Decoding The Investment Opportunity In Climate Tech Sector

Despite global headwinds, a record $100 Bn was invested in climate tech companies globally in 2021, with over $50 Bn invested in the first three quarters of 2022.

Climate tech companies have attracted a steady flow of capital in the past decade, but perhaps not commensurate with the impending existential threat from climate change. The investment interest has felt different and tangible in the last five years or so, as if it is going through its own renaissance period, similar to ecommerce in the mid-2000s or fintech in the early 2010s. 

Climate technology investments have matured in developed countries while maturing rapidly in developing markets. By 2021, deals worth more than $250 Mn would account for more than half of total investment in the sector, up from around 10% in 2017. 

Mid-sized growth deals are expected to contribute the majority of capital in the coming years as business models are validated and exit activity picks up in developed markets, with a knock-on effect in developing markets — typically a signal of maturity and continued steady interest in a sector.

We are seeing widespread investment interest in climate technology from all corners of the world and from a diverse set of capital allocators. 

This raises several questions. Why now? What is the scale of investment interest? And which sectors present attractive investment opportunities? 

Climate Tech Gaining Mainstream Acceptance

The climate change threat has gradually moved from an intellectual debate to mainstream acceptance, thanks to the relentless and decades-long effort from activists and organisations across the world. Governments and consumers have been cajoled to act, which means there is an enormous amount of capital being directed towards finding solutions. 

Asset managers and funds are following suit, or perhaps, following the money. Governments, multi-lateral organisations, development finance institutions, pension funds and even ordinary citizens are pushing the climate change agenda with urgency and conscientiousness. Funds need to allocate an increasing amount of their funds to climate tech companies if they want to maintain their capital flow from their aforementioned funders/limited partners. 

However, two of the main drivers are functions of time. In the last 15-20 years, there has been significant technological advancement and learning from experience in climate technology. 

Technology, as it does, has improved exponentially, and we are better placed than ever to build effective solutions to tackle climate change comprehensively. It’s not just technology, it’s the experience that time has delivered. After decades of iterating business models, we are getting better at understanding what is commercially viable and what isn’t. 

A combination of technological advancement and learning has resulted in thousands of climate tech companies that provide effective solutions to climate change and have validated business models with attractive return profiles.

This combination has piqued the interest of sovereign wealth funds and development finance institutions such as Temasek, IFC (World Bank), and FMO seeking to balance impact and returns. Along with oil economy behemoths like Chevron, Aramco, and Engie hedging against their dwindling cash cows, technology behemoths like Amazon, Samsung, and Tencent are looking for their next big play and synergies with their existing tech empires. 

The financial investor universe is split across specialist/impact funds and the leading generalist funds and programs. The former includes funds such as  S2G Ventures, Unreasonable Capital and Demeter which have earned their stripes in the sector and are well-placed to pick winners.

The latter includes names like Y Combinator, DST Global, and Lightspeed, all of which are increasingly announcing their climate tech ambitions in order to leverage their brand, ecosystem, and capital base.

Even the biggest asset managers like Blackrock see climate tech as the opportunity of the century. Larry Fink, Blackrock’s CEO declared “It is my belief that the next 1,000 unicorns — won’t be a search engine, won’t be a media company, they’ll be businesses developing green hydrogen, green agriculture, green steel and green cement.”

Eight Sub-Sectors Of Climate Tech

So, where are the pockets of opportunity, and how do you navigate the ever-expanding universe of climate technology? Climate technology is defined as technologies that are explicitly focused on reducing GHG emissions or mitigating the effects of climate change. 

It can be roughly split into eight sub-sectors with certain overlaps. All of which are directly mitigating or removing emissions, helping us to adapt to the impacts of climate change, or enhancing our understanding of the climate. These eight sectors are:

Mobility & Transport 

It is the biggest sub-sector, having received over 50% of all climate tech funding over the past seven years. It contributes to just over 15% of global emissions, the highest funding-to-emissions ratio across sectors. 

Investing in transport systems, including electric vehicles, charging infrastructure, cleaner hybrid fuels, smart logistics and shared mobility models, represents a core part of neutralising emissions from this sector. 

Production, Transport & Use Of Energy 

This contributes to over 12% of global emissions. While the advent of renewables due to technology advancement and declining costs has significantly contributed to mitigating emissions from this sector, investing in businesses that contribute to the rapid scaling and further adoption of these technologies will have a tangible impact.

We also see value in investing in solutions that help to commercialise fusion power and green hydrogen production. 

Food, Agriculture & Associated Land Use 

This sector contributes to over 20% of global emissions and we are seeing a transformed willingness amongst consumers, food producers and brands to support low-GHG processes.  This includes practices such as smart farming, precision agriculture and urban farming systems which utilise fewer resources (land and water) while maintaining output levels. 

We have also witnessed a rise in plant-based and lab-grown meats that are ambitiously trying to replace animal products. Animal husbandry is a massive contributor to GHG emissions. Solutions extending the shelf life and reducing food waste are other areas to watch out for.

Operations & Construction Of Buildings & Man-Made Surroundings 

This is the built environment, which contributes over 17% of global emissions and has been relatively overlooked in terms of investment, with the lowest funding-to-emissions ratio across sectors. Although the current scope is limited, smart building management, such as sensor-based low-GHG lighting and heating, will go a long way. 

This is in addition to investing in smart solutions that reduce the ‘upfront’ carbon associated with material production and construction processes. 

Industry, Manufacturing & Associated Resource Use 

This is by far the biggest contributor to global emissions, with over 34% of total emissions in 2019. This sector presents a big challenge. 

There is a big need to upend the manufacturing infrastructure and related supply chain to make them more energy efficient and embed environment-friendly products in design/manufacturing. 

This sector requires patient and long-term capital with longer-term payoffs. This includes investing in equipment and hardware that could deliver efficient use of resources, more efficient processes and improved energy efficiency.  

Software-Based & Satellite-Aided Tools 

They often help with carbon accounting and understanding climate risk for private companies and governments to set, monitor and deliver on their net zero commitments. It covers tech companies building solutions in GHG performance management, risk mitigation, and GHG accounting and reporting. 

Fossil Fuels 

Fossil fuels are likely to remain a primary source of energy and a major contributor to global emissions for some time. Investment in technology solutions which help effectively capture, remove, store or reuse GHG from fossil fuels is going to have a great impact [on delivering the 1.5-degree target]. 

Companies like Aspen Technology, an industrial software company, have partnered with oil giants such as Aramco to help them optimise energy usage and model carbon capture, a good overlapping example for this sector and carbon accounting. 

Circular Economy

Applicable across other sectors, it represents a different way of thinking about business models or product design that allows materials to stay in the system longer, the opposite of the linear economy we have built in the last century. 

It covers companies that enable sharing, leasing, reusing, repairing and refurbishing of existing materials and products to minimise the loss of value of products, components and materials. Some examples are companies like Wardrobe (sharing), Close the Loop (reusing) and HylaMobile (refurbishing). 

We see, over time, as technologies continue to develop and business models continue to iterate for the better, the investment will be further aligned to carbon impact, improving climate outcomes. Early-stage funding and backing of emerging technologies will play a pivotal role. 

We also see a big picture alignment like never before. The climate tech investment opportunity has unbelievably aligned two typical polarities — what is good for humanity and what makes money. 

With massive amounts of brain power and capital directed towards the sector for decades to come, I am in good company when I say climate tech is really the opportunity of the century.