State of the Climate Tech Market

As the summer break draws to a close and we reflect on the past few months, we must mention the 2024 Summer Olympics and Paralympics in Paris. As well as being an exceptional display of athletic performance and inclusion, it was promised to be the most sustainable games in history because of its innovative use of venues, transport, renewable energy, and sustainable food practices, and it will be interesting to see how this played out in practice. “Games wide open” was the widely used slogan for the games. A lesser-used phrase was the Paris Organising Committee’s vision of “doing more with less”, and this statement could have been used to describe the pressures experienced by many technology start-ups over the past 12-18 months. In this alert, we look at the other challenges and opportunities facing climate tech companies in particular.

Climate Tech Investment Remains Popular and Resilient

In 2022, climate tech’s share of investment in the venture capital market reached historic highs, representing more than a quarter of every venture dollar invested in the 12 months leading up to Q3 2022.¹ Despite a decline in overall venture capital exit activity in 2023, climate tech markets showed resilience, with investment deal activity falling by only 14% since the outlier years of 2021 and 2022; during those years, when interest rates were at record lows, investments soared. This drop compared to a fall of 27% in investment deal activity in the overall venture capital market.² In Europe, climate tech received more investment than any other industry in the first half of 2024, bringing in €7.7 billion in equity.³ Fundraising for 2024 is also likely to be stronger than 2023; $3.4 billion was raised as of late June 2024, compared with $3.9 billion in all of 2023.⁴

These numbers show that climate tech investors remain dedicated to the sector, and the pace of fundraising across climate tech in Europe is showing no signs of slowing down.

Challenges and Opportunities for Climate Tech Companies

Climate tech companies face unique challenges compared to other sectors (for example, SaaS). Many of these businesses are extremely capital-intensive, developing novel manufacturing techniques or new products, so they require substantial amounts of capital early in their life cycle. In 2023, the biggest climate tech investments were in asset-heavy companies building infrastructure, such as battery manufacturing and renewable-energy projects. The decline in the venture capital market of mega-financing rounds therefore disproportionately affects the climate tech sector, at a time when investment in companies tackling the areas of highest emission has an outsize positive impact. Later-stage financing has dropped in recent years and needs to increase.

Climate tech companies typically have longer go-to-market and production cycles than many tech start-ups, often taking years or even decades to achieve profitability and meaningful revenue. Certain climate tech companies may therefore not fit neatly into the traditional venture capital model because, while they can offer the potential for extraordinary growth, they tend to require a longer-term commitment from investors. As a result, investors are pushing companies to find other use cases for their technology in an attempt to generate new lines of business and potentially earlier returns, or to speed up the development process by designing and scaling in parallel rather than optimising each stage of the journey before proceeding to the next. There also is pressure on companies to consider other forms of funding earlier than expected, such as debt funding, subject to the debt financier being comfortable with the potential growth of the technology before the product has been manufactured.

Political and Regulatory Focus

The political and regulatory backdrop and recent government initiatives demonstrate a commitment to addressing and mitigating climate change issues. Combined with an increased corporate focus on sustainability and awareness of the economic potential of sustainable technologies and innovation, there is an opportunity for the climate tech sector to grow more rapidly.

The new Labour government intends to quadruple offshore-wind capacity, double onshore-wind capacity, and triple solar-power capacity by 2030 to cut emissions from electricity generation to net zero by 2030. Significantly increasing renewable-power capacity has the potential to spur a new wave of investment across the climate tech sector alongside government funding, accelerating the transition to a low-carbon economy. In particular, the reinforced commitment to solar energy is likely to draw more investment into solar technologies, including advanced photovoltaic systems, smart grid innovations, and energy storage solutions. There will also be demands for advanced artificial intelligence to improve the efficiency and effectiveness of projects.

Regulatory frameworks will continue to play a key role in driving climate tech innovation and improving transparency in the market. For example, the introduction of the EU Corporate Sustainability Reporting Directive may have a positive impact on climate tech investment by requiring corporationss  to commit to sustainable practices and technologies. The directive (which comes into force in phases) has a broad scope and mandates more comprehensive and transparent reporting by large and listed companies on environmental, social, and governance metrics.

Takeaway

Investors and politicians clearly recognise the critical role that climate tech plays in shaping a sustainable future. Despite the challenges noted above, the strong performance of the climate tech sector since 2022 signals that it will continue to be a cornerstone of the global tech market as the demand for solutions to mitigate environmental impact grows.

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Please reach out to any of our industry experts below for more information.

 

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^[1] Cambridge Associates, “Climate Tech’s Evolution: The Maturation to a Competitive, Returns-Focused Thematic Investment Sector,” February 2023.
^[2] British-American Business Council, “The Future of Climate Tech, Presented by Silicon Valley Bank,” May 2024.
^[3] Sifted, “Europe’s 10 most active climate tech investors,” July 18, 2024.
^[4] Pitchbook, “2024 Climate Tech Funds Report,” July 16, 2024.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.