ESG Investment Driving the Future of Climate Tech

Key Takeaways

  • ESG investing places an emphasis on companies’ commitment to environmental, social or governance before making an investment.
  • It’s predicted that in 2021, $58 billion will be invested in climate technology.
  • Climate tech isn’t just good for the environment; it can also improve the economy, livelihoods and quality of life.

The climate crisis is transforming the global economy. Climate-change-fueled natural disasters are expected to cost $77 trillion by 2050. These events are changing public sentiment and in turn putting pressure on governments and corporation to act. What has emerged is a dual opportunity to capitalize on emerging trends and head off an intensifying climate crisis by investing in a sustainable economy.

A new Silicon Valley Bank report, The Future of Climate Tech, looks at how the innovation economy is helping build a sustainable future for our planet.

I recently hosted a virtual event along with Mona Maitra, managing director at SVB; Lafe Vittitoe, managing director at SVB; and Milo Werner, partner at Ajax Strategies, to discuss the report's key findings, as well as the climate tech sector overall. Let’s dig into what we discussed.

ESG investing places an emphasis on companies’ commitment to environmental, social or governance factors before making an investment. ESG investing is sometimes called socially responsible investing, impact investing or sustainable investing. Recently, ESG factors have become a priority for limited partners in venture capital (VC) funds.

Climate change: Impact and opportunity

The intensifying climate crisis, the result of our dependence on fossil fuels, has driven public interest in clean energy and climate technology. Venture capitalists, recognizing this trend, are training their attention on this sector, which is still in its infancy. The result is an unprecedented demand for innovators and investors in climate tech, which encompasses supply chain innovation, clean energy, transportation and more.

Consider the following indicators:


It’s predicted that in 2021, $58 billion will be invested in climate technology, substantially beating the previous record of $36 billion in investment set in 2020.

Fundraising for climate-tech-focused venture funds is on track to hit a record $26 billion this year.

It is forecasted that $35 billion to $40 billion will flow to US-based, VC-backed climate tech companies through special purpose acquisition companies (SPACs) in the next 24 months.

Disrupting the climate crisis

US GHG Emissions by Sector and Tech Distruption.PNG

Silicon Valley Bank. (2021). Us GHG Emissions by Sector and Potential for Technological Disruption. The Future of​ Climate Tech.

1) By total capital paid in; from left to right: Impossible Foods, LIVEKINDLY Collective, Perfect Day, Califia Farms, Redaptive, Phononic, Carbon Lighthouse, Sunverge Energy, Solidia, Fortera, Sublime Systems, Blue Planet, Ltd., Farasis Energy, Microvast, Transphorm, Smart Wires, Rivian, Faraday Future, Lucid Motors and Proterra.

To disrupt the climate crisis, innovators and investors should focus on areas that have the most impact in the shortest amount of time. Energy and power, which account for 73% of global emissions, are ideal targets. Within these areas, certain sectors are ripe with potential for carbonless solutions through technological disruption. Existing, proven technologies can make a real impact in these sectors. Electric vehicles, for example, can reduce the need for internal combustion engines in the transportation sector, while improved battery storage can improve the efficiency of the electrical grid.

Climate tech emerges: Hope for the future

Understanding Climate Tech.PNG

Silicon Valley Bank. (2021). Understanding Climate Tech. The Future of Climate Tech.

2) Source CleanTech Group’s i3 database

Anthropogenic climate change can seem overwhelming. However, climate tech provides a real solution by advancing tech-driven adaptation and mitigation strategies. Findings from our report suggest substantial VC investment will flow into three particular solutions sectors in 2021:

  • Transportation and logistics: $19.5 billion

  • Energy and power: $8.6 billion

  • Agriculture and food: $9.4 billion

Enabling technologies, including artificial intelligence, advanced manufacturing, robotics and the Internet of Things, attracted 24% of climate tech VC investment in 2020. These are the technologies that make cleantech innovations possible and commercially viable. We expect more capital to enter this space.

 

The technologies, from electric vehicles to solar energy, have been proven, and are now on the cusp of widespread adoption.

Venture capital funding and investments

Climate Tech VC.png

Silicon Valley Bank. (2021). Climate Tech VC Investment Activity. The Future of Climate Tech.

While VC investment in climate tech has grown exponentially, although most companies receiving funding are still early-stage, at their Series Seed or A rounds. There is plenty of opportunity. As interest continues to build, greater competition for deals is resulting substantial step-ups in valuation between funding rounds. While the transportation and logistics sector typically experiences the largest increases in valuation, even the energy and power sector has seen substantial growth.

 Climate tech and SPACs

DeSpacs Landscape for Climate Tech Companies.PNG

Silicon Valley Bank. (2021).De-SPAC Landscape for Climate Tech Companies. The Future of Climate Tech.

3) 2020-2021 De-SPACs. 4) Graphic sum above 100%: rounded up 47.5% and 52.5%.

Investment in climate solutions is closely linked with the expansion in SPACs. In the past, climate-tech companies have been acquired, rather than going public, but SPACs are changing this trend. Using SPACs, climate tech companies can continue to focus on technological development and commercialization, rather than fundraising. As a result, it’s predicted that $35 billion to $40 billion will flow to VC-backed climate tech companies through the de-SPAC process within the next two years.

The path to a sustainable economy

Climate tech isn’t just good for the environment; it can also improve the economy, livelihoods and quality of life. Investments in the energy sector—particularly in decarbonizing the electric grid—will make it possible to reduce emissions by roughly 70%. This switch could impact the globe for generations, while having minimal negative economic impact. In fact, job creation in the renewable energy sector is predicted to cover job losses in industries like oil and coal. 

Global Potential Net Job Creation by 203.PNG

Silicon Valley Bank. (2021).Global Potential Net Job Creation by 2030. The Future of Climate Tech.

 

"Government subsidies have a role to play in incentivizing people to adopt climate-friendly technology like electric vehicles."

 

Webinar Q&A

I had the opportunity to engage in a conversation with panelists during the webinar. Here’s a summary of the Q&A.

What are the greatest risks of climate change?

The risk of climate change can’t be overstated. Increasing natural disasters threaten to overwhelm the world’s economic, social and political infrastructure.

How can we begin to scale technologies that are equitable?

Government subsidies have a role to play in incentivizing people to adopt climate-friendly technology like electric vehicles. As the technologies scale and people have positive experiences with them, costs come down and interest increases, accelerating more widespread adoption. New models of ownership, particularly for vehicles, should also be explored.

Where should investors spend more time, in terms of sectors that have positive climate impact?

While transportation and logistics, energy and power, and agriculture and food make up the bulk of greenhouse gas emissions, the circular economy can make an impact on landfills and the plastic problem. While startups that use recycled materials are in their infancy, they are drawing interest from investors and the public.

How should climate tech entrepreneurs capitalize their businesses?

In the early stage, entrepreneurs should build relationships with equity investors who have a long-term vision. Later, entrepreneurs should explore capital that doesn’t dilute ownership, including government grants and debt.

How will the next phase of climate investment be different?

Although there was interest 15 years ago in cleantech, the current expansion of climate-focused investing is fundamentally different. The technologies, from electric vehicles to solar energy, have been proven, and are now on the cusp of widespread adoption. The markets for climate tech have been identified, and implementation is assisted by government policies that benefit environmentally friendly technologies.

To learn more about the future of climate tech, download the full report, and watch the webinar and panel discussion.

Kelly Belcher Headshot
Written by
Kelly Belcher
Kelly is responsible for development of new business, strategy and oversight as well as cultivating the energy tech ecosystem throughout the ERI global practice.

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