A Guide to Climate Tech Finance

The news in 2021 has highlighted climate change like never before. Storms and hurricanes wreaked havoc across the US as far north as New York. Floods in Germany and temperature records across the globe were smashed. Public opinion has shifted towards a demand for more action.

In Germany the Green Party looks set to play a key role in government following the recent election. The US administration passed a flawed US$ 1 trillion infrastructure bill which promised funds for electric charging points, climate resilience and support for decarbonisation.

At the same time governments, businesses and entrepreneurs are realising that there is huge potential in zero or low products and services. Climate tech is cross sector cutting. Nearly every facet of life needs to be decarbonised rapidly if the world is to avoid a climate crisis. This is attracting serious money from venture capital to multilateral banks to giant corporate investors.

BlackRock Chief Executive Officer Larry Fink described climate investing: “I look at this as one of the greatest investment opportunities over our lifetimes.”

Choosing to decarbonise early is a competitive advantage. Carbon emissions will become more costly and less socially and legally acceptable.

Climate tech promises to harness technology to accelerate the transition to a low carbon world. Renewable energy firms are the most visible climate tech champions. But there are many other ways to reduce carbon, through artificial meat, green chemical companies, and low carbon construction firms.

Recent Global Shifts Include:

Election of US President Biden who has acknowledged climate change as the critical burning issue of the day.

China, US, Japan, EU, UK and Korea have all recently promised carbon neutrality in the next 30 years. Of course, political promises can be reneged or ignored, but the political momentum is clear.

The pandemic changed perceptions about the environment, cut carbon emissions (at least temporarily) and showed the world that rapid social and economic shifts were possible and for some desirable. It is much harder for companies and governments to make the excuse that change is too difficult, or that reforms must be slow.

Many companies have followed up on their Paris Alignment pledges and committed to go carbon neutral, car companies saw the writing on the wall and the shift to electric cars became real. Many governments have set targets and dates to achieve zero carbon economies.

Financing Climate Technologies

Money is gushing into Climate tech right now.

Below I look at how climate technology is financed and how this could change in the future. Funding for climate tech is as varied as the sector itself which is largely defined by its goal. Angel investors, venture capital and government funds are heavily backing zero-carbon technologies.

A recent PWC report identified around 2700 investors backing around 1200 start-ups. The industry went from around US$ 418 million funding in 2013 to around US$264 billion last year. This might seem a lot. But the reality is that this number needs to be much higher for technologies to make a dent in reducing carbon emissions.

The scale of change required is awe inspiring. Entire sectors such as transport, infrastructure and energy require complete transformation and billions of dollars to make it a reality.

Petrol driving cars need to be replaced, energy systems shifted from fossil fuels to clean energy. Sectors such as construction which many do not even associate with carbon emissions will have to shift to using low carbon materials and processes.

The scale of this transformation means that the clean tech sector has the potential to grow and grow. Its rise will emulate that of social media in the last decade and its impact will exceed it.

Capital Needed

But for this to happen the entrepreneurs and businesses need funding to match their dreams. Like all new sectors climate tech is risky.

Many new innovations will not work as planned, some will find it hard to scale and of course many start ups will be picked off by rivals or larger competitors.

Climate technologies are also often capital hungry, developing and promoting new technologies can be extremely expensive.

Financing the first deep sea shipping lane powered by methanol or green ammonia will cost US$ 700 million in up front capital investment.

Venture Capital

Venture capital is now heavily backing the climate tech start up scene. According to one survey start-ups raised US$ 16 billion across 250 deals across the first half of 2021. This also represented a 50 percent increase on last year’s figures.

Venture capital firms are of course a fixture in the tech scene and the lure of climate focused start ups has grabbed their attention.

Well known funds such as Sequoia Capital which backed many of Silicon Valley’s biggest most successful stories are now backing climate focused ventures. Other VC firms like Clean Energy Ventures specialise in just climate tech.

Others like The Engine a MIT backed fund take a different approach providing long term capital to ventures trying to solve the world’s toughest problems. Climate change among them.

Start-ups are the most exciting and innovative creators of climate solutions. But established companies have the size and reach to really push decarbonisation.

There are many net-zero levers: alternative proteins, renewable energy or green construction. Climate tech is cross sector cutting which means that it will attract money from a variety of different sources, not just funds with an energy focus.

Corporate Venture Capital

Corporate Venture Capital is another rapidly growing source of finance for Climate Tech.

The funds have been created by major corporations who wish to back a fast-growing sector for financial and strategic reasons. The big tech firms like Amazon, Google and Microsoft have all seen the value of net-zero and backing their own climate tech finance divisions.

This could be to gain market share in emerging technologies or to counteract the fact that major companies are traditionally poor innovators.

Firms that have created climate tech funds include Chevron, Maersk, Microsoft and Unilever. These funds are backing firms which are pushing zero-carbon solutions such as Afresh which uses AI to unify logistics arrangement in delivery and transportation to increase efficiency and reduce waste. Chevron have backed Eavor a Geothermal technology company which hopes to drill deep underground to tap geothermal energy.

The king of the climate tech capital pile is Breakthrough Energy Ventures. Founded by Bill Gates over 5 years ago it has raised over US$ 2 billion for climate technology start-ups.

Emerging Markets and Traditional Banks

In emerging markets, multilateral banks such as the Asian and African Development Banks, the World Bank and European Investment Bank are major backers of climate finance.

In 2020 Multilaterals backed US$ 38 billion in investment into the climate sector. Much of this will be backing the renewable energy sector, energy efficiency and green infrastructure projects. Multilateral banks are also backing climate adaptation and resilience projects.

In a similar fashion Temasek the Singaporean sovereign wealth fund in conjunction with giant investment firm Blackrock are also getting in on the act. The two investment giants created a venture called Decarbonisation Partners which is placing US$ 300 million into a seed fund for climate tech.  

While traditional Banks are clearly a major source of finance they typically back well established renewable companies rather than innovative tech firms.

The emergence of the Taskforce on Climate Related Financial Disclosures (TFCD) has forced firms to disclose their strategy in adapting to a changing climate (with the recognition of climate risks), but this has also made firms think about how they can take advantage of the transition to a zero carbon.

This has seen mainstream banks measuring how climate risk will impact their balance sheets. Spelling out financial risk in this way will push banks to back climate friendly projects and companies

The green bond market has exploded in size over the last few years. US$269 billion was raised in green bonds in 2020. The market is led by the US, Germany and France, most of money raised will go towards green mortgages, renewable energy and transport (such as railway companies).

The green bond market tends to be focused on financing established climate technologies. However, funds that are backing green mortgages, low carbon buildings and other green projects and fall under the green bond taxonomy can directly spark demand for new climate technologies.  

Looking to the Future

Financing climate tech does not have the luxury of time. The sector needs to see a rapid increase in financing levels, this means that other sources of finance need to be tapped. Firstly, governments need to ensure that policy shifts on decarbonisation are matched by action.

For example, passing laws that encourage green construction, taxes on carbon or even meat. These measures will spark demand for climate friendly technologies.The private sector should be following the lead of venture capital and corporate VCs and backing more innovative climate tech firms as well as established technologies.

In the news

Climate Opportunities

Green growth offers opportunities for South Africans. The shift to renewables and a net-zero world creates new industries with often highly skilled positions much needed in South Africa and elsewehere.

Green economy growth is a silver lining for the planet and job-hungry South Africans (iol.co.za)

The Singapore Exchange makes climate related financial related disclosures reporting mandatory. As TCFD reporting becomes the norm the opportunities for climate risk reporting will grow. The sector will thrive and mature as reporting becomes more widespread.

Singapore Exchange proposes mandatory climate reporting in key sectors from 2023 | S&P Global Platts (spglobal.com)

Chevron plans to spend US$ 10 billion on renewable energy and reducing its carbon footprint. But is this just greenwashing and a reaction to recent actions by activist investors?

Chevron to spend $10bn on clean energy push | Financial Times (ft.com)

Climate Risks

A new threat from climate change. As ice melts it could set off huge tsunamis by reducing the weight on the crust below and unleashing intense seismic activity.

Chevron: Despite the company backing climate solutions with one hand it remains very much a traditional fossil fuel company. The oil and gas sector is increasingly fighting off activist investors that are challenging plans and pushing these giant companies to decarbonise.

Chevron prepares to head off challenges at investor presentation – Institute for Energy Economics & Financial Analysis (ieefa.org)

Could restoring Woolly Mammoths via gene editing be a way of restoring lost biodiversity caused by climate change. It does not stop the root problem but open up ways of restoring lost species once habits are restored or rewilded.

How Colossal sold investors on a quest to resurrect a woolly mammoth | TechCrunch

All talk of economic costs in addressing climate change tend to ignore the long-term costs of doing nothing. Climate risks in India, extreme heat, flooding and drought make a mockery of any attempts to protect the economy today, particularly if climate changes further disrupts the all important monsoon.

Economic impact of climate change on India | LinkedIn

A Guide to Climate Tech: How Technology, Innovation and Entrepreneurs Can Build a Zero Carbon World

Tiny brightly coloured microbes live in Yellowstone park’s volcanic springs which can thrive in incredibly hot temperatures up to 235 C. These so called extremophiles are bright yellow, orange, blue and survive and by turning light into energy. Scientists have long been fascinated by their unique habitat and properties.

The microbes caught the eye of Thomas Jonas the CEO of Nature Fynd. The company now takes these microbes and with the aid of water has created a process which can turn sugar into protein. This protein can then be used as the basic building block of an artificial meat product.

Nature Fynd was founded to tackle greenhouse gas emissions through food production. The company can produce “meat” with 99 percent less land and greenhouse gases than the livestock equivalent. Nature Fynd is part of new wave of companies focused on utilising new technologies to reduce carbon emissions.

Why Climate Tech is a Critical Sector

As the threat of global heating grows the need for solutions grows more urgent. Climate tech is an industry focused on solving humanities biggest problem. 2021 has seen record breaking temperature across the world along with more instances of extreme weather, floods, wildfires and hurricanes. From rocky beginnings as cleantech a decade ago which saw a lot of money pumped into firms but few success stories (Tesla a notable exception).

Now a new wave of exciting companies is emerging which are utilising technology to transition society to a zero carbon future.

Proterra is a leading provider of heavy electric vehicles, producing buses, trucks and shuttles all with zero carbon emissions. Founded in 2004 the company is taking advantage of the fact that more companies and governments are switching to electric vehicles for their fleet. As the number of charging points and policies favouring electric vehicles grows so will the market for these vehicles.

Each degree of warming will make climate tech a more attractive sector. As the problem of global heating grows, the solutions needed will become more urgent.

Pachama allows companies purchase carbon credits and restore nature through forest projects. They use artificial intelligence to monitor the forests and protecting older trees and growing new trees to restore habitats.

Aclima measures greenhouse gas emissions and pollutants at a local level which allows its customers to identify where and how they are contributing to greenhouse gas emissions, giving them the information they need to take remedial action.

Climate tech firms can be divided into seven broad areas:

  • Creating zero carbon transport (electric vehicles) or mass transport solutions.
  • Developing solutions around agriculture, farming and forestry which reduce emissions or even create negative emissions (this could mean a venture like Pachama or vertical farming solutions).
  • Decarbonising the built environment, firms that can decarbonise heating systems or make them more efficient. Or firms that can that make buildings with low carbon materials come under the climate tech umbrella.
  • Renewable energy companies, the most obvious solution for many observers, this can mean the production of solar panels and wind turbines or firms which can optimise energy efficiency, distribution and usage.
  • Companies which decarbonise industry through new techniques such as low or zero carbon cement.
  • Companies which utilise machine learning and artificial intelligence to make use of data sources such as satellite imagery, physical sensors and temperature readings which create a detailed information around the rise of climate change.
  • Carbon Capture and Storage is the most uncertain and unproven climate tech, but if deployed successfully could suck carbon out of the air and store it safely. Reducing the amount of carbon in the atmosphere could represent a silver bullet for climate change. But CCS has yet to be proven at scale.

The huge of scale of change required to get the world to net-zero is breath-taking. Estimates run into US$5-7 Trillion over the next couple of decades to hit current 2050 targets. The good news is that the sector is fast growing. In 2020 companies in Climate Tech raised capital three times faster than artificial intelligence. PWC put this figure at US$16 billion, a large amount but tiny compared to what it required.

How Disasters Could Drive the Climate Tech Sector

Perhaps ironically what will drive more investment and more demand for the products is each new piece of bad climate related news, every natural disaster will raise awareness about climate issues. The many pledges made at international conferences and by individual governments are also driving change.

For example, the EU recently published its sustainable finance taxonomy defining climate friendly activities. While many of the pledges are flawed and some may end up unfulfilled or ignored it does create a powerful sense of momentum.

Global giants Microsoft, Unilever and Amazon have all seen which way the corporate wind is blowing. These firms have all set up venture funds to back climate tech start-ups joining a stampede of new financial backers looking for the next growth story.

43 Unicorns and Counting

The business opportunities in this space are likely to rival previous tech booms and produce new Unicorns (tech firms worth a US$ 1 billion or more) and major new companies. Already there 43 Unicorns in the Climatetech sector, but many start-ups will get absorbed by rivals or simply not survive.

Climate tech differs from Cleantech (which experienced a boom/bust cycle a decade ago). Climate tech is focused on activities which reduce carbon emissions. Cleantech is broader and includes activities which help protect the environment such as water filtration or recycling, but not necessarily reducing carbon emissions.

Why Now? Climate Tech has hit a critical inflection point thanks to various factors:

Both demand from consumers and regulation from governments is driving the corporate sector to find new low carbon alternatives. The Paris Agreement, the EU Sustainable Taxonomy and the Task Force for Climate Related Climate Disclosures (TCFD) are all relatively new policy initiatives which

Energy is the most obvious sector for climate tech to disrupt. Solar and wind energy has already made a major impact on global energy production. Falling costs over the last decade (85 percent in the case of wind turbines) means that renewable energy is competitive with fossil fuels. But climate tech is wider than just energy production. For example, battery storage for cars or on an industrial level is increasingly a vital driver of decarbonization.

More efficient energy storage means that renewables become more effective as they can avoid the vagaries of the wind and sun. Grid management tools using machine learning and other techniques can also make for more efficient energy use. The market for electric vehicles pioneered by Tesla and the batteries which drive them is set to grow rapidly as car manufacturers shift production and governments look to ban their use.

Climate tech solutions can be divided into the vertical which deal with carbon emissions in one industry. For example, reducing the carbon loss from soil through precision agriculture or manufacturing process to make low or zero carbon concrete.

Alternatively horizontal solutions address carbon emissions across multiple sectors. Electric car batteries are a good example of this as they have allowed the car industry to shift to electric cars (EV), this encourages the use of solar and wind energy to produce the electricity to run the cars.  

Machine learning (ML) is another horizontal tool which can cut across boundaries and solve problems. ML uses algorithms which can perform a task normally done by humans, such as identifying pictures of friends on social media, act as a IT support chat bot to solve software issues or collect and identify patterns in satellite imagery.

The seven broad areas in Climate Tech are outlined below:

Transport

Moving people and goods by land, air and sea takes up a lot of energy. Most transport is run on oil products which of course leads to greenhouse gas emissions. It makes sense that many climate tech firms are looking to shift and upset this sector.

Electric vehicle production whether this be car, bus or truck is a highly visible sign of climate tech. Of course, the source of the electricity is key. If the electricity is supplied by fossil fuels, then electric cars are not climate friendly. Electric vehicles are only as green as the source powering them. The production of electric vehicles can also be problematic thanks to the need for rare earth metals in the battery which can be environmentally destructive.

NIO is a Chinese car maker which focuses on making Telsa like electric autonomous vehicles. NIO are luxurious vehicles with ultra modern autonomous driving features. With many countries promising to phase out petrol driven cars, manufacturers are shifting to electric models.

Food and Agriculture

Farms and agriculture are increasingly recognised as both major source of greenhouse gas emissions (around a quarter of all emissions) and a difficult problem to solve because of humans need for huge quantities of food and in particular methane producing livestock. Many policy initiatives are unlikely to impact on agriculture as it has been exempted from carbon pricing.

This challenge has resulted in many of the most climate friendly and innovative solutions. Meat production is a major and growing source of greenhouse gases (especially methane) and there many ethical concerns around livestock farming. The answer is a global shift to a plant based diet.

But of course this desire clashes with people’s love of meat. Food production companies such as Viva and Beyond Meat have used technology to create alternative proteins – which taste and appear like meat or fish but are plant based. These products typically represent 90 percent less carbon emissions than their meat equivalents.

The market for plant based products has grown rapidly. The number of vegans and people demanding more plant based foods has grown rapidly in many western countries. The Michelin Guide recently awarded 81 stars to vegan and vegetarian restaurants. A powerful symbol that the world is taking vegetarian food seriously.

The earth and soil and peat are also a major source of carbon storage and depleted soils and. Regenerative agriculture can mitigate climate change and involves activities which improve soil health and sequester carbon and enhance water retention.

Regenerative agriculture includes practices such as cover cropping and conservation tillage which farmers have been doing for many years but too much of modern farming has become destructive to the land and the result in billions of tonnes of carbon being released from the soil each year

Gingko Bioworks are encouraging sustainable agriculture through testing strains of microbes. These microbes can be used to fix nitrogen in the roots of plants. This  improves yields and reducing the need for nitrogen fertiliser (around 3 percent of global emissions).

Heavy Industry

Heavy industry is the fastest growing source of carbon emissions. The world’s demand for goods and products is seemingly never ending. Metals, concrete, fertilisers, plastics, and fertilisers all produce large amounts of greenhouse gases during their creation. Companies that can reduce emissions, reduce the amount of raw materials or used or make production processes more efficient can be classed as climate tech.

For example, 3D printing companies such as EOS and GE Additive can reduce transportation costs by allowing companies to print components reducing emissions. Hybrit is a Swedish firm which is trying to develop zero carbon iron and steel production from energy source to manufacturing process. Hybrit are experimenting with using hydrogen instead of carbon or coke to aid the reduction process. The reduction removes the oxygen from the iron which is a key part of making steel. Traditionally it is done in a blast furnace and relies heavily on coke (a major carbon source).

The Built Environment

Buildings emit large amounts of carbon thanks to heating and cooling systems emitting heat. But the materials that are used to build houses, factories, road, bridges and all our other infrastructure needs also involve large amounts of energy. Just cement production alone amounts to around 8 percent of all carbon emissions globally.

Efforts are underway to try and reduce this amount by trying to capture the carbon emissions during the manufacturing process. Ideas include switching to different more climate friendly fuel sources and by substituting materials such as using coal ash and blast furnance slag instead of clinker.

Through energy efficiency measures such as modern heating systems, improved insulation, plus smart heat management (often using machine learning) emissions can be reduced. These measures can be introduced into existing homes, but of course it is easier to be put into new builds. Green construction methods cut up front carbon costs through green materials.

Airex is a UK company which uses sensors and smart ventilation to help reduce heat demand in buildings. By cutting energy use Airex can cut fuel bills and using sensors can identify poorly ventilated areas and improve air quality.

Renewable Energy and Storage

Wind turbines and solar panels are the most obvious symbols of climate tech. Across the world renewable energy options are becoming more widespread and cheaper. Widespread industrial battery storage now promises to store energy and overcome the problem of when the sun is not shining or wind not blowing.

Hydrogen promises to be an exciting new carbon free energy source. Hydrogen burns like natural gas but without the carbon emissions. Excess renewable energy created in times of low demand can create hydrogen. This hydrogen can be then stored, transported and used as a zero carbon power source. However, this technology is still in its infancy

Climate Capture and Storage

The most uncertain, controversial, and risky climate tech area is carbon capture and storage (CCS). This is seen by some as the holy grail of decarbonisation but by environmentalists as a distraction from carbon reduction efforts.

Extracting carbon from the air and storing in the ground on a massive scale could theoretically solve global heating. Environmentalists view CCS as a risky distraction from decarbonisation which offers false hope. It is perhaps no surprise that funding has been patchy in this sector. The uncertainty and long-time horizons around CCS make it unsuitable for venture capitalists which prefer faster returns and more established technologies.

However, one source namely oil companies have been the biggest backers of CCS – although results have been poor so far. Expect these experiments to continue as if successful it would potentially allow oil companies to capture the carbon they are responsible for releasing into the atmosphere. Some have speculated that the technology for injecting carbon into the ground after capture uses similar techniques to the deep underground drilling that oil companies have such strong expertise in .

Climate Data and Analysis

The launch of many nano satellites has led to an explosion in the amount and quality of earth data captured. This has led to many new companies emerge to provide data on climate risks and forecasting. Companies like Jupiter Intelligence and Sust Global provide detailed information on physical climate risks for organisations. Understanding how the climate may create risks on a granular level allows clients to how extreme weather, drought, sea level rise and many other factors impact their assets.

Firms in this space use machine learning to process and sift through the huge amounts of data and turn them into actionable insights or financial signals. As well as climate risks this information can be used to monitor crop production, deforestation or reforestation rates (which can feed into sustainability ratings) and tracking natural disasters in real time to aid recovery efforts.

What’s Next?

For the success of Climate tech to continue there are several hurdles which need to be overcome. Firstly, financing needs to continue at an even faster rate, which in turn is dependent on the success of the companies involved in the sector.

Secondly the regulatory environment needs to shift further towards climate tech. This means actions like the phasing out of fossil fuel subsidies which prop up the oil and gas sector. It also means more initiatives like the EU sustainable Taxonomy which determines climate friendly activities. However, the problem is that if the legislation or regulation is too complex there is a risk that it will prove difficult for start-ups to navigate. This gives an advantage to larger firms with existing resources and could stifle competition.

Another limiting factor is lack of talented people in the industry. Climate tech is a young industry and its use of cutting-edge concepts like artificial intelligence means that there is a limited pool of workers to drawn upon. However, as the sector grows and the demand for such skills grow, so will the number of people attracted to it and they will develop the appropriate skills.

The rise of social media industry shows us how quickly a new sector can arise and dominate. The combination of new technology, the growing urgency of the climate crisis and the shift in the regulatory environment means that Climate Tech has a bright future.