Funding dropped to levels unseen in five years, though grants and incentives in the Inflation Reduction Act are providing some stability for startups.
(Bloomberg) — Climate tech is no longer a bright spot in a challenging investment landscape.
Private market equity and grant funding for climate tech startups globally totaled $65 billion in the 12 months ending Sept. 30, 2023 according to a new report from PricewaterhouseCoopers LLP. That marks a more than 40% decrease compared to the same period a year earlier.
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The reasons for the overall dip in investments are manifold. They include geopolitical turmoil, inflation, rising interest rates and lowered valuations, all issues that affected the tech investment landscape writ large. But the stakes for climate tech investing couldn’t be higher. The world just experienced its most anomalously hot month on record following a record-hot summer.
The market downturn means that climate tech startups need to be much more focused on solving real-world problems and understanding “the buyer persona,” said Amit Chaturvedy, global head and managing partner of SE Ventures, a €1 billion ($1.1 billion) venture capital firm focused on energy management, sustainability and industrial automation.
Yet funding to address the highest-emitting industrial sectors, which include cement and steel manufacturing, continues to be a relatively small share of overall climate tech funding, despite their outsized contribution to overall emissions. Only 14% of recent overall climate tech investment went towards those sectors, which are not only a major source of carbon emissions but emissions that are hard to bring down. Startups working on mobility and energy have received the majority this year.
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One technology is proving resilient to the climate tech slump: carbon capture, utilization and storage (CCUS). The fossil fuel industry in particular has poured money into the technology, which could prolong the use of oil, gas and coal. The PwC report found it’s the only category of technology to have seen an absolute rise in investment over the past two years.
“Though none of this is meant to suggest that CCUS investments are sure to pay off, rising levels of demand and government support for such projects might give greater confidence to prospective investors in start-ups,” report authors wrote.
The findings are largely in line with analyses done by other groups, including BloombergNEF.
Despite the downward trend in climate tech investments, some hope for the sector persists. Climate tech took up a greater share of the overall startup investment market, at more than 11%, and first-time investors continue pouring into the space, both signs that the sector is still drawing new interest. A handful of new funds have popped up in recent months and could help backstop the industry. The Inflation Reduction Act, passed last year in the US, is also providing a boost thanks to an array of grants and incentives for industries ranging from green hydrogen to home electrification.
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