Climate Tech Investments See 40% Dip, But With a Steady Influx of First-Time Investors, Sector Remains Attractive

PwC's 2023 report shows a 40% fall in climate tech investments due to economic uncertainty. Despite this, first-time investors show interest, highlighting the industry's continued allure.

Climate Tech Investments See 40% Dip, But With a Steady Influx of First-Time Investors, Sector Remains Attractive

LONDON, 17 October 2023 - The latest PwC 2023 State of Climate Tech report reveals a significant 40% dip in climate technology investments, highlighting the impact of economic uncertainty and geopolitical conflicts on investor confidence. This comprehensive analysis, which encompassed over 8,000 climate tech start-ups and more than 32,000 deals amounting to over US$490 billion, provides a unique window into the landscape of climate tech investments in a volatile global economy.

While the downturn in climate tech investment is largely attributed to the prevailing economic uncertainties and geopolitical turmoil, it is noteworthy that this 40% decrease is comparatively smaller than the average 50% drop observed across other industry sectors. Importantly, as a proportion of total start-up investments, climate tech investments have continued to ascend, now constituting over 10% of private market start-up investments, a substantial increase from 7% in 2018.

This report further illuminates a key development: an unrelenting influx of first-time climate tech investors, underscoring the enduring appeal of the sector, even in the face of challenging market dynamics.

As Emma Cox, Global Climate Leader at PwC UK, stated in the PwC press release, "The development and scale-up of climate technology is an essential part of meeting the climate challenge. So, while it is not surprising that absolute levels of investment in climate tech have fallen along with the market, it is concerning. The good news is that the sector has performed well in relative terms, with investment falling less than in other areas. 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."

Notably, the report identifies a shift towards more efficient spending for emissions reduction. Historically, investments were not commensurate with emissions reduction potential, with a disproportionate focus on technologies with limited impact. Nevertheless, the latest findings signify a move in the right direction.

The industrial sector, responsible for a substantial 34% of global emissions, has experienced a noteworthy transformation. Between 2013 and Q3 2022, just below eight percent of climate tech venture funding was directed towards the industrial sector. However, between Q4 2022 and Q3 2023, this allocation nearly doubled, reaching 14%.

Despite an overall decline in investment volumes, there is a noticeable trend towards channeling capital into technologies with significant emissions reduction potential. Solar power's share of investment has risen by 24%, green hydrogen by a striking 64%, and carbon capture, utilization, and storage by 39% since 2022, though it still constitutes less than two percent of total climate tech funding. Conversely, the share of capital allocated to technologies with comparatively lower emissions reduction potential has decreased, with light-duty battery electric vehicles seeing a 50% reduction and micromobility a 38% decrease. Nevertheless, mobility, in its various forms, still accounts for 45% of total investment.

The investor landscape is evolving. Investors are transitioning from early-stage deals to mid-stage deals, attributed to the challenges involved in scaling capital-intensive climate tech ventures and the uncertain macroeconomic environment. Early-stage deals, which comprised over two-thirds of all climate tech deals in 2018 and 2019, have now decreased to approximately 47% in 2023. This evolving pattern highlights the sector's adaptability in the face of external market dynamics.

Will Jackson-Moore, Global Sustainability Leader at PwC UK, as quoted in the press release, commented on the implications of this shift, stating, "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. 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."

The PwC 2023 State of Climate Tech report provides a comprehensive perspective on the climate tech investment landscape. While economic uncertainties and geopolitical conflicts have resulted in a reduction in investments, the sector remains alluring, especially for first-time investors. Notably, investments are increasingly directed towards technologies with substantial emissions reduction potential, aligning with global climate objectives. The transition from early-stage to mid-stage deals reflects the sector's resilience and its adaptability to market fluctuations.