VC and PE Investments Drive Climate Innovation
ESG strategy and reporting are keys to attracting capital
The accelerating pace of ClimateTech investment is powering the next generation of sustainable startups aiming for the Net Zero carbon goal.
Climate change has emerged as one of the world’s most formidable challenges. In response, corporations are accelerating their ESG strategies and disclosures. Investors are discovering, funding, and growing early-stage companies aiming to create innovative solutions for climate action. A September 2020 report from PwC indicates that investments in climate tech over the preceding seven years have exceeded the average market rate of VCs fivefold, totaling $60 billion annually.
That pace is accelerating. According to Pitchbook data, global investors closed as many climate-focused funds in 2021 as were raised in the previous five years combined. In the first half of the year alone, VC-backed climate tech companies raised $14.2 billion worldwide, 88% of the total for all of 2020.
Start-Up Action and Funding
There is a flood of start-ups addressing climate change using different technological approaches. One of the biggest climate funds in 2021 was closed by 3x5 Partners, a VC based in Portland, Oregon. The firm invests in companies developing solutions for global health and climate crises. They have already invested over $400 million in capital, and in March closed a $100 million fund.
The climate crisis has sparked the interest of influential VCs like Y Combinator, Union Square Ventures, and Sequoia Capital. Sequoia launched a fund focused on backing start-ups developing solutions for the climate crisis.
Funding Regulation Map
The VC enthusiasm for climate tech contrasts with investor disappointment in cleantech after largely unfulfilled promises from the first wave in this niche a decade ago. Private Equity action has also increased since then. Nearly 90 private equity firms, representing more than $700 billion in Assets Under Management (AUM), have signed the International Climate Initiative (ICI). This action is supported by the Principles for Responsible Investment (PRI), which calls on the private equity industry to drive climate action. Similarly, a green pledge that has evolved in the VC industry, called The Sustainability Clause, has become a fixture of recent term sheets and shareholder agreements. The SC binds VC-funded companies to undertake climate protection actions, such as working to reduce or compensate for CO2 emissions.
What does the future hold?
To reach the goal of net-zero emissions by 2050, annual clean energy investments need to more than triple by 2030 to $4 trillion, according to IEA. Today, most of the reductions in carbon emissions are coming via existing technologies. By 2050, almost half of the reductions are expected to come from technologies currently in developmental stages or not yet invented. PE and VC activities are expected to provide the capital assets to fuel this innovation. The scope of investments in climate tech is expected to spill over into related fields like cleantech and agritech. The rapidly accelerating deal flow suggests that the rising tide of private investment and venture capital will continue to lift the next generation of startups addressing environmental sustainability issues.
Are you investing in a more sustainable world? Tell us about your efforts and let The Global Imprint help you prepare solid ESG reports, demonstrating your successes while identifying areas requiring greater attention and development.