Financing Climate Innovation

Humanity is facing its largest problem ever – Climate Change. Yet with great challenges come great opportunities and as discussed in the last newsletter, a critical part of ensuring we stay within the 2°C limits defined as a critical threshold by scientists is driven by finding new ways to produce the goods and services we currently depend upon with minimal to no carbon emissions. By some estimates by 2025, $1.5 trillion to $2 trillion will be invested annually into climate-related startups and companies in a bid to tackle this complex problem across a variety of sectors.

Estimates indicate that decarbonizing the US economy by 2050 will cost around $50 trillion. In many ways now is an unprecedented time to establish and scale up companies that make a dent in the global climate crisis, taking advantage of the ever-growing capital that is becoming available to tackle climate change. 

In the mid to late 2000’s the first wave of climate-related technology investments started (called CleanTech at the time) and many investors were burned by the long maturity cycles of many climate-related technologies and because of lack of demand for these technologies. At that time, the warnings given by scientists were being ignored. During the last few years, many developments have happened that are causing the time to focus on climate technology to be now as pointed out in a recent article by Shira Eting, Principal at Vintage Investment Partners.

Venture capital investors are certainly putting their money on the table, with 968 climate tech venture funding rounds around the world in the first half of 2022, totaling a record $26.8 billion. While global slumps in financial markets in the second half of 2022 may result in lower amounts than in the first half, the year is still expected to reach record heights between $40-50 billion.

The first half of 2022 includes 98 rounds with investments over $100 million, compared to just 61 rounds of that size for the full year of 2021. According to the research data from Holonic, there are now 47 climate tech unicorns. Most of this venture funding is focused on companies in developed countries and not in developing countries, many of whom are facing the effects of climate change at a faster rate. 

According to research, over the last 18 months, over 72 new climate venture funds and six growth funds have been established, raising over $37 billion in funds. Traditional generalist venture funds like Union Square Ventures have launched their dedicated climate funds and even corporate venture funds like Amazon, Microsoft, and Google are putting a strong focus on climate technologies in their investments.

Yet, venture capital isn’t the only type of funding going into climate innovation. Governments are putting ever-increasing funds into research focused on climate change. Again, around 80% of that funding goes to researchers in the UK, United States, and the European Union (EU). 

With the younger generation of investors being more climate-conscious, there is an increased focus among traditional investment funds and private equity funds to put money into climate-related investments. This, combined with increased corporate funding, carbon markets, and innovative insurance products focused on climate adaptation is ensuring an ever-growing source of financing for climate mitigation, adaptation, and innovation.

We must do better at ensuring easier access for aspiring entrepreneurs and researchers to the right funding, regardless of where they come from. We must reward collaborative efforts across countries, regions, and sectors. We must also put an increased focus on the impact of solutions and not just financial returns. In particular, we must leverage the multiplying effects of collective impact

There is now a strong sense of urgency around climate risks and this is creating great opportunities for entrepreneurs and researchers who want to tackle these challenging problems. Successful, repeat founders and engineers are not only taking advantage of this opportunity by moving from general tech to climate at an unprecedented rate, but they also feel obliged to take part in saving the planet from peril.

The next decade will be the defining moment for tackling climate change. It is also the time when many areas of climate technology will need to scale up rapidly. For the investors and entrepreneurs involved in climate technologies, the rewards will therefore not only be financial but also life-changing.