Climate tech investment is booming, but not in the right sectors

Electric vehicle startups have captured far more venture capital investment than any other sector in climate tech.
Electric vehicle startups have captured far more venture capital investment than any other sector in climate tech.
Image: REUTERS/Caitlin O'Hara
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Investment poured into climate tech at record levels in 2021, riding an overall boom in tech investment brought on by high-dollar public offerings, economic recovery from the pandemic, and growing interest in tech startups by private equity firms and other funders.

In the first six months of 2021, climate tech attracted $60 billion in investment globally, nearly tripling the record set in the last six months of 2020, according to a Dec. 15 analysis by the consulting firm PwC. That sum, spread across more than 700 deals, amounts to 14% of total venture capital investment across all sectors in the period, up from just 6% in 2019. And the size of individual deals nearly quadrupled in the first half of 2021 from one year prior, from an average of $27 million to $96 million, more than 10 times the size of the average deal in the first half of 2013.

But if the feverish pace of investment is a sign that venture capitalists see massive profit potential in fighting climate change, they are so far focused primarily on technologies that do relatively little to cut carbon emissions, leaving those with greater potential impact starved for cash, according to PwC.

EVs and E-scooters are cannibalizing the clean energy transition

The vast majority of investment over the last decade, at least $70 billion, has gone to light-duty electric vehicles. EVs are essential for displacing oil demand, but ultimately a greater share of global emissions are linked to electricity and the food system; thus, technologies aimed at reducing emissions in those sectors have a greater potential impact than those targeting mobility.

Green hydrogen, wind energy, and food waste reduction technology remain particularly underfunded relative to their carbon-reduction potential. E-scooters, meanwhile, have drawn nearly as much investment as solar power. Overall, PwC found, the five top carbon-reducing technologies, that represent 80% of total carbon mitigation potential, have so far received just 25% of investment.

Mobility is a proven profit generator for investors, said Emma Cox, global climate lead at PwC and the lead author of the analysis. To draw investors out of that comfort zone and toward higher-impact technologies, policymakers must sweeten the deal, she said—potentially through a package of tax incentives similar to the major US climate legislation killed over the weekend by a senator with deep ties to coal.

But investors willing to take risks on emergent technologies could be richly rewarded. Shareholder returns on climate tech companies that have gone public consistently outpace the S&P 500—and at least 78 so far have crossed the billion-dollar “unicorn” threshold.

“Hard-to-abate sectors with higher emissions often rely on climate technology solutions that are less proven, or require yet-to-be implemented policy changes to become commercially viable,” Cox said. “The investors that lean into that, and take the right risks, will create the next set of climate tech unicorns.”