Climate tech start-up investment has fallen this year. Here’s why

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Victoria Masterson, Senior Writer, Forum Agenda

• Climate tech start-up funding is falling, but the sector is still appealing to investors, finds the PwC State of Climate Tech 2023 report.
• Part of the reason for the fall is that more mature sectors like wind and solar need banks and governments – rather than early-stage investors – to fund big deployments.
• Climate investment should be targeted where it can have the most impact, the World Economic Forum says in its Global Risks Report 2023.

Climate technologies that can help cut greenhouse gas emissions are critical for getting the world to net zero by 2050.

To scale and deliver these solutions, investment in climate tech companies is needed. But funding for climate tech start-ups has fallen for a second year in a row, according to the latest State of Climate Tech report from professional services organization PwC.

The report analyses more than 32,000 deals worth more than $490 billion and involving over 8,000 climate tech start-ups.

How much has investment dropped?

Funding for climate tech start-ups has dropped by 40.5% this year compared with 2022.

This isn’t as bad as the overall 50.2% fall in all kinds of private equity and venture capital investment in early-stage companies – a drop fuelled by geopolitical turmoil, inflation, rising interest rates and lower company valuations, PwC says.

But the fall in climate tech investment still takes start-up funding in the sector back to where it was five years ago.

Why is early-stage climate tech investment falling?

Solar and wind start-ups are getting a much smaller share of investment than in the past. This is because the technology and the markets for them already exist, PwC says.

Early-stage investment to drive innovation isn’t what’s needed in these more mature sectors. Instead, they need capital to pay for a big increase in the rollout of their technologies. Banks, governments and other funders typically provide this kind of capital – not the venture capital firms and private investors who back start-ups, PwC explains.

Start-up investment has consequently been shifting to some sectors with high emissions and therefore significant potential to cut emissions, PwC notes. These include carbon capture, utilisation and storage, green hydrogen and alternative foods. However, they are receiving only small shares of start-up investment, PwC says.

Some technologies with big emissions-reduction potential don’t attract much start-up funding. Image: PwC

Some early-stage climate tech is hard to scale – meaning it is difficult for investors to make a return. And weak financial markets are putting off some start-up founders from raising capital, because their businesses might not be valued as highly as they could be.

Discover

What’s the World Economic Forum doing about climate change?

Climate change poses an urgent threat demanding decisive action. Communities around the world are already experiencing increased climate impacts, from droughts to floods to rising seas. The World Economic Forum’s Global Risks Report continues to rank these environmental threats at the top of the list.

To limit global temperature rise to well below 2°C and as close as possible to 1.5°C above pre-industrial levels, it is essential that businesses, policy-makers, and civil society advance comprehensive near- and long-term climate actions in line with the goals of the Paris Agreement on climate change.

The World Economic Forum’s Climate Initiative supports the scaling and acceleration of global climate action through public and private-sector collaboration. The Initiative works across several workstreams to develop and implement inclusive and ambitious solutions.

This includes the Alliance of CEO Climate Leaders, a global network of business leaders from various industries developing cost-effective solutions to transitioning to a low-carbon, climate-resilient economy. CEOs use their position and influence with policy-makers and corporate partners to accelerate the transition and realize the economic benefits of delivering a safer climate.

Contact us to get involved.

Why is climate tech still a good sector to invest in?

Climate tech is still an appealing sector for start-up investors, PwC says.

The need for climate technologies is continuing to climb – and there is a “steady inflow” of first-time investors, it says.

Investment in some regional climate tech sectors is also rising. In North America, for example, industrials – the sector with the highest emissions levels – saw its share of start-up investment almost double from 9% to 16% between 2022 and 2023.

Climate tech is seeing a steady inflow of new investors. Image: PwC

Lower company valuations also mean it’s a potentially good market for investors buying stakes in these start-ups, PwC says – assuming the companies these investors choose go on to be successful.

What could boost climate tech start-up funding?

Early-stage climate tech investors such as venture capital and private equity firms are just part of the funding landscape, the State of Climate Tech report suggests.

“Massive amounts” of growth capital – not just start-up capital – will be needed to mitigate the necessary 25 billion tonnes of CO2 by 2030, investors tell PwC.

PwC’s message to start-ups is to “explore all possible sources of capital”, including government loans and incentive programmes.

Greater collaboration between organizations and changes in standards and policy are also vital.

The world’s top four risks over the next decade are all climate-related. Image: World Economic Forum

Invest in climate tech with the biggest impact

Failing to mitigate climate change is the leading risk facing the world over the next decade, according to the World Economic Forum’s Global Risks Report 2023.

The second, third and fourth-biggest global risks are also climate-related, including biodiversity loss, natural disasters and extreme weather events.

Against this backdrop, in difficult geopolitical and financial times, investment needs to be channelled to where it will have the most impact.

“By restoring biodiversity in soils, for example, regenerative agriculture has the potential to store large amounts of carbon,” the Forum suggests.

Investing in solutions that address multiple climate risks also makes sense. This could include projects that help communities adapt to climate change while also reducing greenhouse gas emissions.