Mostafa Monira Firdouse, Green Finance Advisor. Friends of the Earth (HK)
Key word: Climate tech, blended finance, innovation, ESG & SDG
At the beginning of 2024, climate tech start-ups are running into a major bottleneck. Funding for companies ready to build commercial-scale facilities is declining. Investment dropped 20% in the first half of 2024 compared to the same period last year but backing for growth-stage companies fell even further.
But it’s not all doom and gloom. While climate tech investors are keeping a tight grip on the purse strings — due both in part to the tough macroeconomic climate and uncertainty ahead of the US election — deals and even mega-deals are still getting done. Climate tech start-up kicked off 2024, raising $8.1 billion.
Reasons for downward trend of investment
- Solar & wind market uptake: Part of the reason for the fall is that more mature sectors like wind and solar need banks and governments – rather than early-stage investors – to fund big deployments. Solar and wind start-ups are getting a much smaller share of investment than in the past. This is because the technology and the markets for them already exist, it’s cheaper and profit driven.
- Global risks focus: Globally, climate-related focus much concentrated to biodiversity loss, natural disasters and extreme weather events. Against this backdrop, in difficult geopolitical and financial times, investment needs to be channeled to where it will have the most impact.
- Speeding-up supply chain decarbonization: Decarbonization technologies mostly exist in the market, so, investors are focusing funding companies in technology deployment, such as, renewable generation, power grids, green energy, transportation, energy storage and so on.
- IPOs, SPACs, Acquisitions: Overall, IPOs, SPACs, and M&A transactions decreased by 50 percent in 2023. SPACs, in particular, saw an 89 percent downturn, signaling a potential collapse in that market for climate tech companies. Transportation and Energy saw the largest number of companies go public or get acquired, representing 64 percent of the sector’s total exits in 2023. More than 80 percent of M&A deals in the climate tech space were for undisclosed amounts.
- Corporates: Since 2020, corporates have emerged as the most active acquirers of companies, responsible for 41 percent of all acquisitions. Notably, BP, Shell, and Schneider Electric have been particularly significant players.
- Risks: Identifying potential impact driven climate tech involves HUGE RISK for investors, such as:
- Technology Risk: Assessing technology risk, specially, for the new technology, often the single biggest issue investors face. Risk exists at each step through from concept to early and late prototypes, all the way to first-of-a-kind (FOAK) and commercial operation stages.
- Execution or Project Risk: With a database of over 16,000 projects globally, Bent Flyvbjerg estimates that over 90 percent of projects (construction) aren’t completed on time, overrunning by an average of 60 percent.
- Geographic Risk: The success of specific solutions will greatly depend on the local context. Some innovations may be more applicable or relevant in certain geographies than in others.
- Geo-political Risk: With this rising geo-political issue, lack of law/regulation, inflation and FX volatility etc. posses additional risk for FOAK to take-off at scalable stage.
However, as discussed in my previous article (January), climate technologies need more money than venture capital firms usually provide, and they’re riskier than private equity and infrastructure funds are willing to support. To make these technologies more widely available, we need a different approach to financing. Like;
- Public-sector support to lower the cost of capital and attract private investment.
- Blended finance models, which combine public and private money, are important for funding riskier projects in the early stages.
Blended Finance Ecosystem
It is now widely accepted that the energy transition is a technological revolution which will play out over the next two decades — and potentially longer. It will harness the power of many new technologies, many of which are not the present options in their respective sectors.
So, it is imminent that we need blended finance to support projects or initiatives that aim to generate both financial returns and positive social or environmental impact. And keep continue financing innovation to create pathway to achieve environmental, social and economic impact towards sustainability & SDG.
bloomberg, insights.jefferies.com, weforum.org, pitchbook.com, PWC, allianz-trade.com
