Climate tech investment falls 40% in last year as investors ‘reluctant’ to back green tech

Investment in climate technology has dropped by 40% in the past year, says a report from PwC. The State of Climate Tech report for 2023 analysed over 8,000 climate tech start-ups and more than 32,000 deals worth over £400 billion.

The decrease in investment reflects market conditions rather than a deliberate move away from climate tech, the report suggests. This comes as economic uncertainty and geopolitical conflict shake investor confidence.

Interestingly, the fall in climate tech investment was significantly smaller than the venture capital and private equity average of 50% across sectors. Instead, the share of funding going to climate tech continued to rise, accounting for more than 10% of private market start-up investments in 2023.

Emma Cox, global climate leader at PwC UK, commented: “The development and scale-up of climate technology is an essential part of meeting the climate challenge.” She added, “So, while it is not surprising that absolute levels of investment in climate tech have fallen along with the market, it is concerning.”

However, she also noted: “The good news is that the sector has performed well in relative terms, with investment falling less than in other areas.” Emma concluded by saying, “It is also encouraging to see a shift in the balance of investments towards technologies that can cut emissions the most.”

“Now we need to see that shift continue, coupled with an increase in the absolute levels of investment in all technologies with the potential to cut emissions.”

The research found a shift towards greater efficiency in spending for emissions reduction although a disproportionate share of investment is still going to technology with lower potential.

While overall investment numbers are down, there has been a rise in the share of climate tech private equity and venture capital as well as grants for start-ups working on higher emissions reduction potential technologies, PwC said.

The report found that solar power’s share of investment is proportionally up by 24% while green hydrogen is up by 64%.

Elsewhere, carbon capture, utilisation and storage is up 39% since 2022 though it still represents less than 2% of total climate tech funding.

Meanwhile, the proportion of capital going to technologies with relatively lower potential to reduce emissions has fallen.

For example, light-duty battery electric vehicles’ proportional share of investment is down 50% since 2022, and micromobility (transport like e-bikes) is down 38%.

However, mobility in its different forms (transport) still accounts for 45% of investment.

The industrial sector, which is one of the highest emitting sectors in the economy, saw a surge of investment in climate tech venture funding.

Investors had previously directed less than 8% of climate tech venture funding to industrials between 2013 and Q3 of 2022, according to PwC. However, the analysis found that the share of investment into the sector has almost doubled to 14% between Q4 2022 and Q3 2023.

The report also shows a shift from early-stage deals to mid-stage deals, due to challenges around scaling or implementing capital intensive climate tech, as well as a challenging macroeconomic environment. Early-stage deals made up more than two-thirds of all climate tech deals in 2018 and 2019, dropping to around 47% in 2023.

Will Jackson-Moore, global sustainability leader at PwC UK, said: “A challenging macroeconomic environment, sinking valuations, and geopolitical turmoil has seen capital flows to climate tech ventures drop 40% at a time when climate tech needs it most.”

He added: “But while such industry and macroeconomic dynamics may cloud investor confidence, they also present significant first-mover opportunities for investors to engage in the current dip, as the need for climate tech innovations will only grow stronger.”

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