Climate Tech Industry – Investments, Trends, and Challenges

Posted On Jun, 01, 2023

Overview

The climate tech industry, also known as the clean technology or cleantech industry, refers to the sector that develops and deploys technologies aimed at addressing environmental challenges, particularly those related to climate change. Climate tech companies focus on creating innovative solutions to reduce greenhouse gas emissions, increase energy efficiency, and promote sustainable practices across various industries. The climate tech industry encompasses a wide range of sectors and technologies including renewable energy, electric mobility, sustainable agriculture, waste management, climate analytics, and data platforms.

The climate tech industry has gained significant attention and investment in recent years as governments, businesses, and individuals recognize the urgency to address climate change and transition to a more sustainable future. The adoption of United Nations Sustainable Development Goals (UNSDGs) in 2015 has worked as a catalyst in shaping the industry as the goals provide a global framework and common agenda that guide and reinforce the efforts of the climate tech industry, facilitating collaboration and creating a shared vision for a sustainable and climate-resilient future.

Significance of the Climate Tech Industry

The industrial revolution brought an era of technological advancements which were exhaustive of fossil fuels and hence have resulted in the rise of greenhouse gases in the atmosphere. These changed levels of greenhouse gases in the atmosphere have caused climate change resulting in heat, sea-level rise, and unpredictable catastrophic weather conditions. Climate tech equips us with better means to deal with the effects of climate change. In the case of Europe, research suggests that approximately 40% of the emission-reducing targets by 2050 will be achieved by emerging climate technologies. For instance, the use of hydrogen fuel for mobility helps in reducing the emissions level of public transport, and the integration of climate technology with infrastructure has resulted in positive outcomes such as the development of stilted buildings in flood zones to effectively reduce the disaster. In addition, some modern advancements in the sector such as satellite imagery and improved weather warning systems enable better management of adverse climatic conditions.  

Significant Coalitions Augmenting Climate Tech Industry

Common standards and regulations, set up by significant coalitions, create a level playing field for businesses, reduce barriers to market entry, and increase investor confidence. This harmonization enables companies in the climate tech industry to develop products and services that can be easily integrated into the market, driving innovation and competition.

The Paris Agreement

The Paris Agreement, adopted in 2015 by the United Nations Framework Convention on Climate Change (UNFCCC), is an international treaty aimed at addressing climate change. It sets out a global framework to combat climate change and accelerate actions and investments toward a low-carbon, climate-resilient future. While the agreement has multiple objectives, it has had a significant impact on the development and growth of the Climate Tech industry. The Paris Agreement provides a strong policy framework and long-term signal for governments, businesses, and investors to transition towards a low-carbon economy. This clarity and commitment have encouraged governments of signatory countries to adopt supportive policies, regulations, and incentives that promote the development and deployment of Climate Tech solutions. This also sets a market demand for innovative technologies and solutions which provide space for the climate tech industry to flourish. The Climate Tech industry plays a crucial role in providing these solutions, such as energy-efficient systems, and carbon capture and storage technologies. The agreement also emphasizes the need for financial support to enable the climate tech industry to undertake climate action and has mobilized significant financial resources through various channels such as the Green Climate Fund (GCF), to support climate-related projects and investments and the Special Climate Change Fund (SCCF) which focuses on catalyzing resilience of developing countries by fostering innovation for climate change adaptation, have proved instrumental in furthering the establishment of climate tech industry.

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The European Union Regulations

Similarly, European Union (EU) regulations assist in the enhancement of the industry in EU member states. The EU has set ambitious climate targets, such as the goal of achieving carbon neutrality by 2050. These targets create a strong market demand for innovative technologies and solutions that can help the EU member states transition to a low-carbon economy. For instance, The EU's Renewable Energy Directive establishes binding targets for EU member states to increase the share of renewable energy in their energy consumption which has stimulated the growth of the renewable energy sector and provided a supportive framework for the development and deployment of renewable energy technologies. It has attracted investments in wind, solar, and other renewable energy sources, fostering the expansion of the Climate Tech industry. In addition, other initiatives like the EU’s Circular Economy Package assist in transitioning to a more resource-efficient and sustainable economy.

The Kyoto Protocol

The Kyoto Protocol is another international treaty adopted in 1997 under the UNFCCC, aimed to address global warming and reduce greenhouse gas emissions. While the Kyoto Protocol is focused primarily on emission reduction targets for developed countries, it has some indirect significance in enhancing the Climate Tech industry. The Kyoto Protocol recognized the importance of technology transfer from developed to developing countries to facilitate their mitigation and adaptation efforts. Developed countries were encouraged to support technology transfer and provide financial resources to developing nations. This emphasis on technology transfer opened opportunities for collaboration, knowledge sharing, and the adoption of climate-friendly technologies. It helped facilitate the transfer of Climate Tech innovations to developing countries, fostering their growth and development. However, Clean Development Mechanism (CDM), established by the protocol provides an escape to developed countries by allowing them to trickle down investments over developing countries as a way to meet their own emission reduction targets.

Industry Trends

Businesses in the climate tech industry comprise people with a multidisciplinary skill set where at least 80% of founders have industry-level expertise and 10% of founders come from academia. In 2021, companies from the fields of energy and power, transportation and logistics, and agriculture and food exited to become climate tech enterprises through mergers & acquisitions deals valued at USD 114 billion in 2021 which builds the foundation of considerable growth in the climate tech industry. In 2022, the enterprise value of the global climate tech startup ecosystem stood at USD 1.6 trillion which has increased the industry’s combined value by 56 times in a decade. Climate tech startups are also reported to attract a bulk of impact investments in 2022 ranging from 70% to 80% of the global impact investments. This implies that climate and environment-impact-based startups are much more likely to attract more investments as compared to social focus.

Themes Attracting Investments in Climate Tech

Some important themes to attract investments are energy transition, circular economy, mobility, and carbon inclusive of sub-themes such as carbon capture and storage, blue bioeconomy, infrastructural sustainability, and farming and food production. According to the startup list published by Startup Basecamp, Europe tops the list with the most activities in the climate tech industry followed by the U.S. However, even though the Asia Pacific region produces the most CO2 emissions, climate tech startup conversion stands as low as 4% in the region. A large amount of support was shown for the clean energy sector which reduces the dependence on fossil fuels along with a few off-grid energy innovations which were also given weightage as they provide energy solutions for individual households and remote communities.

Innovations in the Climate Tech Industry

Climate tech players are also solving the issue of carbon emissions through food production including the emission from animal husbandry. Innovations like automated farming systems, aquaponics, and plat-based meat production have particularly gained traction in this sector. In addition, to achieve resource efficiency, numerous players have come up with circular economy solutions which allow low-value and end-of-life products back in circulation. Rigorous methods of waste management have maximized resource recovery, reusing, recycling, and upcycling and have reduced cumulative carbon footprints. Low-carbon manufacturing is proving to be instrumental in instilling resource efficiency in various industries. Some common practices adopted by manufacturing companies include the utilization of the potential of decarbonization of the supply chain to achieve low carbon footprints along with the conversion of waste heat into electricity. This has reduced the overall carbon footprint of the manufacturing industry.

Climate tech also contributes to the efficient use of natural resources and assists in saving them from further degradation. Solutions like wetland regeneration and water purifying solutions for wastewaters have helped in the integration of climate tech with other industries such as metal refineries and manufacturing.  Specifically, desalination allows local communities, living in proximity to industries, to deal with growing water needs. Climate tech also includes companies that are helping in devising solutions through data analytics. It is commonly observed that startups are using Internet of Things (IoT) sensors and satellites to collect real-time data which allows them to develop accurate climate models such as smart irrigation which helps in the reduction of water usage per unit of land.

It's important to note that the climate tech industry is rapidly evolving with more signs of climate change unfolding globally. Hence, there is a growing focus on adaptation and resilience measures which can be augmented with the help of climate technologies.

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Investments

Climate tech Venture Capital (VC) investments have gained pace since 2021. The share of climate tech VCs has more than tripled in the last ten years rising from 3% in 2012 to 10% in 2022. Venture capital investments in the sector have increased 24 times in the last decade with the maximum reported to be USD 56 billion in 2021. However, in 2022 the sector faced a drop in this number by 10% with venture capital investments of USD 50 billion only. U.S. achieved maximum venture capital investments between 2019 and 2022 with a cumulative investment of USD 73 billion in three years. Europe, The Middle East, and Africa (EMEA) Region attracted USD 39 billion through venture capital investments making it the second priority region for the growth of the climate tech industry. Third was the Asia and Oceania region with much lesser investments of USD 19 billion as compared to the first two regions. Out of the three regions, only EMEA recorded growth in investments of 13% in 2022 as compared to the base year 2020 amongst the top three. Asia and Oceania experienced a significant drop of 33% in 2022 from 2021. Even though the U.S. faced a drop of 13% in 2022 from 2021, it remains the highest achiever of climate tech venture capital.

Challenges

Even though the sector has seen a multifold boom in the last decade, there still are some challenges that require global attention. According to the 2022 Tech Nation Report, 70-75% of players find it difficult to build long-term partnerships which can help the business in dealing with issues like hiring. Expansion of an initiative overseas is seen as the second biggest challenge with almost 70% vote by net-zero programs and others, as it becomes difficult for the entities to accommodate the fluctuations caused by geographical and regional differences. Climate tech companies in Europe have especially highlighted this issue. Scaling and expansion as a challenge is seen to be the fourth biggest challenge faced by climate tech players as 68.5% of respondents showed their concern.

The establishment of a sustainable supply chain also stands as a global challenge for companies focused on sustainability. Small businesses face the brunt of developing a sustainable supply chain because of the cost associated with the process. Ultimately, it widens the gap between the small players and big corporations making it difficult for them to compete. In addition, climate tech relies on innovation and Artificial Intelligence is one such innovation that has brought some game-changing developments in this sector such as auto-irrigation and the use of IoT for mapping energy consumption. Even so, the climate technology market lacks in scaling up the use of AI. According to Capgemini's analysis, more than 80% of climate tech firms spend less than 5% of their funding on AI, and only 42% of possible AI applications are really being tested.

Despite these challenges, the climate tech industry has made significant progress in recent years. Continued innovation, supportive policies, growth in investments, and collaborative efforts are necessary to overcome these challenges and realize the full potential of the climate tech industry in addressing climate change.