Heightened focus on ESG in private markets and recent wave of corporate net zero targets have prompted dramatic increase in global climate tech investment, according to new PwC analysis, but fears remain that key technologies are under-funded
Fourteen per cent of venture capital investment in 2021 went into climate technologies, with just shy of $90bn being pumped into solutions geared at reducing greenhouse gas emissions, according to new analysis from PwC.
The latest edition of the consulting giant’s State of Climate Tech report reveals that global climate technology investment more than tripled in 2021, increasing by 210 per cent to $87.5bn from the $28.4bn invested in 2020.
Mobility and transport technologies received the lion’s share of the climate tech funding boom, with the findings highlighting a soaring appetite among investors for electric vehicle technologies, micro-mobility, and other forms of innovative transit models.
In the year up to 30 June, mobility and transport received two thirds of all climate-focused venture capital funding with $58bn of investment pumped into the sector. Mobility and transport attracted more than eight times more investment than was secured by manufacturing and resources management technologies, which was the next most popular climate tech category identified by the research.
As such, PwC has urged policymakers and financiers to work together to rebalance climate technology investment flows to ensure funding is more evenly spread across a range of critical decarbonisation areas. Currently, investment is focused on solutions that account for just 20 per cent of emissions reduction potential, it warned.
“Innovation is critical to meeting the challenge and the good news is that climate tech investment is up significantly across the board,” said Emma Cox, global climate leader at PwC. “However, our research has found there is potential to better channel and incentivise investment in technology areas that have the greatest future emissions reduction potential.”
The report notes that solutions designed to deliver solar and wind power, reduce food waste and accelerate supply and demand for green hydrogen, and low carbon proteins received just a quarter of climate tech investment between 2013 and the first half of 2021. Yet these technology areas are estimated to be responsible for 80 per cent of future emissions reduction potential, it said.
Cox said the relatively low levels of funding for certain key decarbonisation areas raised significant questions that needed attention. “Are investors missing a value opportunity or is there an incentive problem that needs the attention of policymakers?” she asked.
PwC has noted that some $60bn was raised for climate technologies in the first six months of 2021 alone as investment rebounded following the pandemic-induced lull experienced during 2020. The bounce back was also driven by a heightened focus on environmental, social, and governance funds in private markets, emerging regulations and standards, and the wave of net zero targets that has recently swept the private sector, it said.
The report notes the average climate tech deal size nearly quadrupled in the first half of 2021, increasing to roughly $96m from $27m a year earlier. It also noted that roughly 1,600 investors were active in the space during that period, up from 900 a year earlier.
Elsewhere, the report notes that despite overall growth, the number of early VC, seed, and Series A investments in climate tech has remained “largely stagnant” since 2018. While this is due in part to the growing maturity of climate tech as an asset class, it also points to the the need for investment to go towards more start-ups, PwC said.
“Technology is not the panacea, but climate tech’s rapid growth is a critical mechanism to bend the emissions curve down and get us on track to meet the 1.5C goal.,” said Leo Johnson, disruption lead at PwC UK. “Investment is needed across all challenge areas, but targeting funding to nascent technology areas can drive the breakthrough innovations that are needed for accelerated decarbonisation. The challenge is implementation and speed and scale, and it will take engagement and action from policymakers as well as investors to deliver the potential of these climate tech breakthroughs.”
The surge in VC investment in climate technologies is hugely encouraging, with the rapid uptick in overall investment and increase in average deal size suggesting many key clean tech firms are now moving rapidly from the start-up to scale-up stage. But PwC’s report also highlights how many of the problems that have dogged the green VC market for the past decade persist. Early stage companies with exciting clean technologies continue to find it too hard to access investment and bridge the ‘valley of death’ as they work to reach commercialisation.
Meanwhile, the entire VC market remains tilted in favour of the most glamorous and exciting consumer-facing technologies and is routinely guilty of ignoring less visible infrastructure technologies that can actually deliver the deepest emissions reductions and often the most predictable returns. Policymakers and investors alike should reflect of PwC’s latest report and ask if they are really maximising the climate technology opportunity?