With emissions targets in focus as world leaders and corporate executives gather for COP26, a UN climate conference that started on Sunday in Glasgow, momentum around financing new climate tech is accelerating to meet global aims set in the Paris Agreement.
Existing technologies can reduce up to 65% of emissions, according to the Boston Consulting Group (BCG), and the remaining 35% of emissions needed for net-zero goals will come from technologies that are not yet commercially scalable.
“I think this year, it's gonna be more clear than ever that the solution to climate change is that of a triangle: It's the entrepreneurial side, it's the public capital, and it's the private corporate capital,” Svenja Telle, an emerging technology research analyst at Pitchbook and former UN climate adviser, told Yahoo Finance in an interview. “And while COP21 was very ambitious with the Paris agreement, we are now at a point where we need solutions, and startups are going to supply those solutions to the existing technology gap.”
Yahoo Finance and Yahoo News will be reporting from COP26, which is set to begin on October 31 and last until November 12 in Glasgow, Scotland. Check out the coverage here.
That's the opportunity that many venture capital firms around the world seem to be betting on, according to a new Pitchbook report.
BCG estimates that the size of the investment opportunity for reaching net-zero emissions globally ranges from $100 trillion to $150 trillion of investment over 30 years, or $3 trillion-to-$5 trillion per year.
While that kind of investment has yet to fully materialize, the number of climate tech deals venture capital firms are entering and exiting are increasing rapidly. Year to date, climate tech startups raised $30.8 billion in 783 deals. $12.9 billion of that investment occurred in the third quarter alone, which was up 38% year over year.
Builders work on the roof of a new housing construction site in Alexandria, Virginia October 17, 2012. (REUTERS/Kevin Lamarque) ·(Kevin Lamarque / reuters)
The U.S. becomes 'the powerhouse for climate tech innovation'
The magnitude of capital flowing into climate tech today is reminiscent of waves of interest in clean tech in the past.
The backdrop that has helped to spur on this flurry of investment comprises the growing sense of urgency around the climate crisis as its extreme effects are seen and felt more broadly, a more holistic approach by private equity to climate tech, the falling costs of renewable energy and its components, and strong support from some investors, policymakers, and corporations.
There's also a geopolitical element at play.
“We had high values of close to $20 billion in 2018. But that was very specifically focused on China's investments into electric vehicles,” Telle said. “So the data back then was biased towards China. Right now. We really see the U.S. as the powerhouse for climate tech innovation, investment, and exit.”
President Barack Obama, left, meets with Chinese President Xi Jinping during the COP21, United Nations Climate Change Conference, in Le Bourget, outside Paris, on Monday, Nov. 30, 2015. (AP Photo/Evan Vucci) ·(ASSOCIATED PRESS)
Telle added that currently in China, "we see major investments more into battery technology. While in the U.S., the investment is way more far spread across segments and categories and technologies."
Telle, who was present at the climate summit where the Paris Agreement was drafted, also noted that a major catalyst for climate innovation and capital allocation was the supportive stance the Biden administration took upon assuming the White House.
“I think it is spurred a lot through the changed administration and, with it, a very different budget proposal as we would have seen it under previous legislation,” she said. “And another big factor, I believe, is also of the U.S. rejoining the Paris Agreement and the upcoming COP26 Conference, where there's gonna be a lot of housekeeping around how much governments and countries are on track to comply with the Paris agreement they have signed and pledged to.”
'The next 1000 unicorns will be in climate tech'
Climate tech may reach into a myriad of sectors, but VC firms and investors favor transport the most, with nearly half of all investment going toward that segment.
The largest early-stage and late-stage deals, including a $2.5 billion funding round by EV-maker Rivian, were in electric transportation.
Where climate tech investment is going. YTD $15 billion in investment has poured into electric transportation. (Source: Pitchbook) ·(Pitchbook)
Telle highlighted that a number of other segments had seen growth, particularly in carbon technologies and industry.
“So we are really seeing a lot of investments in direct air capture, just as the largest direct air capture plant just opened in Iceland by Climeworks,” Telle said. “But we are also seeing a lot of investments in other segments, especially carbon fintech. That saw the fastest growth between 2020 and 2021, which includes and makes up carbon initiative banking solutions for end customers and clients.” Aspiration is one example of carbon-conscious financial services that offers a credit card that plants a tree for certain transactions.
While carbon capture and storage, which sucks greenhouse gas emissions out of the atmosphere, will be critical to reach net-zero emissions by 2050, Telle stressed that investments also have to go into sectors that will be hard to decarbonize, such as construction and industry, with the development of green hydrogen fuel and decarbonized concrete.
Telle also noted Impossible Foods, which is set to IPO by spring 2022, as an example of a successful exit.
"We are gonna see more and more of venture capital deployed into alternative protein and indoor farming, especially indoor farming has grown over the last four years," she said. "And more and more top investors are really looking into that direction to solve climate change.”
And following the intensified scrutiny on cryptocurrency's carbon footprint, startups are clamoring to find solutions to diminish the energy use of decentralized finance.
“It's very, very, very fast pace,” Telle said. “A lot of the startups, they exit within just a couple of years. They're even hard to attract staying in the venture capital ecosystem because they exit so fast.”
And while there is much work to be done to transition the world away from fossil fuels, Telle sounded optimistic about the progress made since the Paris Agreement.
“Something that makes me really happy is to think about that in 2015, climate tech wasn't even a term. Nowadays, it's a buzzword. I think that's progress in itself,” she said. “2015 investments into climate tech were pretty much nonexistent. While nowadays, leading investment firms forecast that the next 1000 unicorns will be in climate tech. That gives me hope.”