What does Latin America need to thrive in climate-tech?

Rumbo Ventures’ insights to unleash our region’s potential

By Fernando Lelo de Larrea & Alicia Hernández

Latin America has always astonished us as a region. From its rich history and diverse cultures, to its breathtaking natural wonders, we always feel proud to call ourselves Latin Americans. Perhaps this love for Latin America’s vibrant tapestry is one of the reasons that drives us to continuously try to understand the socio-economic disparities, inequality complexities, and climate change challenges that our region faces. At Rumbo, given the nature of our work, we find ourselves discussing issues at the intersection of climate action, innovation, development and capital on a daily basis.

More often than not, the question at the center of our meetings is: what does Latin America need to thrive in climate-tech? As a team, our everyday involves immersing ourselves in the world of innovative climate-tech ideas. We continuously talk to founders from Latin America or those with solutions tailored to the region. We collaborate closely with cutting-edge startups in our portfolio, grasping their understanding of the unique challenges of our region. We deep-dive in the latest trends, scientific breakthroughs, and top solutions in the global climate-tech landscape. We also reflect on our own direct experience immersed in the emergence of the entrepreneurial ecosystem in Mexico, Colombia, Chile. By doing so, it becomes obvious to us that there are significant gaps between the development of the sector in the subcontinent and other hubs such as Europe and the U.S. But why? This article gathers our observations, but most importantly our call to action to unleash Latin America’s climate-tech potential.

Let’s start with the context of our question. Why is it important for Latin America to develop and implement climate technologies successfully?

First, it is a matter of urgency. While climate change is a global urgent matter, Latin America is highly vulnerable to climate breakdown. Weather extremes are already causing water scarcity and displacements while also affecting the lives of millions of people, and driving the region further into extreme poverty. In 2022 alone, there were 78 reported weather, climate and water-related disaster events that affected 10 million people and caused economic damage of US $9 billion in the region (WMO, 2022).

Second, it is a matter of potential. The region’s diverse ecosystems and natural resources offer unique opportunities for developing climate-resilient technologies and sustainable practices. Latin America houses 25% of the Earth’s forests and arable land, as well as more than 30% of the world’s water resources (The Nature Conservancy, 2018). Our region also hosts more than 40% of the world’s biodiversity, and has six of the natural wealthiest countries: Brazil. Colombia, Ecuador, Mexico, Peru and Venezuela (IADB, 2023). Climate tech solutions that harness and preserve ecosystem services provided by these resources, such as carbon sequestration and water management, can be pivotal to the region’s -and the planet’s- environmental wellbeing.

In addition, Latin America is abundant in renewable energy resources, including solar, wind, hydroelectric, geothermal, and biomass. With more than 319 GW of announced, pre-construction, or under-construction large-scale solar and wind capacity, the region is poised to increase its large-scale wind and solar energy capacity by over 460% by 2030, surpassing the current 69 GW (27.6 GW solar and 41.5 GW wind) in operation. If all these projects were to be operational, this would represent nearly 70% growth above the region’s current total electrical capacity from all sources (457 GW) (Global Energy Monitor, 2023)

It is important to acknowledge that while countries in the region have enhanced their efforts to adapt and mitigate, we require more definitive action and cross-sectorial strategies to deliver the results we need. For the 30 parties to the Paris Agreement in the region, the top priority areas for adaptation are agriculture and food security, water, health, and ecosystems. In terms of reducing greenhouse gas (GHG) emissions, the priorities are energy, transport, and land use, land use change, and forestry (LULUCF). Without concerted climate action on these areas, by 2050, over 17 million people in Latin America and the Caribbean could be forced to move to escape slow onset climate impacts (World Bank, 2021), swelling migration to cities and potentially increasing urban population by up to 10%.

Ok, so we are on the same page: Latin America has both the urgency to mitigate and adapt to climate change and the potential to become a climate-tech leader given its rich natural resource landscape.

Now, what do we actually need for Latin America to thrive in climate-technology?

Strategies across sectors are key. Our assessment is three-fold: we believe that governments, the private sector, and the startups themselves must work together to collectively make the region thrive in climate-tech. Let’s get into that:

1. The role of governments

Provide strong policy support and regulation

Many of the governments in the region have already set ambitious climate goals and targets, aligning with global commitments like the Paris Agreement. However, these commitments should come with policy measures that include incentives such as tax breaks, grants, and favorable tariffs to attract investment into climate-tech ventures. A great example of how policy and regulation can boost climate-tech is the Inflation Reduction Act (IRA) signed into U.S. law in 2022. This law authorizes $369 billion in spending on energy and climate change, providing tax credit provisions for renewable energy manufacturing, infrastructure, carbon capture, home insulation, clean household energy, and commercial clean vehicles, boosting domestic demand for climate-tech products (Endeavor, 2022). Additionally, IRA also sets fees on methane emissions at the industry level, targeting one of the most GHG-heavy sectors (SVB, 2023). Governments across Latin America must make these policies a core element of their public agenda, to signal their commitment, refocus constituents’ priorities and attract investments.

Invest in research and development (R & D)

Investing in research and development is paramount for unlocking innovative climate-tech solutions. Governments (in collaboration with international organizations and the private sector itself) can allocate resources to support local research institutions, startups, and entrepreneurs focusing on climate technologies. By encouraging R&D initiatives, Latin America can cultivate a homegrown ecosystem of climate-tech pioneers. In a study published by Endeavor, founders mentioned that government grants for R&D, in addition to subsidies and tax breaks, were key to providing the capital needed to launch their businesses. In the same report, the example of Chile is highlighted: “if you are building an innovative company in Chile, you can apply for credit lines from CORFO, a government institution that supports innovation and entrepreneurship, or agricultural innovation funds” a founder explained.

Improve the overall business environment, especially investing in human talent development.

Despite the advancements in Latin American markets’ business environment, there remains a need to further tailor corporate laws, infrastructure, human capital, and openness in order to foster startup success and growth. It’s essential to prioritize founder-friendly regulations, including robust intellectual property rights protection, export assistance, and improved access to funding. Additionally, investing in educational programs and vocational training is crucial to develop a skilled workforce capable of driving the integration of climate-tech and thriving in the green economy.

2. The role of investors and the private sector

Foster entrepreneurship and innovation

The private sector has a key role in promoting a culture of entrepreneurship and innovation. It is essential to develop innovation hubs, accelerators, and incubators that specifically focus on climate-related challenges. These initiatives will provide access to capital, mentorship, lab and R&D facilities, technical expertise, access to customers and access to talent. It is not only about applying the same methodologies to a new industry. It is about coordinating academic, industrial, business and technical talent towards a joint objective, standing on the shoulders of those that built the ecosystem, yet cross fertilizing with international alliances, and following the lead of what is being developed abroad.

Increase access to funding and Venture Capital

Latin America is still not up-to-speed in its share for climate tech capital, despite the region’s huge potential: between 2H of 2020 and 1H of 2021, the US, Europe and China received 95.8% of the investment made in Climate tech (Latitud, 2022). Because of this, impact-driven investors and venture capitalists should tap into Latin America to offer the much-needed financial support to emerging climate-tech entrepreneurs. In order to achieve this, there are several challenges that investors should make sure they tackle. First, become familiar with climate-technology, especially niche fields such as ocean agriculture, sustainable chemical separation, and hydrogen fuel (Endeavor, 2022). Second, local investors should actively work together to build trust in the region to attract more funding from investors in the U.S. and Europe, as large funding rounds are usually not available for growth stages. Lastly, regional investors must internalize the fundamental differences that climate tech entails: the deep-tech and experimental nature of many innovations, the B2B ubiquity, and the high capital-intensity of many opportunities. Together, these factors make for a very distinct risk-return profile, and thus for the need for specialization rather than just an addition of a vertical to funds’ strategies.

3. The role of climate-tech startups

Build global networks

One of the main challenges for startups is, of course, access funding. Entrepreneurs should build up their networks at the local and global level. We have seen that for instance, first-time founders often rely more on introductions to investors via support programs or their other early investors. If participating in an accelerator program, founders should prioritize programs and early investors that give them better access to investors around the world, as this will increase their funding opportunities.

Provide more founder-to-founder support

While the tech startup ecosystem in Latin America is flourishing,, the climate-tech sector specifically is still in its early stages of development. Founder-to-founder relationships play a crucial role in helping climate-tech companies scale their operations. As these companies grow and achieve success, they are more likely to reinvest in the entrepreneurial community. Moreover, when founders become angel investors, mentors, or pursue new ventures, their impact on the entrepreneurial ecosystem multiplies. These connections are essential for creating a self-sustaining climate-tech entrepreneurial environment, where future generations of companies can build on the achievements of experienced founders.

Secure the right talent

One of the challenges of the climate-tech sector involves small talent pools, heavy competition and high salary expectations, especially for managers. Founders face the need to hire talent for industries within climate tech that are small and nascent, requiring niche skills that are limited in the job market. In order to secure the right talent, startups must be careful with their hiring process, and understanding that training and flexibility will be important. While experience is important, startups tend to attract younger professionals, for which it is important to pay attention to skills such as technical expertise, problem-solving, adaptability and resilience to change and an uncertain environment.

Let’s wrap it up….

Latin America stands at a pivotal moment in its fight against climate change. By embracing climate-tech as a catalyst for sustainable development, the region can build a greener and resilient future. Through a blend of visionary policy-making, access to capital, and cross-sector collaboration, Latin America has the potential to be at the forefront of climate-tech innovation, unlocking economic and social development. At Rumbo Ventures we are committed to this purpose, and we look forward to contributing towards a thriving climate-tech ecosystem by investing in the best and most scalable solutions, as well as by working along other investors, startups, and local governments to strengthen climate change resilience in our region. Are you a founder with an innovative climate-tech solution for Latin America? Shall we set a new Rumbo together?

Sources

Endeavor Insight. Scaling Climate Tech: A Global Study of Entrepreneurs and Networks. Endeavor Insight, 2022. endeavor, https://endeavor.org/knowledge-center-events/research-report/scaling-climate-tech/. Accessed 24 july 2023.

Global Energy Monitor. Una carrera hacia la cima: América Latina 2023. Global Energy Monitor, 2023. Global Energy Monitor, https://globalenergymonitor.org/wp-content/uploads/2023/03/GEM-LATAM-report-Spanish.pdf. Accessed 28 July 2023.

Latitud. The Latam Tech Report 2022. Latitud, 2022. Latitud, https://www.latitud.com/en/reports/the-latam-tech-report-2022. Accessed 25 July 2023.

Silicon Valley Bank. The Future of Climate Tech 2023: A look at the technologies driving a sustainable future. SVB, 2023. SVB, https://www.svb.com/trends-insights/reports/future-of-climate-tech. Accessed 25 July 2023.

Studer, Isabel. “Latin America’s Natural Resources and Climate Change.” The Nature Conservancy, TNC, 18 August 2019, https://www.nature.org/en-us/what-we-do/our-insights/perspectives/latin-america-natural-resources-climate-change/. Accessed 21 July 2023.

Watson, Gregory, et al. “Nature for Latin America and the Caribbean’s prosperity — Sostenibilidad.” Blogs IADB, Inter American Development Bank, 13 March 2023, https://blogs.iadb.org/sostenibilidad/en/nature-for-latin-america-and-the-caribbeans-prosperity/. Accessed 28 July 2023.

World Bank. A roadmap for climate action in Latin America and the Caribbean 2021–2025. World Bank Group, 2021. World Bank, https://openknowledge.worldbank.org/server/api/core/bitstreams/d3e9d5ba-bdea-543b-8e51-e53f39308a73/content. Accessed 30 July 2023.

World Meteorological Organization (WMO). State of the Climate in Latin America and the Caribbean 2021. Geneva, Switzerland, WMO, 2022. WMO, https://library.wmo.int/index.php?lvl=notice_display&id=22104. Accessed 20 July 2023.

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