Climate Tech Investment Falls in Tough Market, But Hits Record Share of VC and PE Funding: PwC – ESG Today

    Climate Tech Investment Falls in Tough Market, But Hits Record Share of VC and PE Funding: PwC – ESG Today

    Venture capital and private equity investment in climate technology ventures has declined 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 by global professional services firm PwC. The report found also indicated the emergence of a broadening investor base for climate tech startups, and a shift to funding technologies with greater emissions reduction potential.

    For the report, PwC used its Climate Tech Investment Index as its underlying dataset, and analyzed more than 8,000 climate tech startups, and over 32,000 deals worth more than $490 billion over the past 10 years, in addition to asking investors about market trends and their approaches to the market.

    According to the PwC report, climate tech private market funding has declined by 40.5% in 2023, although the slowdown was not as sharp as the drop in overall venture capital and private equity financing, which is down by more than 50%, in a market impacted by geopolitical turmoil, lower valuations, and higher inflation and interest rates. Climate tech gained share for a fourth consecutive year, reaching a record 10% of overall investment in 2023 – and over 11.4% in the most recent quarter – compared to 9.2% in 2022, and only 7.2% in 2020.

    Will Jackson-Moore, Global Sustainability Leader at PwC UK, said:

    “A challenging macroeconomic environment, sinking valuations, and geopolitical turmoil has seen capital flows to climate tech ventures drop 40% at a time when climate tech needs it most. But while such industry and macroeconomic dynamics may cloud investor confidence, they also present significant first-mover opportunities for investors to engage in the current dip, as the need for climate tech innovations will only grow stronger.”

    The report also uncovered several key trends, indicating a more mature and mainstream climate tech investment market. One of the most interesting developments found in the study was an increasing alignment between funding flows and emissions reduction potential. The report found, for example, a significant shift in investments towards startups targeting solutions to reduce emissions from industrials, which account for a greater share of emissions than any other sector, with the share of investment in this area rising to 14% between Q4 2022 and Q3 2023, compared to a long term average of under 8%. Conversely, the mobility sector, which accounts for a relatively smaller share of emissions, still attracts the greatest share of investment, but saw its share fall to less than half, declining to 45% from its long-term 50% average.

    Similarly, the study found a growing share of funding being directed to higher emissions reduction potential technologies such as carbon capture, utilization and storage (CCUS), green hydrogen, and alternative foods, with declining – but still higher – shares to lower emissions reduction potential areas such as light duty battery EVs and more mature technologies such as wind and solar.

    CCUS technologies, while still representing only a small portion of the market, showed particular strength, emerging as the only climate tech category to see an absolute increase in investment over the past two years, as companies have announced commitments to purchase carbon removal credits, and government incentives have emerged, such as the U.S.’ Inflation Reduction Act and Bipartisan Infrastructure Law.

    One of the key trends highlighted by the report was a shift in climate tech funding away from early stage deals, relative to mid-stage. Early stage deals represented less than half of the total for climate tech for the first time in 2023, with mid-stage reaching more than 45%, up from around a quarter of deals four years ago. According to PwC, investors have said that the decline in early stage deals is driven by concerns about the technologies’ scalability, as well as by start-ups’ reluctance to raise funds at lower valuations.

    The report also found indications that climate tech investment is becoming more mainstream, with a growing share of first-time 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 investments towards technologies that can cut emissions the most. Now we need to see that shift continue, coupled with an increase in the absolute levels of investment in all technologies with the potential to cut emissions.”

    Click here to access the report.