How Clean and Climate Tech Became a Good Investment

Clean and climate tech just might heal the planet. But clean tech hasn’t always been a good investment. Early on, it experienced several years of boom-and-bust cycles. But if clean tech 1.0 was about energy and efficiencies, climate tech is about everything and evolution. The new dawn of climate tech is about acknowledging our planet’s hurtling trajectory toward an unlivable future and rewiring how we do things to get to any reasonable place.

In 2013, venture capital dollars started to flow toward climate tech. Now, hundreds of billions of dollars are pouring into climate tech projects, and corporate net-zero carbon emission pledges are driving innovation at the world’s biggest companies. It’s clear that this climate tech investment trend is built for the long term.

What’s Changed in Climate Tech?

A lot has changed in the past two decades. Technology cost curves have come down. Solar and wind, which underlie much of the clean energy side of climate tech, are much more affordable. At the same time, innovation has spiked to match novel corporate willingness to pay with fresh business models.

There is also significantly more legislation than 10 years ago, including at the international, national, and local levels, that encourages or demands clean energy measures.

It helps that the industry is flush with top-down environmental, social, and governance (ESG) capital, much of which comes from sovereign wealth funds, pension plans, and big endowments that want to do well by their constituents and deliver returns over many decades. These funds recognize that climate is an unavoidable disruptive force that they need to account for.

Finally, talent has moved toward climate tech. Some of the best and brightest minds are choosing this work. It’s meaningful, and it’s where the biggest problems and fastest growth rates are currently happening. There are unprecedented rates of folks departing big tech in particular and working on climate, not to mention the climate-first people who are now coming out of school and looking for their first jobs.

On the Nature of Climate Tech

Climate tech is bigger than just clean energy and electric vehicles, which may get too much attention. In fact, it encompasses seven broad categories.

• Energy. The category is truly about the electrons that power everything we do, including batteries, demand response tools, HVAC, and, of course, your new energy-generation technologies.
• Food and water. This massive category includes everything from pure-play agriculture tech and machinery to alternative proteins and all those brands you might see in the grocery aisle.
• Mobility. This one’s about electric vehicles, which are vastly superior, from a climate impact perspective, to internal combustion engines.
• Industrial. Think raw goods and materials like iron, steel, cement, chemicals, metals, and mining. This stuff requires a lot of deep tech and a lot of capital.
• Consumer. These are the things people buy, like devices or investments.
• Climate. This refers to data, analysis, risk assessment, and information systems, often using satellite monitoring. This category is beneficial for insurtech and is increasingly important for measurement and verification purposes.
• Carbon management. This is a big growing category that’s relatively new. It is all about carbon capture utilization and storage. It’s a removal category and has great potential.

These seven sectors offer a simple way to think about all the elements that make up climate tech. The rubric offers investors and funds a way to parse the types of projects they want to participate in. For corporations, it is a way to analyze their commitments to clean energy.

Climate Tech Opportunities

About two-thirds of the S&P 500 companies have made net-zero corporate pledges. These pledges have teeth because they’re from publicly managed corporations with huge supply chains. These companies have specific goals and many ways to get there.

Companies will do their best to clean up their supply chains until it becomes too expensive on the margin. After they cross that threshold, they’ll likely outsource and purchase from an external offset. An external offset basically means that a company that must emit a ton of C0₂ then pays for and specifically accounts for a ton to not be emitted somewhere else. This carbon offset market is robust, and it’s another difference maker in climate tech.

Offsets work okay, but they’re obviously not as effective as removing the carbon. Carbon removal and storage is going to be big business, and it’ll likely be driven by the big energy corporations with the infrastructure for such projects.

Many companies and VC funds will focus on decarbonization and removal. Decarbonization activities run the gamut from changing an electricity mix to sourcing low-carbon fuels, using alternative packaging, and entirely changing from animal to lab-grown cellular beef. We call these Scope 1 activities of directly mitigating a corporate footprint.

However, the biggest source of emissions for most companies comes from upstream industrial processes — like the emissions that come from mining the metal and minerals that go into your cell phone — and the downstream emissions from utilization and distribution of the product, like the fossil fuels that go into the car that delivers stuff to you or accounting for the electricity mix from usage by people who plug in their phones every day, for example. We call these larger, harder pools of emissions Scope 2 and 3.

Climate Tech Challenges

Decarbonization, supply chain cleanup, and carbon offsets are big, achievable goals, and they’re likely to grow. That’s not to say that the climate tech market is safe from economic challenges. Over the past year, valuations are down about 15% on average, which is noticeable. Volatility in the broader market does have an effect. But there’s no bust on the horizon.

The biggest companies in the world have climate strategies, and multibillion-dollar — $100 billion — funds have a stake in this. There’s a ton of capital. There are large, talented, and active teams working on climate tech. There’s a ton of money to be made.

Companies and funds are not doing this just for impact. They’re primarily doing this because it’s a good way to make money and a good way to prepare businesses for the long term.

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About Sophie Purdom

Sophie Purdom is co-founder and Editor of Climate Tech VC, a leading weekly publication on the intersection of climate change and innovation read by more than 30,000 subscribers. Previously, she was Head of Strategy and Operations at Kula Bio Inc. and consulted at Bain & Company, where she focused on private equity and social impact engagements. Sophie is also the author of Sustainable Investing: Theory and Practice.

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This climate technology article is adapted from the GLG Roundtable “The State of Climate Tech in 2022 — Trends & Opportunities.” If you would like access to the transcript for this event or would like to speak with climate technology experts like Sophie Purdom or any of our approximately 1 million industry experts, contact us.