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State of Climate Tech 2021: Can investment reduce code red?

  • The last year has seen an influx of funding into climate technologies alongside increased corporate interest in ESG issues.
  • VC investment plays a critical role in scaling up – a challenge for start-ups too big for angel capital but too high-risk for commercial lending. 
  • Funding should further target nascent technology to enable breakthrough innovation and capitalise on areas of untapped potential.

Society will need a variety of tech solutions – that will help mitigate, adapt to, and understand climate change – in order to respond effectively to the climate challenge. If mitigation technology is not accelerated in time, adaptation will be required. In either scenario, data and monitoring will be crucial.

To avoid more than 1.5°C of warming, the world has to decarbonise at 12.9 percent a year, over eight times the rate historically achieved since 2000. With the global economy, based on COP26 2030 targets, on track to producing an estimated 2.4°C of warming, the fundamental analysis of the Intergovernmental Panel on Climate Change (IPCC) that this is ‘code red for humanity’ remains true.1

Technology is not the sole answer, but it is an amplifier of intent. And while climate tech alone is not the panacea, it’s a space that is emerging rapidly as a critical mechanism to bend the emissions curve down and get the world back on track. PwC’s State of Climate Tech 2021 explores how investors are securing both climate impact and commercial returns from climate tech.

The state of climate tech in 2021

Among the many findings of the report’s analysis, a few key trends:

  • Investment in climate tech is continuing to show strong growth as an emerging asset class, totalling US$87.5bn over the last 12 months analysed (H2 2020 and H1 2021), with H1 2021 alone delivering record investment levels in excess of US$60bn. This represents a 210 percent increase from the US$28.5bn invested in the 12 months prior. Climate tech now accounts for US$0.14 cents of every VC dollar. 
  • The average deal size nearly quadrupled in H1 2021 from one year prior, growing from US$27m to US$96m. Megadeals are becoming increasingly common and are driving much of the recent topline funding investment growth in climate tech.
  • Innovative finance remains core to climate tech’s growth. The past 18 months have seen special-purpose acquisition companies (SPACs) tested as a new tool in the toolkit for start-ups looking to go public and raise large amounts of funding. This new fundraising approach is responsible for driving a significant proportion of growth in climate tech, with H1 2021 seeing SPACs provide a third of all funding at US$25bn. 
  • Mobility and transport remains the most heavily invested challenge area, raising US$58bn between H2 2020 and H1 2021, which represents over two thirds of the overall funding in the period. Within this, electric vehicles (EVs) and low greenhouse gas (GHG) vehicles remain dominant. In particular the report found that H1 2021 was dominated by a handful of significant megadeals, with Lucid Motors raising US$6.9bn, Northvolt US$2.8bn, Cruise US$2.8bn and Rivian US$2.7bn. 
  • There has also been significant growth in industry, manufacturing and resource management, raising US$6.9bn between H2 2020 to H1 2021, over triple the amount raised by the vertical in the period a year prior. This has been driven by megadeals such as Ginkgo Bioworks’ US$2.5bn raise in H1 2020 and the rise of numerous circular and second-hand businesses. These include Back Market, which raised US$335m, and Vinted, which raised US$300m in H1 2021. 
  • The US remained the most dominant geography in H2 2020 – H1 2021, completing more deals than any other geography. The world’s most active climate tech hub, the San Francisco Bay Area, continued to lead the way, with start-ups across every challenge area raising funding in the 12 month period. Notable rounds included goliaths such as Cruise raising in excess of US$2bn between Microsoft, General Motors and Honda; as well as sectoral innovators such as Electric Hydrogen and Sound Agriculture raising US$24m (Series A) and US$45m (extended Series C). Beyond the Bay Area, the next-most active climate tech hubs are London, Berlin and New York.

New innovations need new funding

Highlighted in last year’s inaugural State of Climate Tech 2020 report, a rapid increase in the climate tech market has occurred in the last few years, booming from US$418m globally in 2013 to US$16.3b in 2019, rising more than 3,750 percent in only seven years. This year sees a further acceleration, with the average size of climate tech deals nearly quadrupling in the first half of 2021 and over 200 percent growth in terms of total volumes year on year.

It is evidence of a rapid, dramatic increase of interest in climate tech start-ups – a new generation of innovators leveraging these technologies to shake up high-carbon business models ripe for disruption. Scale is a challenge. Most critical, for many start-ups, is getting hold of the funding they need to escape the ‘valley of death,’ where they are too big for angel capital but too high-risk for commercial lending. 

It’s in this space that venture capital (VC) plays a critical catalytic role. Indeed, 2021 has been a year of transformation in the VC landscape. New types of capital and funding mechanisms have resulted in significant new flows of investment into private markets. In addition, cash reserves for investment stockpiled in 2019-20 are now being put to use in the deals-led recovery of 2021. 

The investment landscape for climate tech is no different, as society increasingly feels the impacts of climate change. An accelerated focus on environmental, social and governance (ESG) criteria in private markets, alongside emerging regulations such as the EU’s Sustainable Finance Disclosure Regulation, is driving growth and leading many companies and investors to pivot their strategies. Additionally, thousands of companies have made public commitments to net zero, set science-based targets or sought to demonstrate their wider commitments to society through B Corp status. Megafunds are being ring-fenced for climate tech, including Brookfield’s US$7bn Global Transition Fund2 and TPG’s US$5.4bn Rise Climate fund.3

Missed opportunities

Despite the predominantly positive trends being reported, there are still significant areas of untapped potential. Of 15 technology areas analysed in the report, the top five – representing over 80 percent of future emissions reduction potential by 2050 – received just 25 percent of recent climate tech investment between 2013 and H1 2021. 

An opportunity is being missed by not deploying capital in line with impact potential – a handful of mature technology areas are attracting the majority of investment. Though funding is needed across all challenge areas, targeting funding to nascent technology areas can enable breakthrough innovations, trigger tipping points to accelerate sector-based adoption and decarbonisation as well as achieving meaningful financial returns.

Achieving breakthrough innovations in these currently underfunded areas will require new action from investors and policymakers. Long-term strategic plans and targeted policy measures by governments, such as carbon pricing, are needed to kick-start investment in hard-to-abate sectors and to deliver net zero infrastructure — for example, low GHG concrete or green hydrogen production, as well as carbon removal technologies that will be pivotal to achieve global net zero targets. 

Getting to green

The climate tech landscape is moving quickly, and momentum has significantly accelerated over the past year since PwC’s first climate tech report. Although capital is pouring in, attention is still needed at pre-seed and seed stages to drive breakthrough innovations, advancing and scaling future technologies to help tackle the climate crisis. 

Investors need to look beyond the low-hanging fruit to help scale technologies in harder-to-abate sectors, with a focus on channeling money into the critically underfunded technologies that have a higher emissions reduction potential to drive deep decarbonisation of the economy. And they will need a longer-term investment horizon in order for the fruitful of these technologies to reach maturity. 

Finally, it is worth noting that nearly all funding of climate tech is going into mitigation, with very little touching on adaptability. While this potential optimism hopefully bodes well for net zero, and the last 12 months have shown a clear global intention to respond to the climate crisis, short and longer-term adaptation may be necessary if technologies are not accelerated quickly enough – it highlights a clear innovation and funding gap.


For the full findings and in-depth analysis on investment in climate tech over the past year, download the State of Climate Tech 2021 report.



References

  1. https://www.un.org/press/en/2021/sgsm20847.doc.htm
  2. https://www.globenewswire.com/news-release/2021/07/27/2269263/0/en/Brookfield-Announces-Initial-US-7-Billion-Closing-for-Brookfield-Global-Transition-Fund.html
  3. https://www.ft.com/content/2fa772ed-45c1-4d43-9aeb-2a0e133d4ff8