Climate tech investment plummets 40% year-on-year

Investing in solar, green hydrogen and low-carbon industry remained attractive propositions

That is according to PwC’s new State of Climate Tech report, which analyses almost 32,000 deals that have taken place over the past year.

Deals included in the report include those supporting businesses that address critical challenges on the road to net-zero, such as the energy transition. Also covered are start-ups with strategies focused on the net-zero transition and start-ups using innovative technologies and processes to reduce emissions.

PwC has recorded a 40% decrease year-on-year, in absolute terms, in the level of finance provided through these deals. It has attributed this to “a challenging macroeconomic environment, sinking valuations, and geopolitical turmoil”.

The report notes that, despite these challenges, investments in climate tech have remained more attractive than investments in many other kinds of start-up. Venture capital investments and private equity funding, across all sectors, fell by an average of 50% year-on-year.

PwC also found that the share of VC and private equity funding allocated to climate tech is continuing to rise. It was 10% in the past 12 months, compared to 7% in 2018.

Impact over optics

Another promising finding is that investment is, increasingly, being directed towards climate technologies with a high potential to reduce global emissions significantly.

Investors are “steadily shifting” away from early-stage to mid-stage deals, PwC found. Early-stage deals accounted for more than two-thirds of the total in 2018 and 2019, falling to 47% this past year.

Investors are also changing their focus in terms of sectors and specific technologies. They directed less than 8% of their climate tech VC funding to industrial sectors between 2013 and the third quarter of 2022, according to PwC. The past 12 months has seen this proportion increasing to 14%.

Investment is also soaring in green hydrogen (up 64% year-on-year) and solar (up 24% year-on-year). Additionally, 45% of global climate tech funding now goes to mobility – but PwC has noted a need for a shift in funding towards other methods of transport than light-duty vehicles, as solutions in heavier transportation sectors are less mature than electric cars and vans.

PwC UK’s global sustainability leader Will Jackson-Moore said it can be concerning to see capital flows to climate tech ventures dropping so significantly when it is “most needed”.

He added: “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.”