Finding and funding the technologies which can meet the climate challenge
Meeting net zero emissions targets will require an entirely new range of technologies to be made commercially available at an unprecedented pace and global scale, requiring extraordinary investment capital
Climate technology has attracted huge investor interest in recent years, with wealthy and ultra-wealthy long-term investors emerging as a crucial source of funding for new and emerging climate tech.
Despite challenging market conditions last year, venture capital (VC) investment into climate tech rose by more than $70bn (89 per cent) globally. These represent more than a third of aggregate VC funds for climate tech raised since 2010 ($194.4bn), according to impact intelligence platform HolonIQ.
“We see the climate tech space as not only being highly impactful from an environmental perspective, but also potentially highly profitable, if investors can select the right strategies,” says Credit Suisse’s head of sustainable and impact investing advisory James Gifford.
He believes the space represents a “huge growth opportunity”, which smart investors will be able to leverage.
Policy support is providing a significant boost to the climate tech sector, which benefits from a “growing pool of world class talent”, including tens of thousands of PhDs and scientists, plus a generation of climate-motivated founders and entrepreneurs building tech companies, says Mr Gifford.
The challenge for both investors and the planet, he says, is locating ‘gigacorns’, namely companies valued at greater than $1bn which, in addition, can save more than 1gigatonne (GT, equivalent to 1bn tonnes) of carbon emissions per year, while being commercially viable.
While existing mature technologies including solar, wind and electric vehicles are important for the green transition, half of emission reductions required by 2050 will come from technologies not yet commercially available, with many still in the prototype phase, according to the International Energy Agency. Investments in renewable energy must be tripled to $4tn annually by 2030, to reach net zero emissions by 2050.
This means the world will need an entirely new range of technologies to be made commercially available at an unprecedented pace and global scale, requiring extraordinary investment capital. Between $100tn and $150tn will be needed by 2050 to decarbonise the global economy and limit the Earth’s warming to 1.5C to 2C, estimates Boston Consulting Group.
Under the radar
Some “under the radar” climate techs could make a significant contribution to combating rising temperatures in coming decades, explains Mr Gifford in a recent report, Under the Radar: 20 climate tech game changers. He believes the climate crisis needs to be tackled from all angles, and that there is no “silver bullet” to solve it.
Among the 20 technologies he highlights are perovskite solar cells, which significantly increase the efficiency of solar panels, and new battery recycling tech and green fuels, such as methanol. In agriculture, cultivated meat and genetically edited microbes can reduce the need for synthetic fertiliser.
The future of the climate depends heavily on developing markets, today responsible for two-thirds of annual emissions, according to the Center for Global Development. These economies will need vast amounts of additional, cheap energy to power economic growth.
But the biggest challenge for these technologies is scaling up, explains Michael van der Meer, Credit Suisse’s head of sustainable investment analysts and co-author of the report.
Many technologies are going up against incumbents already benefiting from scale and widespread adoption. For instance, replacing fossil fuels with green fuels or electrification, or animal meat with synthetic meat, requires new infrastructure, while getting the timing right on consumer adoption, says Mr van der Meer.
“Counter-intuitively there is also an incumbency issue within the climate tech space itself,” he adds. For example, where silicon solar panels have already reached tremendous scale using mature production methods, it can be difficult to persuade producers to change their tried and tested production processes to accommodate new technologies such as solar perovskites, he explains. “Ultimately new tech needs to have such clear benefits that both producers and consumers are willing to embrace it.”
Driving investment
Technology innovation aimed at reducing greenhouse gasses is set to drive growth in climate investments for decades, believes Bruce Usher, professor at Columbia Business School, long-term investor and adviser to entrepreneurial ventures focused on climate change and clean energy.
Shifting social norms are also driving investments in this sector. While physical risks of the climate crisis are still relatively low for most firms and investors, consumers are demanding sustainable products and services, while employees prefer to work for sustainable companies. More than 5,000 of the world’s largest companies have made pledges to reduce greenhouse gas emissions to zero.
Importantly, governments are responding to these trends, most evident with the US Infrastructure Act and the Inflation Reduction Act (IRA), legislation together providing nearly $1tn in government support for climate solutions. The EU has recently responded with its Green Industrial Plan, which could place Europe’s potential green investment ahead of the US IRA’s subsidy package.
“Investors should invest into climate investments, both for their own benefit and the planet,” says Mr Usher. Investment opportunities exist in nearly every sector, worldwide, he adds, as after 300 years of burning fossil fuels for industry and agriculture, the entire global economy must be decarbonised within 30 years.
Green hydrogen and direct air capture technologies, while still not commercially competitive, will be crucial to mitigate the climate crisis and meet net zero, he states.
Impact before profit
These technologies belong to the category of ‘impact first” investments, where impact is the primary objective, he explains, adding that UHNW individuals have an important role to play in funding early-stage climate technologies, as they have the capital to take additional risk and long-term horizons.
He cites Bill Gates’s Breakthrough Energy Ventures, which has raised more than $2bn in committed capital to support more than 90 cutting-edge companies. Most of these investments will fail, but the few that might succeed will have “tremendous impact” on climate mitigation, and might prove very successful investments too, believes Mr Usher.
The great wealth transfer set to gather pace in coming decades will also be an important source of funding for new climate technologies. Family offices and private wealth have helped spur the technology revolution in Silicon Valley, with many focused on leaving a legacy and better world for next generations.
While it is key to support innovative start-ups, there are significant risks associated with venture capital. Moreover, climate tech is only a new subset of the VC sector, with few managers boasting long track records, warns Credit Suisse’s Mr Gifford.
It may make sense for wealthy clients, he says, to also invest in diversified approaches, spreading risk across multiple strategies in different climate-related sectors, including energy, food, agriculture, mobility and “the built environment”.
