Cleantech, short for clean technology, includes products, services and processes to minimize environmental impact by enhancing energy efficiency, promoting sustainable resource use and reducing waste. As the need to combat climate change and ecological degradation intensifies, this swiftly advancing sector has captured the interest of investors, policymakers and businesses globally. Investing in cleantech is an ethical and environmental necessity and presents a significant economic opportunity.
The importance of cleantech
The world faces unprecedented environmental challenges, including increased pollution, climate change and depletion of resources. These issues are significant threats to global ecosystems, economies and communities. Cleantech promotes using renewable energy sources, improving energy efficiency and reducing waste and pollution.
- Renewable energy: Cleantech comprises renewable sources such as solar, wind, hydro and geothermal power. These are sustainable resources and have a lower environmental impact than fossil fuels, a major cause of greenhouse gas emissions and climate change.
- Energy efficiency: Technological innovations in energy efficiency such as electric vehicles and smart grids have reduced the energy needed to power houses, businesses and transport systems. This has reduced greenhouse gas emissions and energy costs for consumers and businesses.
- Waste reduction: Cleantech aims to reduce waste through recycling, waste-to-energy solutions and sustainable production techniques. By cutting down on waste, organizations reduce damage to the ecosystem and expenses on waste disposal.
Investment in cleantech
This has grown exponentially in recent years, driven by supportive policies, technological innovation and rising concerns over environmental degradation. Global investment in clean energy grew 17% to $1.77 trillion in 2023, a record level of annual investment, according to Bloomberg NEF. This indicates a shift in perspective relating to the need to transition to a low-carbon economy – from being a painful necessity to save the environment to one with interesting opportunities for making money.
- Venture capital (VC) and private equity (PE): VC and PE firms are some of the biggest drivers of cleantech investment. Such investors are drawn to the outsized returns generated by innovative startups developing cutting-edge technologies. For example, companies in the electric-vehicle sector, such as Tesla, Rivian and Lucid Motors, have accessed substantial funding from VC and PE firms.
- Public markets: Public markets have also seen a surge in cleantech-related initial public offerings (IPOs) and special-purpose acquisition companies (SPACs). Companies such as NextEra Energy and Sunrun have gained prominence in public markets, benefiting from investor interest in renewable energy and energy storage technologies.
- Institutional investors: Institutional investors, such as pension funds, sovereign wealth funds and insurance companies, are moving more and more capital towards cleantech, driven by growth in the long-range sector but also by the desire to hold portfolios in line with environmental, social and governance criteria.
- Government support: Government policies and incentives are key drivers of investment in cleantech. Subsidies, tax credits, grants for projects related to renewable energy and regulations to reduce carbon emissions provide a favorable environment for cleantech investment. The European Union’s Green Deal and the US Inflation Reduction Act are bold policy initiatives taken to accelerate the pace towards a low-carbon economy.
Key trends in cleantech investment
Several key trends are shaping the landscape of cleantech investment:
- Decentralization of energy: The rise of decentralized energy systems is eroding the traditional model of centralized production. Distributed generation, epitomized by rooftop solar panels and microgrids, puts consumers in charge of producing and managing their own energy. Investments are being driven to technologies that allow decentralized production and storage of energy, such as batteries and smart-grid solutions.
- Electrification of transport: One of the major trends in cleantech is the move to electric vehicles (EVs). With challenging targets set by different countries for the discontinuation of internal combustion engine cars, EVs and their infrastructure, together with the required next-generation battery technologies, are gaining ground as an investment destination. Proof of concept and profitability of EVs were first demonstrated by companies such as Tesla, attracting more investment in the space.
- Circular economy: A significant amount of work is envisaged, particularly in the area of circular economy, characterized by recycling, reuse and sustainable production. Companies are now using technology that minimizes waste and promotes an extended product life, attracting investment from both private and public sectors.
- Carbon capture and storage (CCS): As the race to a low-carbon future trickles down to every corner of the world, technological advancements in CCS continue in earnest. These technologies capture carbon dioxide emissions from industrial processes and can have the components stored underground or used in other applications. Investment in such technology is rising as governments and companies adopt measures to meet net-zero targets.
Challenges facing cleantech investment
Despite the positive outlook, the cleantech sector faces several challenges that could impact investment:
- Technological risk: While many clean technologies are in the early stages, there is concern surrounding their potential efficiency and scalability in the long run. Investors should focus on technological risks with respect to early-stage startups.
- Market uncertainty: Government policies, regulatory changes and energy prices impact cleantech markets and, in turn, returns on cleantech investment.
- Capital intensity: Most cleantech solutions require considerable investment to develop and increase scale. This could be problematic for startups or indigenously owned small companies that have difficulty raising such capital.
- Competition: The rise of the cleantech sector has been explosive, increasing competition. This could spur innovation but also squeeze margins and profitability in crowded markets such as solar energy or EVs.
Cleantech is one of the most significant channels for attaining a sustainable future, presenting solutions to many of the world’s most serious and pressing environmental challenges. It has realized substantial growth in investment recently, driven by technological progress, policy support and general awareness of the need for sustainability. While near-term challenges exist, on balance, the long-term outlook for cleantech investments appears to be overwhelmingly positive. Cleantech is likely to play an ever more central role in reshaping the future of our planet and the global economy, with increased prioritization of environmental stewardship and economic resilience. Therefore, investors who understand these trends and act on them would help achieve a far more sustainable world, with substantial financial returns.
