Climate tech refers to technology that addresses, measures, and mitigates the challenges of climate change, with solutions to reduce greenhouse gas emissions, enhance carbon sinks, adapt to the impacts of climate change and support the low-carbon economy transition. Examples of climate tech solutions are renewable energy projects, carbon capture and storage technologies, smart grids, electric vehicles, circular economy models and climate analytics. These solutions create global value while addressing one of the most urgent challenges – climate change.
Climate tech is a rapidly growing and evolving sector attracting significant public and private investments. Its share of private market equity and grant investment rose to 11.4% in Q3 2023 and is growing at a 10% annual rate. However, these investments slowed down in 2022, owing to challenging economic conditions, geopolitical turmoil, sinking valuations, inflation and rising interest rates. Venture funding for climate tech start-ups fell to USD52bn in the first three quarters of 2022, 30% less than in 2021. Current investments are disproportionately diverted towards areas that have less carbon impact, lowering the potential for good climate outcomes. As a result, investors are increasingly looking for climate tech solutions that deliver financial returns and positive environmental outcomes. Investors are required to align their funding with climate-focused results and support innovative solutions that accelerate decarbonization and boost climate resilience.
Source: PwC analysis, Pitchbook and Project Drawdown
Source: PwC analysis, Pitchbook and Project Drawdown
Key drivers of climate tech investment:
- Public policy support: Public sector initiatives are becoming more focused on creating and sharing policies that address economic growth and protection, instead of obscure environmental matters. The public is more supportive of environmental issues when they become band-aid solutions for economic problems (e.g., the impact of the Russia-Ukraine war on oil prices, rate of inflation and job opportunities).
- Private sector demand: The private sector remains the demand driver for decarbonization solutions, emphasizing a balance between the advancement of immediate opportunities and future approaches. Information technology firms are aggressively investing in renewable energy projects to sustain their operations. A few technology titans are also encouraging their wider communities to switch to a no-carbon future. Several major technology firms are members of Climate Pledge, which was established by Global Optimism and Amazon 4 years ago and now has nearly 400 signatories, including several other large organizations from across the industries.
- Innovation potential: Innovation potential is a key driver for climate tech, using technology to solve the climate crisis by reducing greenhouse gas emissions, enhancing resilience, and creating value for businesses and society. Technology will play a critical role in bending the decarbonization arc, but innovation capital will be vital in the coming decades. As the time for action becomes shorter, innovation needs to accelerate simultaneously. Innovation potential can help achieve global net-zero goals by 2050; these goals are essential to limit global warming to 1.5 degrees Celsius and avoid the worst impacts of climate change.
- Capital efficiency: Climate tech solutions can reduce emissions, enhance resilience, and create value for businesses and society while requiring less capital than traditional solutions. For example, renewable energy projects can generate income from selling electricity or carbon credits, while carbon capture and storage technologies can reduce costs by capturing and storing excess emissions underground.
Key challenges of climate tech investments: Despite increasing demand and innovation potential, barriers still hinder climate tech investment growth and impact:
- Lack of data availability and quality: Data on emissions sources, sinks, trends, impacts, costs, benefits, risks, etc. are often scarce or inconsistent across countries and sectors, thus limiting investors’ ability to assess opportunities and risks accurately. Climate tech solutions often rely on data to measure, monitor and verify their performance and impact. However, data collection and sharing can be difficult, owing to technical, regulatory, or ethical barriers. For example, some climate tech solutions may face challenges in accessing or using satellite imagery, remote sensing or other data sources that are not readily available or reliable.
- High upfront costs: Many climate technologies require significant upfront capital investments that may not be affordable or accessible for many start-ups or investors. These upfront costs create a risk-reward trade-off that may deter some from entering or scaling up. Climate tech solutions can have high capital requirements to develop, deploy and scale, making them less attractive for investors who are looking for quick returns or low-risk investments.
- Regulatory uncertainty: Climate policies vary widely across regions and countries, creating uncertainty about future regulations and incentives that may affect climate tech markets. This may create challenges for planning long-term strategies or securing financing. Moreover, climate tech solutions may face regulatory uncertainty or barriers that limit their market access or profitability. For example, some climate tech solutions may need to comply with different standards or regulations across countries or regions.
- Early-stage funding and talent shortage: Climate tech solutions often require early-stage funding to validate their ideas, prototype their products and test their markets. However, early-stage funding is scarce and competitive in the private market. Moreover, climate tech solutions may face a talent shortage in areas such as engineering, management, finance, or marketing, making it harder to attract and retain qualified staff who can help them grow and scale.
In summary, climate change is a universal problem that calls for an immediate and coordinated response. Climate technology plays a pivotal role in facilitating the endeavor by offering inventive resolutions that can mitigate carbon emissions, adjust to the consequences of changing climate and rising temperature, and provide social and economic advantages. The expansion and influence of climate tech are, nevertheless, hampered by several obstacles. Investors, legislators, and inventors must work together to encourage the creation and application of climate technology to overcome these obstacles and achieve international decarbonization targets by mid-century for a more affluent and viable future.
