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Investing in the future: The 2022 State of Climate Tech report
- Venture capital investment into climate tech has been relatively stable over the last year.
- Investment and innovation need to be accelerated to meet emissions reduction targets.
- A more efficient flow of investment aligned to climate outcomes could promote stronger progress.
To limit global warming to 1.5 degrees Celsius, the world needs to reach a decarbonisation rate of 15.2 percent. In the last year, it’s declined by just 0.5 percent. As the time for action gets shorter, innovation needs to accelerate. The PwC 2022 State of Climate Tech report examines whether financing of climate tech is up to the challenge. This year’s answer? Yes, and also, no.
Overcoming inertia – The key findings
Despite challenging economic conditions, political instability and market corrections, the climate tech market has been fairly resilient. If any combination of systemic risks might have led investors to withdraw, as they did after the ‘cleantech’ bubble a decade ago, those occurring in 2022 could have done it. Yet investors remain committed to funding environmental, social and governance (ESG) products and are optimistic about the market outlook. Furthermore, climate tech’s share of investment has remained close to its historic highs, despite a slight and possible natural softening, and the rolling 12-month average investment has been mostly stable since the beginning of 2021.
Yet there are reasons for concern. Compared with 2021, the year has seen a drop in overall investment levels. Venture funding for climate tech start-ups fell to US$52 billion in the first three quarters of 2022, 30 percent less than in the same period last year. Seed and Series A funding is down even further, creating a potentially tough market for later-stage investors down the track. And as the report points out, both the volume and number of early stage start-up deals are trending in the wrong direction. In other worrying news, the investment that is happening is disproportionately going to areas that have less carbon impact, lowering the potential for good climate outcomes.
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Private and public sectors are driving demand
A closer look at this year’s report findings suggests that although climate tech investment may have slowed, wider investment into the transition to a net-zero economy indicates rising demand. Public policy is creating an environment suitable for climate tech start-ups as policy makers continue to connect climate security, energy security and economic security. Public sector climate initiatives are increasingly designed and communicated around questions of economic development and preservation rather than arcane environmental concerns. Public support is strong when solving environmental issues becomes a salve for economic woes – such as war-affected energy prices and inflationary and employment pressures.
For its part, the private sector continues to drive demand for net-zero solutions, focussing on balancing short-term opportunities with development of longer term solutions. Global coalitions are publicly strengthening the desire for climate tech, allowing investors to fund the scaling up of emerging start-ups. Likewise, regulatory requirements (along with investor expectations) are driving the need for enterprise software, with specialties such as greenhouse gas (GHG) emission accounting, supply chain traceability and environment, health and safety reporting. Indeed, this year’s report identified nearly 300 deals in the GHG data intelligence space since the start of 2021 and posits that the drop-off in the number and value of deals in Q3 of 2022 could be a response to product launches by major tech players.
An inefficient market causes concern
Two challenges face the effectiveness of meeting climate change and net-zero goals: Early stage funding, and ensuring that technologies are targeting the highest potential for emissions reduction.
An inequality in climate tech deals is becoming evident. Since early 2021, small deals, in both number and total value, have been declining. This is problematic as they are typically associated with the earliest stages of funding, critical to new innovation. At the same time, mid-size deals of between US$5 million and US$1 billion, associated more with later stage funding, have done well both in funding levels and the number of deals occuring.
On the other end of the spectrum, blockbuster deals over US$1 billion, which have been consistent for most of 2018-2021, have declined, and while numbers picked up in Q3 of 2022, their value has dropped sharply. The bottom line is that a top-heavy pipeline could lead to a potential dearth of quality start-ups to move from initial to later stage funding down the road.
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Secondly, climate tech faces a challenge in effectively tackling climate issues. The investment into climate technology is not proportional to the sectors contributing most to GHG emissions. While it has slightly improved since last year, mobility and transport is still receiving almost half of all climate tech investment – despite the fact that it’s only responsible for an estimated 15 percent of global emissions. The other half is distributed across all the remaining sectors, which are responsible for 85 percent of emissions.
From a technological maturity view, taking into consideration the potential future impact of emissions reduction on climate and the economy, the market is simply not yet efficient. A market that can reach goals to mitigate climate disaster needs to balance funding technologies with high potential to lower emissions in the here and now, with important long-term solutions. Reducing carbon emissions today will have a greater impact than reducing it by the same amount in the future. Yet much of the funding is currently going towards technologies that promise benefits at some point in the future, such as into hydrogen-based fuels. Carbon capture technology, on the other hand, could make a great deal of difference already today and yet remains underfunded.
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Towards a greener future
As crunch time gets closer, the world cannot afford the disproportionalities and inefficiencies in the investment of the climate tech market. To meet and exceed emissions targets, changes must be made, whether that is by sectoral-funding or solution priority. While demand has kept current investment levels buoyant, more is needed – in the right places and for the right solutions – in order to effect the changes that society and the global economy desperately need to make.
For further insights into the current climate tech situation globally, download the full 2022 State of Climate Tech Report.
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