Venture capital and private equity investments in climate technology companies fell sharply in 2023 but continued to outperform the broader market, which continues to be impacted by economic and geopolitical turmoil, according to a new report from global professional services firm PwC . The report found also indicated the emergence of a broader investor base for climate tech startups, and a shift toward financing technologies with greater potential for emissions reductions.
For the report, PwC used the Climate Tech Investment Index as an underlying dataset and analyzed more than 8,000 climate technology startups and more than 32,000 deals with a value of more than $490 billion over the past ten years. In addition, PwC asked investors about market trends and their approaches to the market.
According to the PwC report, private market financing for climate technology will fall by 40.5% by 2023, although the slowdown was not as sharp as the decline in overall venture capital and private equity financing, which fell by more than 50% has fallen in a market impacted by geopolitical unrest, lower valuations and higher inflation and interest rates. Climate technology gained market share for the fourth year in a row, reaching a record 10% of total investments in 2023 – and over 11.4% in the most recent quarter – compared to 9.2% in 2022 and just 7.2% in 2020.
Will Jackson-Moore, Global Sustainability Leader at PwC UK, said:
“A challenging macroeconomic environment, declining valuations and geopolitical turmoil have seen capital flows into climate tech companies fall by 40%, at a time when climate tech needs it most. But while such industrial and macroeconomic dynamics may cloud investor confidence, they also provide significant opportunities for investors to ride the current dip, as the need for climate technology innovations will only grow stronger.”
The report also revealed several key trends, pointing to a more mature and mainstream climate technology investment market. One of the most interesting developments that emerged from the research was an increasing alignment between financing flows and emission reduction potential. For example, the report finds a significant shift in investment towards startups focused on solutions to reduce emissions from the industrial sector, which is responsible for a greater share of emissions than any other sector, with the share of investments in this area between the fourth quarter of 2022 increases to 14%. and in the third quarter of 2023, compared to a long-term average of less than 8%. Conversely, the mobility sector, which is responsible for a relatively smaller share of emissions, still attracts the largest share of investments, but saw its share fall to less than half, from the long-term average of 50% to 45%.
Similarly, the study found that a growing share of funding is going to technologies with higher emissions reduction potential, such as carbon capture, use and storage (CCUS), green hydrogen and alternative foods, while the share is decreasing – but still increasing – towards a lower emission reduction potential. areas such as light battery EVs and more mature technologies such as wind and solar energy.
Although CCUS technologies still represent only a small share of the market, they have shown particular strength and emerged as the only climate technology category to see an absolute increase in investment over the past two years, as companies have announced commitments to extend credits for carbon removal, and Government incentives have emerged, such as the US Inflation Reduction Act and the Bipartisan Infrastructure Law.
One of the key trends highlighted in the report was a shift in climate technology financing away from early-stage deals and towards mid-stage deals. In 2023, early-stage deals represented less than half of the climate tech total for the first time, with mid-stage deals reaching over 45%, compared to around a quarter of deals four years ago. According to PwC, investors have said the decline in early-stage deals is driven by concerns about the scalability of the technologies, as well as the reluctance of startups to raise money at lower valuations.
The report also found evidence that climate tech investments are becoming more mainstream, with a growing number of new investors joining the market, and a lower share attributed to seasoned investors, or those who have invested in five or more climate tech deals.
Emma Cox, Global Climate Leader at PwC UK, said:
“The good news is that the sector has performed well in relative terms, with investment falling less than in other areas. It is also encouraging to see a shift in the balance of investment towards technologies that can reduce emissions the most. Now we need to see that shift continue, coupled with an increase in absolute levels of investment in all technologies with the potential to reduce emissions.”
click here to access the report.