The COP28 is expected to facilitate international commitment to a more rapid deployment of renewable energies. The International Energy Agency (IEA) has clearly stated that the world needs to triple the rate of deployment of renewable energy by 2030 – and this will be largely driven by technology.
However, renewable energy is only part of the climate technology equation. Any technology that forms the bases of services and products which enable decarbonisation of the global economy can be considered part of this growing market.
According to the IEA, innovative, large-scale financing mechanisms are required to support clean energy investments. But investment and grants in cleantech startups have fallen just over 40% over the last 12 months, according to PWC. And though addressing the climate crisis through technology investment may have lost out amid shifting governmental priorities in the face of macroeconomic and geopolitical headwinds, most agree that it is a short-term shortfall.
However, Patric Hellermann, General Partner at Foundamental, puts at least some of it down to bad allocation. From 2021 to 2022, too much venture capital was deployed quickly into cleantech startups with unproven technology or cleantech software companies (such as carbon accounting software) that would not move the needle when it comes to the climate crisis, according to Hellermann.
“This isn’t dissimilar to cleantech 1.0 between 2008 to around 2014 when billions of dollars were poured into startups whose founders promised to achieve unreasonable physical and commercial metrics,” adds Hellermann who believes that historical misallocation has set the bar so high that there will likely have been more money raised for carbon accounting software firms than there actually is a market size for.
“We don’t necessarily need COP28 to breathe life back into the industry to kickstart cleantech investing again,” says Hellermann who firmly advocates for venture capitalists with scientific backgrounds, better suited to judging “winning concepts for cleantech on a physical and chemical basis” as he puts it.
Adam Chirkowski, investment director at UK based AlbionVC points out that while climate tech has not been immune to the impacts of the wider economic environment, compared to the rest of the technology market it has, at least, been slightly insulated.
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The number of deals in climate tech have been declining steadily in the last six quarters, with the largest decline in the third quarter of 2023 (-21%), according to Net Zero Insights. At the same time, investment values have increased. After negative growth in Q1 and Q2, climate tech funding increased 53% quarter-on-quarter from $14.9bn in Q2 2023 to $22.8bn in Q3 2023.
It seems that climate technology investing might be having a bit of a moment. Climate technology saw a slew of mega fundraising deals upwards of $1bn within the third quarter of 2023 a time of capital constraint for more generalist funds. In fact, the funding peak of Q3 2023 brought funding levels close to the highs of 2021 and 2022, according to Net Zero Insights.
Furthermore, Chirkowski says the climate tech venture capital market has “significant dry powder to deploy”- albeit at a slower rate than 2021/22 – with investors like himself actively looking to invest in the space.
Anecdotally, although the first half of 2023 was quiet, Chirkowski says that his colleagues and himself have seen an uptick in climate tech funding rounds in the second half of the year, especially moving into Q4. “That looks set to continue into 2024 as companies who have raised internal bridge rounds in 2023 and focused on capital efficiency, are expected to come to market next year,” he adds.
Can the COP28 give cleantech a tangible boost?
Peter Hirsch head of sustainability at European venture firm 2150 sees the COP28 as a “productive place” for the visibility of startups and to build networks on an international scale. “We’re seeing a lot of productive forums open up there bringing the conversation of startups and the need for innovation and support for early stage tech into policymakers priorities,” he says.
For an early-stage investor like Hirsch, the private sector’s increasing role at the summit is both welcome and presents the opportunity for Net Zero aspirations to illicit change on a more practical level.
“But what we’re hoping to see at this COP,” says Hirsch, “is coalition around building, particularly on the private sector side.” While there are positive signals from policy makers, according to Hirsch, ultimately there cannot be any meaningful movement without similar commitments from industry. And these should focus towards energy transition in urban environments in terms of building and industrial activity.
“There are initiatives in cement and steel that have already happened, pre-the COP that are starting to show that there’s going to be that demand there, that ultimately this net zero transition will happen,” says Hirsch. If the COP28 builds on this demand there is quite possibly a shift from something that should happen, to it actually happening, says Hirsch.
Will the COP28 focus enough on the built environment?
Gregory Dewerpe, founder and CIO at Europe’s largest built world VC firm A/O, is positive about the summit’s potential for accelerating climate tech investment in carbon capture, removal and storage technologies in oil-based economies such as those in the Middle East. As a built world investor, Dewerpe says he’s all too aware of the fundamental role developing economies will play in the energy transition. While 90% of Europe’s existing building stock will stand in 2050, as much as 80% of Africa’s building stock is yet to be built. “Incentivising the low carbon construction and operation of real estate and infrastructure today will be critical for preventing carbon lock in later down the line,” says Dewerpe.
Increased investment in the built world is critical, according to Dewerpe who points out that it accounts for 37% of global greenhouse gas emissions, yet climate solutions targeting the problem receive just three percent of annual venture capital investment (albeit up from two percent in 2021), making it significantly underinvested.
Comparatively, Dewerpe says clean mobility and sustainable food accounted for seven percent and four percent of venture capital in 2023, despite addressing a smaller problem of 15% and 20% of greenhouse gas emissions respectively.
No doubt there will be competing interests within the climate technology space at the COP but the hope is that investment in innovation to address the climate crisis is not a zero sum game. Such concerns have been raised from those like Dr Gabrielle Walker, co-founder of CUR8 and founder of Rethinking Removals who believes that the developing the carbon removals market needs greater investment.
“I am very worried that at COP28 the narrative around this important climate solution could be affected by competing interests,” says Walker who insists that the science is clear. According to Walker, Carbon removal as well as deep emissions reductions and adaptation are critical in addressing global warming but to achieve an appropriate outcome, the world will have to scale carbon removals over next decade.
No matter the competing interests, the overall investment landscape for climate tech looks positive against the backdrop of an investment community laser focused on identifying breakthrough technologies. While capital investment across all categories of science and innovation fell 37.8% from 2021-2022 according to the World Intellection Property Organisation’s Global Innovation Index 2023, the long-term outlook shows a 20.6% rise in such investment over the period 2012-2022. The overarching upward trend for investment in new technologies bodes well for climate tech whether COP28 manages to move the dial on investment or not.Don’t miss our coverage of COP28! Subscribe here for exclusive insights & analysis.