13 / 03 / 23 - 4 minute read
For some, this transition will be a cost that brings down margins and returns. For others, however, this represents a transformational opportunity as the transition will come on the back of new technologies and business models. Venture capital investin
Table of content
Sustainable Future Ventures (SFV) is PATRIZIA's sustainable venture capital strategy focused on precisely this segment - investing in technology solutions that positively impact the built environment. SFV focuses on investing in high-growth companies with commercial revenues and validated product-market fit that are looking to scale. While the fund is independent and focused on generating returns, its strategic relationship with PATRIZIA gives us unique insights and perspective on this opportunity.
One such insight has been the massive challenge around retrofitting our existing stock of buildings in order to achieve a lower carbon footprint. The reality is that retrofitting a building can cost more money than the energy savings can justify or that investors and tenants are prepared to pay. There are some old buildings that we can’t entirely retrofit. Moreover, the carbon emissions associated with new buildings aren’t going anywhere soon. In other words, as things stand, real estate companies will struggle to reach their carbon goals this decade.
At SFV, we found two opportunities to address this problem with transformative technologies:
Heating and cooling are responsible for as many as 5 gigatonnes (Gt) of carbon dioxide equivalent (CO₂e) emissions. As bad as this sounds, the more significant issue is that it is getting worse as rising temperatures, populations, and income levels will lead to many more air conditioners - and another 1 Gt in CO₂e emissions by 2050. Fossil-fuel heating systems continue to be installed faster than heat pumps. This is increasing global heating emissions and expanding the pool of buildings that will eventually need to be retrofitted. A big reason that heating and cooling emissions are trending in the wrong direction is that there is a lack of climate-friendly and easy-to-deploy solutions on the market.
Enter Gradient, which has created a heat pump that is as easy to install as a window air conditioning (AC) unit. The company has taken the two parts of a heat pump — the outdoor condenser and indoor evaporator — and combined them into a single piece of equipment that sits in a window without blocking views. The system removes the need for a professional installer or the cost and hassle of making holes in walls or installing an outdoor condenser. The solution is especially well designed for the multi-family residential space, particularly in older buildings in cities like New York, Seattle or London, which often lack an easy path for retrofitting. This challenge is notably acute for social housing, which often lacks air conditioning but are frequently seeing temperatures in excess of 90°F/32°C. The New York City Housing Authority is keen to address this problem and recently awarded a $24M initial purchase order for Gradient’s units. Several other US cities are watching this deployment closely. SFV invested in Gradient in 2022 to help fund the company as it scales up to meet the demand of what we expect to be a large and fast-growing market.
While real estate companies are focused on removing as much CO2e from their operations as possible, we aren’t likely to achieve a 100% reduction or even the 50% reduction that PATRIZIA targets by 2030 with operational improvements alone. This is particularly true if you include embodied carbon from construction or retrofit processes that require concrete, steel or other building materials. So what are the options for real estate companies that are still keen to achieve their goals? We believe that carbon removal credits are a key piece of the puzzle.
Carbon removal credits are tied to processes that actually pull carbon dioxide from the atmosphere (note this differs from carbon offsets, which are tied to reducing harmful practices like burning fossil fuels or cutting down trees – these reduce CO2 emissions but do not actually remove existing CO2). Microsoft, Alphabet and Swiss Re are among the big-name companies committed to using carbon removal credits. Still, we expect the list to grow quickly, particularly as more and more companies focus on removing carbon as opposed to offsetting carbon. Right now, the price per tonne of removed carbon is $100-150 (with much higher prices for technologies like direct air capture). If carbon removal technologies achieve a removal capacity of 500 megatonnes (Mt) by 2030 that implies a market size of $50-75 billion.
Carbonfuture, based in Freiburg, Germany, is an end-to-end platform for companies who want to participate in removing carbon from the atmosphere – and it is gaining increasing attention from the industry. The company’s platform monitors carbon removal processes, and reports their impact using its own tracking platform with third-party certifications. Carbonfuture’s marketplace solution then allows those companies to sell their offsets to corporate buyers. SFV invested in Carbonfuture in 2022 as it sees its technology as being a key enabler of this massive emerging market.
Under growing regulatory and social pressure, real estate calls for innovations that will make targeting net zero a realistic, financially viable ambition. For investors willing to take a risk and identify transformative technologies, the rewards will be undeniable – for their returns, the built environment and the planet.
Matt is a Partner at SFV. He has over 20 years’ experience as a technology investor, mostly in the San Francisco Bay Area. Matt has spent a number of years on the operations side of technology businesses. Prior to SFV, Matt has held roles as co-founder of Synapse Partners, principal at Trident Capital and a partner at Rich Products Ventures.
Conan is a Partner at SFV. Prior to his role with SFV, Conan was the managing partner at PropTech venture capital firm, M7 Structura. Conan has worked within PropTech for almost a decade, first as COO of real estate data management business, Voyanta, before leading Altus Group’s corporate venture capital activity.