The world is in a race to oppose the continuously growing threat of climate change. Put simply, climate change is one of the most pressing of our time. Even the UN Secretary-General has named climate change as the “defining issue of our time.” Climate change is a blanket term that can be traced to several underlying factors including increased carbon emissions, rapid deforestation, and unchecked air and water pollution. Of these issues, scientists have targeted carbon emission as the most pressing threat to climate change. Simply put, atmospheric carbon is a greenhouse gas, and increased carbon production as a by-product of combustion vehicles, industry, and agriculture serves to trap excess heat within Earth’s atmosphere leading to a phenomenon called global warming. According to The Intergovernmental Panel on Climate Change (IPCC), which includes more than 1,300 scientists from the United States and other countries a rise in global temperatures can lead to significant impacts on the natural world including rising sea levels, increased incidence of drought, heightened intensity of tropical storms, and disease outbreaks to name a few. Seeing as how the natural disaster of COVID-19 drastically influenced social and economic life, it is quite obvious why climate change is the forefront issue for countries around the world.
What Progress Have We Made?
The overarching goal to reach a net-zero carbon world is a task of great depth and breadth. Consequently, it is a challenge that must be tackled by entities as large as governments and corporations to groups as small community organizations and households. The 2015 Paris Agreement saw world leaders agree to limit a global temperature rise by the end of the century to well below 2°C, and to pursue efforts to limit the temperature increase even further to 1.5°C. While we are making tremendous progress towards these goals, unfortunately, we are lagging on progress to this goal. According to data from PricewaterhouseCoopers, the current rate of decarbonization is nearly 7x below the rate it needs to be at to reach the goals outlined in the 2015 Paris Agreement.
Clearly, society must increase efforts to reach a net-zero future in order to stifle global warming. However, reaching a net-zero future through policy that drastically alters people’s way of life is both impractical and infeasible. Thus, like humans have done throughout history, we will need to rely on technological innovation to reach a net-zero carbon future in a way that is fairly congruent with our daily lifestyle. Consequently, we will also need seed funding to launch climate tech companies into aspects of daily life.
What is Climate Tech?
Simply put, climate tech is technology that focuses on either 1) the reduction or capture of greenhouse gases or 2) the capturing of emissions data for means of tracking net carbon emission. The majority of climate tech is focused on reducing carbon emissions in the following five areas: Energy, Mobility and Transport, Food, Agriculture and Land Use, Heavy Industry, Built Environment (Building and Construction).
Looking at Global Venture Funding
With increased social pressure to take action on climate change, we have begun to see investors and corporations put seed funding into many climate tech startups. However, investment into climate tech is not solely for public image or Corporate Social Responsibility, it is actually a promising area to seek high returns on investment. On the corporate side, we have seen significant seed investment into climate tech. For example, Amazon has committed to
launching their Climate Pledge Fund, $2 billion in venture capital aimed at clean energy ventures. Additionally, Jeff Bezos personally pledged $10 billion to fight climate change through the creation of the Bezos Earth Fund, making him the largest single US climate change donor. The technology firm Microsoft has announced a $1 billion Climate Innovation Fund, and conglomerate Unilever has pledged to invest €1 billion in a new dedicated Climate & Nature Fund, focused on nature restoration and carbon sequestration.
Additionally, climate tech has seen seed funding from major venture capital firms including Sequoia Capital, Kleiner Perkins, and Khosla Ventures to name a few.
To look more at overall global funding, consider the graph below. According to data from PWC, there have been around 2,700 unique investors from venture capitalists, corporate VCs, angel investors, philanthropists, and government funds who have participated in funding over 1,200 climate tech startups between 2013 and 2019. By 2019, this meant that nearly 6% of global venture capital activity was put towards climate technology.
This significant increase in VC funding had lent itself to an 84% CAGR in total capital being deployed into the space. This is nearly 5x greater than the general capital deployment rate for the VC industry as a whole. Additionally, there has been a rapid acceleration in the number of deals taking place. The number of funding rounds grew at a 35% CAGR from 2013-2019. Because this CAGR was lower than the rate at which funds are being deployed, it says that there has been an increase in the typical size of a deal- a sign of a maturing climate tech market.
Additionally, if we see above, a majority of the VC deals being converted are taking place in the U.S. and Canada followed by China and Europe. There are significantly smaller percentages of funding occurring elsewhere, which points to a major challenge in reaching global net-zero emissions. How can less developed countries with less mature economies find a way to allocate resources to confronting climate change? This is a serious question that global bodies like the United Nations will have to face in the near future.
Continued Funding and Barriers
The current rate of funding in the climate tech sector is a promising sign in the battle against the looming threat of climate change. It is important that funding can continue to maintain progress on reaching the goals set by the 2015 Paris Agreement. There are several reasons to believe that the future of investment in the climate tech sector is positive. First, consumer demand for sustainable products and services has risen significantly and is likely to continue to do so as younger generations enter the workforce and develop purchasing power. Secondly, the advancement in computing technology has made the process of tracking emissions and developing new technologies somewhat easier. Lastly, Corporate Social Responsibility (CSR) is a growing trend among major corporations, and such a movement motivates corporations to operate sustainably. This is likely to grow in parallel to consumer demand for sustainably produced products. Lastly, political regulators in developed economies are increasingly taking actions to reach net-zero emissions. Such political favorability lends itself well to continued climate tech development and funding.
It is important to acknowledge that there are some barriers that may stifle funding in the future as well. For example, failure in the research and development of climate tech, lack of regulatory support in less developed countries, and inability to attract talent to the climate tech industry are a few headwinds that can limit future funding.
Nonetheless, the future outlook for climate tech appears positive, and society should have reason to believe that there will be continued investment in the sector moving forward.
Barrett, Scott. "The coming global climate-technology revolution." Journal of Economic Perspectives 23, no. 2 (2009): 53-75.
Herweijer, Celine, Ben Combes, Tarik Moussa, James Wark, Jess Wrigley, and Marissa. Donnelly. “The State of Climate Tech,” September 9, 2020. https://www.pwc.com.
Moore, Bill, and Rolf Wüstenhagen. "Innovative and sustainable energy technologies: the role of venture capital." Business Strategy and the Environment 13, no. 4 (2004): 235-245.