial to helping companies work towards their net-zero goals [...] and they need to be supported by digital tools that help them achieve accuracy and comprehensiveness, which helps decision making for reduction.”

-Charlotte Degot, Founder
and Global Leader of
CO2 AI by BCG

Electric & hybrid car sales adoption curve

Sources: GP Bullhound Insights and BCG "Technology is the fast track to net zero", 2022 Note: 1) BCG 2022 CO2 AI by BCG Carbon Emission Survey and 2) Excluding small reporting companies (SRC) defined by less than 100m in revenue

Sources: GP Bullhound Insights and BCG "Why EVs needs to accelerate their market penetration" Note: 1) BCG publications 2021

FROM ADOPTION TO IMPACT: THE NEXT WAVE OF THE SOFTWARE EVOLUTION

How GP Bullhound categorises climate software opportunities

With climate tech needed to transform every industry and aspect of our lives to achieve a sustainable trajectory, we need to structure and specify these areas to advance the discussion. With inspiration from the EU Green Deal and John Doerr’s Speed & Scale initiative, we have structured a climate tech overview to categorise software opportunities.

Although this article is focused on climate specifically, the industry-agnostic (horizontal) tools that aim to increase intelligence about our footprint also include social footprint and governance (S&G).

GP Bullhound has identified a selection of the above areas that are currently in a more mature underlying technology stage. We use this as a starting point for the areas of higher immediate relevance where we focus as software investors in this space.

Fix food systems: Optimise food production and distribution

With the world's population set to reach 9.7 billion by 2050, the agriculture industry is faced with numerous challenges, including the rise of meat-heavy diets, depletion of fertile land, water scarcity, unpredictable weather patterns, and climate change. To ensure a secure food supply for future generations, the industry must embrace the next generation of technology that has now accelerated with AI breakthroughs:

Precision farming & crop monitoring
Food distribution systems
Innovative food production methods

Relevant companies include Agrodit, Improvin', Indigo Agriculture, CarbonCloud, Vultus, ignitia, Blue River Technology, and Source.ag.

ESG intelligence & tools: Insights for sustainable decision-making across industries

We need to familiarise ourselves with the status quo and make data-informed decisions. Who do we cooperate with, invest in, and buy from? How do our efforts compare to others, and what are our current and future climate risks? In addition, we need to finance and insure such initiatives. While the broader market includes solutions ranging from pure consultancy to software, our analysis focuses on the latter, which is software solutions that tackle the knowledge gap with the data we need.

These solutions include:

Supply chain ESG ratings
ESG compliance and reporting
Carbon accounting
Green finance & insurance

Relevant companies include EcoVadis, Novata, Celsia, IntegrityNext, The Upright Project, ESG Book, Doconomy, Clarity AI, Novisto, SESAMm, Prewave, and Milkywire.

Green energy transition: Supporting the green shift

Widespread electrification, decarbonised electric supply, and major advancements in storage are needed to reduce our fossil fuel use. To power our lives with more renewable and green power, we need increasingly smart ways to store and use it through grid technology, demand management, and improved capacity regulations in our energy systems. Sub-categories include:

Production and asset management
Grid management, storage and distributed energy resources optimisation
Smart-home and charging

Relevant companies include WeaveGrid, Pexapark, Skyfri, SparkMeter, Monta, Enode, gridX, and Tibber.

Sustainable buildings: Changing how we design, build and live

Our built environment – how our cities are designed, constructed, and cared for – is at the heart of our urban lifestyle and our climate challenges. There is substantial potential for improvement in reducing emissions when we design new spaces and build our buildings, but also when we use them. We can also make existing buildings more climate-friendly. Software can power these efforts by:

Design and city planning
Construction and project management
Building energy management

Relevant companies include ClimateView, Concular, Cervest, Ento Labs, cove.tool, Spaceti, and Shayp.

Reduce and remove carbon: Facilitating decreased GHG emissions

You can’t manage what you can’t measure. Accounting and reporting on carbon emissions are key to mapping and reducing the pollutive footprint of companies and individuals. When reduction efforts are in place, the market, and options to remove and offset carbon emissions, need to advance for proper scale. Software has evident potential across these categories:

Carbon accounting and corporate management
Carbon removal and offsetting
Carbon market intelligence and tools

Relevant companies: Sweep, Persefoni, Plan A, Carbonfuture, Pachama, Patch, Choose, CarbonCloud, BeZero Carbon, Normative, Climate.co, and Climate Trade.

FROM ADOPTION TO IMPACT: THE NEXT WAVE OF THE SOFTWARE EVOLUTION

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FROM ADOPTION TO IMPACT: THE NEXT WAVE OF THE SOFTWARE EVOLUTION