As climate risk is increasingly threatening the environment, society, and global economy, it is up to both the public and private sectors to undertake serious actions in order to adjust to new environmental challenges. These challenges go from creating and adapting appropriate policies, to market opportunities, to financial return potentials, to many, many more.
Addressing these challenges as well as providing an overview of the investment landscape, the World Fund has published a whitepaper “Climate Tech Investments: An Opportunity for Europe”. The analysis notes a broader market shift, highlighting an adoption of science-based methodology, to determine an investment's long-term potential. Using industry sources and data, the whitepaper also benchmarks where additional funding is most required, highlighting the sectors with the biggest carbon reduction requirements, the technology investments required, and the sectors where technological breakthroughs need to be made.
According to the whitepaper, 2022 was a record year for climate tech startups, as the investment levels, just last year, reached $13.2 billion. Although this is a positive movement, the fact is that the investment requirements are outstripping investment volumes, at a rate that is widening exponentially.
As highlighted, only 16% of climate finance needs are being met. Perhaps better said, in order to meet EU and global climate targets by 2030, climate tech funding needs to increase at least 590% (to $4.35 trillion annually).
Five hundred and ninety percent.
How do we close this gap?
One of the solutions is by investing in the right industries, companies, and technologies. It is important to note that investment decisions in climate-tech startups are increasingly influenced by science. It is primarily about criteria related to investments and financial potentials with regard to the climate, because of the impact of climate change.
The whitepaper points out three major challenges that are pushing investors towards climate-tech startups:
- Increasing carbon costs
- A worsening climate crisis
- Economic opportunity
Consequently, a more detailed and comprehensive analysis is needed compared to when it comes to other topics and investments.
So with the scientific-led approach but also having in mind the economic and asset-specific criteria, an investor deploying capital in the climate tech startups needs to develop a solid understanding of the underlying climate science of a proposed target. This can range from the carbon cost of the vertical the technology is replacing to the technological barriers that must be overcome for the technology to reach its potential.
And, "Europe has the potential to lead the global climate tech revolution", states Danijel Visevic, Founding Partner at World Fund. He also adds that “whilst we have lost a lot of time, it’s not too late to prevent the worst consequences of the climate crisis. We must grasp the full economic and environmental potential of the technological revolution unfolding before us.
This first-of-its-kind analysis of the private markets in climate tech illustrates that much is still to be done - in terms of ensuring there is sufficient funding to secure a regenerative world - and the VC community has a particular responsibility to fight to secure that future. That means doubling down on climate deep tech - and the innovative solutions that replace carbon-heavy industries.”