The urgency to address climate change has never been greater. As the world grapples with extreme weather events, rising sea levels, and biodiversity loss, the need for innovative solutions is paramount. Climate tech, encompassing a diverse range of technologies aimed at reducing greenhouse gas emissions and adapting to climate impacts, has emerged as a critical driver of progress in this fight. However, the road to large-scale climate tech adoption is paved with both headwinds and tailwinds, shaping the investment landscape in 2024 and beyond.
According to the 2023 Investment Trends Report by Sightline Climate, the industry sector emerged as a standout performer in 2023, securing a total of $5.3 billion for the year. Its most significant achievement was in Q3, where it reached unprecedented heights, with 48 deals raising $3 billion, constituting 24% of the total climate tech investment for that quarter. Notably, four deals accounted for $2.3 billion of this amount, including the noteworthy $1.6 billion Growth round for H2 Green Steel.
Meanwhile, the transport sector maintained its dominance, reaching a peak of $5.4 billion across 60 deals in Q3 (and totaling $10.7 billion for the year). Seven deals of $100 million or more contributed to a significant percentage of the total investment in 2023, with three particularly notable ones: Northvolt’s $1.2 billion investment (US Li-ion), Redwood’s $1 billion investment (US Battery Recycling), and Verkor’s $900 million investment (EU Li-ion).
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Headwinds: Challenges Shaping the Climate Tech Landscape
- Macroeconomic uncertainty: The global economic slowdown, rising interest rates, and geopolitical tensions cast a shadow on investments across all sectors, including climate tech. Higher borrowing costs can make projects less attractive, leading to delayed or cancelled investments. Opinions on whether investment will decrease further or rebound in 2024 vary, with some optimistic about substantial funding rounds from companies and investors who delayed in 2023, while others are cautious due to challenging public market conditions and a subdued exit market, the Sightline Climate stated.
- Technology maturation and scalability: While many promising climate tech solutions exist, translating them into large-scale deployments remains a challenge. Some technologies require significant infrastructure development, policy support, and cost reductions before reaching commercial viability. For example, carbon capture and storage technologies, despite potential benefits, face hurdles in terms of scalability and long-term storage security.
- Competition from business and obtaining financing: Traditional industries may perceive climate tech as a threat to their established business models, posing a barrier to its widespread adoption. Moreover, competition within the climate tech sector itself can pose challenges for early-stage ventures in securing funding and market share. In some sectors, emissions reduction efforts may require less innovation funding due to the existence of effective technologies. Consequently, PwC concluded, the primary funding requirement for decarbonization in these sectors lies in financing the deployment of existing technologies, such as renewable generation and energy storage, which is typically provided by banks, governments, and other entities rather than venture capital firms and private investors.
- Public perception and social acceptance: Public perception and social acceptance: Building public trust and overcoming social barriers to certain climate tech solutions like nuclear energy or large-scale carbon capture projects remain crucial for their widespread adoption. Effective communication and community engagement are key to addressing concerns and ensuring social license to operate.
Tailwinds: Accelerating Climate Tech’s Growth
Amidst challenges and obstacles, the climate tech industry continues to forge ahead, driven by significant and compelling forces.
- Growing urgency and policy support: The rising cost of inaction due to climate change, coupled with public pressure and ambitious global climate targets, is driving increased government support for clean energy innovation and deployment. The Inflation Reduction Act in the US and the EU Green Deal are examples of policy initiatives fostering investment in climate tech. More countries are expected to take similar action regarding climate tech policy acceleration.
- Technological advancements and cost reductions: Continuous innovation is lowering the cost of many climate tech solutions, making them increasingly competitive with traditional alternatives. IRENA reported that the past year has highlighted the advantages of embracing renewable energy sources, which include enhancing energy security, mitigating the adverse impacts of fossil fuel price fluctuations, and enhancing energy affordability. Renewables have become more competitive compared to fossil fuels, presenting opportunities to lower energy expenses and decrease reliance on imports.
- Private sector investment: Despite the current economic climate, significant private capital continues to flow into climate tech. Venture capital funding for climate tech reached a record in 2022 total funding was $40B and in 2023 the total is $28B, according to Sightline Climate. The International Energy Agency indicates that achieving ambitious emissions targets relies on technologies in the demonstration phase, requiring crucial VC investment for financing and scaling. Expectations suggest that the Climate Tech sector will maintain high activity levels in 2024.
- Emerging markets and new business models: Emerging economies represent a vast potential market for climate tech solutions, particularly those addressing adaptation and resilience needs. Additionally, innovative business models, such as pay-as-you-go financing and carbon offset mechanisms, are unlocking new avenues for project development and financing.
Navigating the Headwinds and Riding the Tailwinds
To succeed in investing in climate solutions, it’s crucial to target solutions with clear pathways to commercialization and scalability. Prioritizing technologies with strong policy support and regulatory alignment can enhance the chances of success. Additionally, investing in ventures with robust business models and innovative approaches to overcome competition is essential.
Engaging with policymakers and communities to advocate for supportive policies and social acceptance can create a conducive environment for investment. Furthermore, diversifying portfolios across different technologies and geographic markets is key to mitigating risk and maximizing impact in the transition to a sustainable future.
Climate tech investments in 2024 and beyond will be shaped by a balancing act between headwinds and tailwinds. While economic turbulence and technology challenges create hurdles, the urgency of climate action, policy support, and technological advancements are powerful tailwinds propelling the sector forward. By understanding the risks and opportunities, investors can play a crucial role in accelerating the development and deployment of climate tech solutions, paving the way for a more sustainable future.
