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Asset class / Equity

Solving deforestation: VCs are starting to take SDG 15 seriously

Small steps maybe, but early-stage investment into tech companies linked to SDG 15 – Life on Land – is shooting up. Good news for institutional investors complaining about the lack of infrastructure to support investment policies around biodiversity.

Deforestation
Venture capitalist investors are finally getting to grips with SDG 15: Life on Land. (Photo by Chayakorn Buntharaksa via Shutterstock)
  • SDG 15 is one of the least-targeted by institutional investors, who cite a lack of data as the primary reason for their inability to mitigate biodiversity loss.
  • However, Capital Monitor analysis shows that venture capital investments in start-ups tackling SDG 15 are growing at a rate that’s faster than other SDGs.
  • From 2018 to 2020, capital injected into companies tied to SDG 15 increased by 275%, albeit from a low base.

The cost of biodiversity loss to our livelihoods is well-known. Putting a price on biodiversity itself is far more challenging. While investors are increasingly aware of the importance of mitigating biodiversity loss – targeting– to avoid environmental destruction, progress is slow. Multiple studies reveal that, compared to climate change, for example, investors are failing to deal with biodiversity.

A lack of action with regards to biodiversity loss, or Sustainable Development Goal (SDG) 15: Life on Land, makes more sense when considering how difficult it is to measure its physical and financial costs. The biggest barrier cited by investors is a lack of data on the topic, according to research conducted by Responsible Investor and Credit Suisse.

Unlike emissions, there is no standardised taxonomy for natural capital, and the question of who owns the forests is unclear, despite the fact that investors are directly linked to land degradation and deforestation through the supply chains of companies that sit within their portfolios.

But what is a financial risk is also an opportunity for start-ups and investors with the innovation and expertise to gather crucial data on biodiversity, and, in particular, forests, which is fast turning into a sector prized by early-stage investors.

SDG 15 start-ups on the rise 

Capital Monitor analysis of Dealroom data from 2018 to 2020 shows venture capital (VC) investment into companies whose objectives match SDG 15 witnessed the largest growth of all the SDGs – from €170m to €638m, a 275% increase. Of the €638m, €374m came from US-based investors and €142m from Europe, with the remainder from Israel, Asia and the Middle East.

Dealroom’s database is updated daily, and when a company is labelled an ‘impact’ start-up that company is assigned one or more UN SDGs, depending on its specific focus. As with other areas of investment, companies linked to SDG 13 – Climate Action – received by far the most funding over the same period, although this can partly be explained by its broadness as a category.

The companies tackling SDG 15 range from those working in conservation or regeneration, to those working with bees or trees. Dealroom maps some of the most popular sectors for SDG 15 along with their total overall funding – this includes reforestation and ecosystem restoration (€78m), forest monitoring with artificial intelligence (€45m), and tree planting for consumers and businesses (€25m).

To provide context, in the period 2018–2020, there were 1,532 funding rounds for start-ups tackling SDG 13, with a total funding of €43bn, whereas for SDG 15 it was around 10% of that figure, with just 151 funding rounds and total funding of €1.4bn.

The average amount of funding per round in this period for companies linked to SDG 13 was around €28m, whereas the average amount of funding per round for SDG 15 was €9m. Within the SDG 15 start-up space in the 2018–2020 period, there were only eight deals where commitments of more than €40m were made, indicating that it is still a very niche sector.

In 2020, notable SDG 15 investments included Terviva, which makes a tree-based feedstock for the biofuel market (it raised $54m of late venture capital); Cervest, which has developed an artificial intelligence (AI) platform that makes climate forecasts ($30m, series A); and weathertech firm Tomorrow.io ($77m, series D).

One of the largest early-stage funding rounds of 2021 was for global forest restoration company Terraformation, which on 6 June closed $30m of investment from nearly 100 angel investors, after raising $5m of seed funding in 2020.

Terraformation is a prime example of Silicon Valley’s foray into the forest economy. The company says it has developed new systems for scaling forest restoration projects around the world with the aim of “reversing climate change” by restoring three billion acres of global native forest ecosystems.

“I think trees suffer from a marketing problem, where it's not viewed as a sexy, cool new technology, just because it's a billion years old… We wanted to bet big on scalable technology, and to us that was trees,” Yee Lee, head of growth at Terraformation, tells Capital Monitor.

Although it’s hard to establish which investors are especially targeting companies linked to SDG 15, historically the top five most committed VC investors into companies tied to life on land are Sequoia Capital, New Enterprise Associates, Accel, Andreessen Horowitz and DST Global.

The vast growth of climate tech

But while venture capital investment in SDG 15 remains low compared with the others, in the start-up space, as with natural capital, growth is everything.

Start-ups targeting the SDGs fall into the broader category of ‘climate tech’, a recent term used to describe companies using technology to mitigate the impacts of climate change. Climate tech ‘unicorns’ – private companies valued at more than $1bn – to emerge in recent years include Beyond Meat, Nest, and even Tesla, the largest ‘climate tech’ company on Dealroom’s database, with a current valuation of around $600bn.

The speed at which climate tech is growing is a potential indicator of how SDG 15-related start-ups could be set to grow. According to PwC’s ‘The State of Climate Tech 2020’ report, a good indicator of just how fast the overall ‘climate tech’ space is growing is to compare it with AI.

The report cites Dealroom’s data to show the differences between AI and climate tech: “In 2013, the early-stage venture funding for climate tech companies was about $418m. However, in 2019, total venture funding increased to $16.1bn, a more than 3,750% increase. This is of the order of three times the growth rate of VC investment into AI, during a period renowned for its uptick in AI investment.”

Polly Bindman

Data Journalist

Polly joins the team as our data journalism lead tasked with making sense of the world via data and infographics.