The third quarter of 2023 disrupted the trend of slowing investments in the climate technology sector. Investments totaled $16.6 billion in the third quarter, largely due to interest in decarbonizing the economy and starting low-carbon businesses, according to a recently released BloombergNEF analysis. According to the report, this is the highest quarterly financing in climate technology since the fourth quarter of 2021.
Total climate technology financing peaked at $13.1 billion in the first half of 2023, down a full 40 percent from the same period in 2022. according to CTVC. This dip worried the business community multiple media sockets covering the once impenetrable sector’s apparent fall from grace.
But the catalyst for climate technology’s rocky start in 2023 does not appear to be related to climate technology.
“I think it’s a function of the broader macro environment,” Shayle Kann, partner at Energy Impact Partners, told GreenBiz. “Investment is down across the board and everywhere.” Kann cites high interest rates and a challenging domestic economic situation as leading factors, and he is not alone in his assessment.
During a recent keynote speech at GreenBiz’s VERGE23, Sophie Purdom, co-founder of CTVC and managing partner at Planateer Capital, referred to a “non-zero interest rate phenomenon” as the reason for the failure of climate technology financing deals.
Both Kann and Purdom refer to that of the Federal Reserve decision to reduce interest rates to zero during the height of the COVID-19 pandemic. The Fed’s action was an attempt to stabilize a rapidly shrinking economy by encouraging the market to spend and grow with as little risk as possible. Since then, the central bank has aggressively raised interest rates to curb soaring inflation. Now, almost four years after the initial rate cut and many rate increases later, inflation has stabilized at the level 5.33 percent and no further increases are on the horizon.
In the “world of technology returning to reality,” investments in climate technology have remained relatively strong, Kann said: “There are only a few sectors that are outperforming the overall investment world, and those are basically AI and climate.”
Although the total amount invested in climate technology companies fell in the first half of 2023, the total number of deals in this area actually increased. A total of 633 climate tech startups raised money, up from 586 in the first half of 2022. Startups receiving funding for the first time have increased by 34 percent compared to 2022.
That was in stark contrast to the broader venture capital landscape. In Pitchbooks recently released analysis of third quarter venture capital trendsearly-stage activity has declined in 2023, with a total of 2,717 deals through September.
The latest trends from the third quarter show a strong recovery in the form of money flows into the sector.
Although the total number of deals fell to 241, according to BloombergNEF’s Investment Radar Q3 2023, some huge deals drove the quarter’s financial recovery. They include H2 Green Steel’s $1.6 billion roundproducer of lithium-ion batteries Northvolt’s $1.2 billion roundand a battery recycling company Redwood Materials Series D round of $1 billion. These deals all took place in sectors often associated with higher levels of emissions that are difficult to reduce. as noted by PWC.
The shift towards larger mid- to later-stage deals will continue, says John MacDonagh, senior analyst at Pitchbook: “The battery spaces, [and] some of the clean fuel areas, [like] hydrogen, for example, I think we will see similar trends in the coming quarters.”
CTVCs analysis of the first half of 2023 concluded that a return to higher figures in the third quarter could indicate a market recovery. Now that federal interest rates have stabilized and the need for climate mitigation technology is more urgent than ever, a bubble burst – like what happened with Clean technology 1.0 – is not a strong possibility.
‘I don’t think there are [climate tech] sectors that I would say are really falling behind,” MacDonagh concluded.