Why investors care about climate tech’s green premium

I’ve been thinking more about the financial piece of climate innovation since my colleague James Temple sat down for a chat with Mike Schroepfer, former CTO of Meta and a current climate tech investor. They talked about Schroepfer’s philanthropic work as well as his climate-tech venture firm, Gigascale Capital. (I’d highly recommend reading the full Q&A here.) 

In their conversation, Schroepfer spoke about investing in companies not solely because of their climate promises, but because they can deliver a cheaper, better product that happens to have benefits for climate action too. 

This all got me thinking about what we can expect from new technologies financially. What do they need to do to compete, and how quickly can they do so? 

Look through the portfolio of a climate-focused venture capital firm or walk around a climate-tech conference, and you’ll be struck by the creativity and straight-up brilliance of some of the proposed technologies.

But in order to survive, they need a lot more than a good idea, as my colleague David Rotman pointed out in a story from December outlining six takeaways from this century’s first boom in climate tech. Countless companies rose to stardom with shiny new ideas starting around 2006 before crashing and failing by 2013.

As David put it, there are lessons in that rise and fall for today’s boom in climate technology: “The brilliance of many new climate technologies is evident, and we desperately need them. But none of that will ensure success. Venture-backed startups will need to survive on the basis of economics and financial advantages, not good intentions.”

Often, companies looking to help address climate change with new products are competing with an established industry. These newcomers must contend with what Bill Gates has called the “green premium.”

The green premium is the cost difference between a cheaper product that increases pollution and a more expensive alternative that offers climate benefits. In order to get people on board with new technologies, we need to close that gap.