Climate tech accounted for 25% of all venture investments in 2022, so why isn’t this good news?

Investments into the climate tech market are sliding down year on year

New research from PwC shows that climate tech funding in 2022 accounted for more than 25% of all venture spending and investments.

Investment into climate-related technologies has sat at the $15-20bn range per quarter, in line with the first half of 2021. PwC notes that the overall aggregate funding for climate tech since the start of 2018 is now $260bn, of which more than $50bn was issued in 2022.

On the surface, this is welcome news. However, the PwC analysis points to a few growing pains that the market is experiencing that need to be addressed if investment into climate technology is to reach critical mass.

PwC notes that in 2021, the start-ups with solutions and projects targeting sectors that are accountable for 85% of global emissions attracted just 39% of investment. In a positive trend, those sectors now attract 52% of investment.

However, while the overall share of venture capital spending on climate is performing strongly, an overall decline in venture investment in this sector has been recorded. Funding in cash terms in the first three quarters of 2022 is down by 30% over the same period in 2021.

There is also the issue that early-stage funding, typically for deals under $5m, has been declining since early 2021. PwC notes that a downward investment trend has been recorded in early-stage funding because of a “weak pipeline” of quality start-ups that are able to progress to more mature funding stages. This, PwC notes, may be dissuading investors from deploying more capital in the climate space over the coming years.

Additionally, while funding continues to be pumped into the climate space, PwC notes that it isn’t efficiently targeting solutions that can drive accelerated change to decarbonise. The research cites food waste reduction initiatives and new solar solutions as “comparatively underfunded” areas of the climate space.

PwC UK’s global climate leader Emma Cox said: “As society grapples with how to halve emissions by 2030, more investment is needed into climate tech – not just at the top level, but with better spread across sectors and solutions, across different start-up sizes, and across different technological maturity levels.

“This includes transition technologies, such as carbon capture, which are near or already at maturity and ready to scale up now.”

Nascent markets

Investments in clean technologies, such as renewables, continue to break records because the investment markets for these technologies are nascent. While substantial investment growth is welcome, much more needs to be done to accelerate green spending.

Global investment into clean energy and related technologies reached a new record in 2021, with nations funnelling more than £560bn ($750bn) into solutions that would push them towards national climate goals, research from BloombergNEF (BNEF) found.

The report found that investments in 2021 totalled £560bn, across renewable energy, storage, electrified transport and heat, nuclear, hydrogen, carbon capture and storage (CCS) and sustainable materials. Across all of these sectors, only CCS received investments lower than its 2020 levels. In total, investments levels were 21% higher than those recorded in 2020.

Investment in renewable energy reached £273bn in 2021, a 6.5% increase from 2020 levels.

However, much more needs to be done to increase the financial flows to reach the required level of investment to deliver the Paris Agreement and keep global average temperature increases to 1.5C.

PwC has previously warned, for example, that up to £400bn needs to be unlocked and funnelled into green infrastructure to meet the 2050 national target in the UK alone.

Globally, some $150bn was invested in clean energy in developing economies in 2020, according to the International Energy Agency (IEA). But the Agency believes this figure must hit $1trn by 2030 to deliver a net-zero world.

Looking ahead, between 2021 and 2030, four dollars will need to be invested in low-carbon energy supply for every dollar spent on fossil fuel energy supply globally, if net-zero by 2050 is to be achieved. That is a headline finding from a new analysis of energy investment requirements in the most popular and detailed net-zero scenarios, published by BNEF last month.

The publication assesses energy investment needs, on the supply side, in net-zero scenarios laid out by the International Energy Agency (IEA), the Network for Greening the Financial System and the UN-backed Intergovernmental Panel on Climate Change (IPCC). All scenarios entail reaching net-zero greenhouse gas emissions globally by 2050, with most being aligned with the Paris Agreement’s 1.5C temperature pathway.

In all scenarios, the ratio for investment in low-carbon energy supply to fossil fuel energy supply changes dramatically this decade. The ratio was 0.9:1 last year and 0.97:1 in 2020 but has never crossed 1:1.

This is set to change, the report states, with $815bn set to be spent on low-carbon energy supply in 2022, up from $718bn in 2020. While fossil fuel energy supply investment is also likely to increase in this timeframe, a 6.3% increase is expected, compared with a 17.7% increase for low-carbon energy.