Arguably the greatest innovation challenge humankind has ever faced is staring us in the face: the world has ten years to halve global greenhouse gas emissions until 2050 to reach net zero.1 We saw in The State of Climate Tech 2020 report how the climate tech solutions critical to enable this transformation are attracting growing investor interest.
PwC’s analysis2 this year explores how investors are securing both climate impact and commercial returns from this emerging asset class, helping keep the Paris Agreement’s goal of limiting global warming to below 1.5 degrees Celsius within reach.3
A hot year for the climate, creating new urgency for a green recovery
The last year has seen a transformation in the venture capital landscape. New types of capital and funding mechanisms have resulted in significant new flows of investment into private markets. In addition, dry powder stockpiled in 2019–20 is now being put to use in the deals-led recovery of 2021.
The investment landscape for climate tech is no different, as society increasingly feels the impacts of climate change. The latest Intergovernmental Panel on Climate Change (IPCC) report, published in August 2021, amplified the calls for drastic action. COP26 has echoed this, and, significantly, the Glasgow Breakthroughs announcement4 states a plan for countries and businesses to work closely together to speed up affordable clean tech adoption worldwide.
This sharper focus on ESG in private markets, alongside emerging regulations such as European Union’s Sustainable Finance Disclosure Regulation (SFDR), is driving growth and leading many companies and investors to alter their strategies. Thousands of companies have made public commitments to net zero, set science-based targets, or sought to demonstrate their wider commitments to society through B Corp status. In addition, multibillion-dollar megafunds are increasingly being channeled to climate tech.
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Climate tech investing
Emma Cox, Global Climate Leader, PwC UK explores the innovative solutions needed to decarbonise the global economy.
Climate tech scaling for impact: Trends from this year’s analysis
Investment in climate tech is continuing to show strong growth as an emerging asset class, with a total of US$87.5bn invested over H2 2020 and H1 2021 (second half of 2020 and first half of 2021), with H1 2021 delivering record investment levels in excess of US$60bn. This represents a 210% increase from the US$28.4bn invested in the twelve months prior. Climate tech now accounts for 14 cents of every venture capital dollar.
The average deal size has nearly quadrupled in H1 2021 from one year prior, growing from US$27m to US$96m. Megadeals are becoming increasingly common and are driving much of the recent topline funding investment growth in climate tech.
Innovative finance remains core to climate tech’s growth. The past 18 months have seen SPACs (special purpose acquisition companies) tested as a new tool. This new fundraising approach is responsible for driving a significant proportion of growth in climate tech, raising US$28bn in H2 2020 and H1 2021, enough to account for a third of all funding.
Mobility and Transport remains the most heavily invested challenge area, raising US$58bn, which represents two-thirds of the overall funding in H2 2020 and H1 2021. Within this, electric vehicles (EVs) and low greenhouse gas (GHG) emissions vehicles remain dominant, raising nearly US$33bn. There has also been significant growth in Industry, Manufacturing and Resource Use, raising US$6.9bn in H2 2020 and H1 2021, nearly four times the amount raised by the challenge area in the period a year prior.
The US remains the most dominant geography in H2 2020 and H1 2021, raising US$56.6bn from H2 2020 to H1 2021, nearly 65% of all funding. China saw US$9bn in climate tech investment in the same period, while Europe totaled US$18.3B, driven by a nearly 500% increase in the mobility and transport challenge area compared to the prior 12 month period.
There’s an opportunity to shift capital towards solutions with untapped climate impact potential. Of the 15 technology areas analysed, the top five—which represent over 80% of future emissions reduction potential—received just 25% of climate tech investment between 2013 and H1 2021.
Climate tech as a maturing asset class
The climate tech market is a rapidly maturing asset class, offering investors significant financial returns5 and the opportunity for outsized environmental and social impact. Climate technology has moved well beyond a proof of concept and our analysis finds new investors entering the market each year. Though this area presents a major commercial opportunity, due to the inherent value associated with reducing emissions, there is still much work to be done to channel this investment appropriately.
Top 5 investment hubs
(H2 2020 - H1 2021)
- San Francisco Bay area, California, US
London, UK
Berlin, Germany
New York City, New York, US
Boston, Massachusetts, US
'Technology is not the answer, it’s the amplifier of intent, and climate tech alone is not the panacea, but it's a space that is emerging rapidly as a critical mechanism to bend the emissions curve down and get us back on track towards 1.5 degrees'
What is climate tech?
Climate tech is defined as technologies that are explicitly focused on reducing GHG emissions, or addressing the impacts of global warming. Climate tech applications can be grouped into three broad sector-agnostic groups—those that:
Directly mitigate or remove emissions
Help us to adapt to the impacts of climate change
Enhance our understanding of the climate.
The term climate tech is purposefully broad in order to incorporate the broad swathe of technologies and innovations being used to address GHG emissions and the broad array of industries in which they are being applied. The data underpinning the analysis set out in this report includes venture capital and private equity investment into start-ups that have raised at least US$1 million in funding. Funding round types analysed include grants, Angel, Seed, Series A-H, and IPOs (including SPACs). Valuation data is sourced from Dealroom.co and media reports.
The data sources used have stronger coverage in European and North American markets. This analysis may therefore be a conservative estimate of the relative levels of Chinese investment and of overall investment.
Investment highlights
Following rapid growth between 2013 and 2018, climate tech investment plateaued between 2018 and 2020, as did the wider venture capital (VC) / private equity (PE) market, tempered by macroeconomic trends and the global COVID-19 pandemic.
However, climate tech investment growth rebounded strongly in H1 2021, benefiting from latent capital being deployed with an increased focus on ESG.
PwC identified over 6,000 unique investors from venture capitalists, private equity, corporate VCs, angel investors, philanthropists and government funds. Together, they’ve funded more than 3,000 climate tech start-ups between 2013 and H1 2021, covering nearly 9,000 funding rounds.
Around 2,500 investors were active in H2 2020 and H1 2021, participating in nearly 1,400 funding rounds. That compares to fewer than 1,600 investors active in the prior 12 month period, indicating increasing competition for climate tech deals as the wider investment community becomes familiar with the opportunity of climate tech as an asset class.
The number of climate tech unicorns has grown to 78. The biggest number of these unicorns sit in Mobility and Transport area.
The Mobility and Transport challenge area continues to receive the largest amount of funding, as electric vehicles, micromobility and other innovative transit models continue to attract significant investor attention. Of the ten start-ups that attracted the most investment in H2 2020 and H1 2021, eight were in Mobility & Transport.
Mobility and Transport also led in terms of growth rate, though with Industry, Manufacturing and Resource Management (IM&R) and Financial Services not far behind, each recording over 260% year-on-year growth between H2 2019 and H1 2021. In fact, only one vertical challenge area—Built Environment—recorded a growth rate below 90%, coming in at 20% growth. The horizontal challenge areas of GHG Capture, Removal and Storage and Climate Change Management and Reporting recorded YoY growth rates of 27% and 16%, respectively. Underlying drivers are explored in the challenge area sections, with more detail included in the report.
The number of climate tech unicorns has grown to 78. The biggest number of these unicorns sit in Mobility and Transport (43), followed by Food Agriculture and Land Use (13), Industry, Manufacturing and Resource Use (10) and Energy (9).
Taking a sectoral lens
Mobility and transport
Transport is one of the fastest growing sources of emissions globally, having increased by 71% since 1990, accounting for 16.2% of global emissions. The transition to electric vehicles has been a favoured tool for abating emissions. In addition, developments in green hydrogen in terms of synthetic fuels for transport are expected to be a key driver of the future hydrogen economy.
Business-as-usual continued growth in passenger and freight activity could outweigh all mitigation efforts unless transport emissions can be strongly decoupled from GDP growth. Electrifying transport systems remains a vital part of the net zero transition.
Source: PwC State of Climate Tech 2021
Energy
The production, transport and use of energy makes up almost three quarters of global GHG emissions, with 13.6% of total emissions attributed to energy, representing one of the greatest opportunity areas for climate tech. Rapid scaling of low-carbon energy is critical to curbing emissions and keeping the world on track to meet the Paris Agreement goals.
Year-on-year unit costs of renewables have continued to fall, while energy efficiency has increased, driven by learning curves and economies of scale. Overall investment has been lower compared to other challenge areas, reflecting the relative maturity of wind and solar, which have transitioned to debt, project and other forms of financing.
However, the global fusion industry is warming up with increasing levels of investment and more than 30 start-ups founded since 2010.
Source: PwC State of Climate Tech 2021
Food, agriculture and land use
Food systems are responsible for 20.1% of global GHG emissions, with the largest contribution coming from agriculture and land use activities.
Financial investment in plant-based meat and dairy alternatives is growing, driven by consumer demand and media coverage. The next generation of solutions is expected to focus on lab-grown meat, insect proteins and genetic editing.
Further attention is required to reduce food loss and waste and create more sustainable packaging solutions, which could also extend the shelf life of produce. These issues are critical, with food loss and waste making up approximately a quarter of food system GHG emissions.
Source: PwC State of Climate Tech 2021
Industry, manufacturing and resource use
Global industry and manufacturing is responsible for 29.4% of GHG emissions and is one of the most difficult challenge areas to abate due to the need to retrofit, upgrade and replace existing equipment and transform the associated supply chains.
Emissions result from energy used in manufacturing and industrial processes and the production of materials; they are also generated directly by industrial processes themselves (such as CO2 emitted during a chemical reaction). Therefore, an absolute reduction in emissions from industry and manufacturing will require deployment of a broad set of mitigation options, including more efficient use of resources, more efficient processes and improved energy efficiency.
Source: PwC State of Climate Tech 2021
Built environment
Buildings and construction are responsible for 20.7% of GHG emissions. Operational emissions account for nearly two-thirds of this, while the remainder comes from embodied carbon emissions, or the ‘upfront’ carbon that is associated with materials and construction processes.
To eliminate the carbon footprint of the built environment, both buildings and materials must become more efficient, smarter and cheaper. Small-scale efficiencies, such as improvements in heating, lighting or appliances, will also play an important role.
Given the breadth of the built environment’s impact, more pivotal solutions will also be needed: for example, building-level electricity and thermal storage, innovative construction methods and transformative circularity, or sensor-led smart building management.
Source: PwC State of Climate Tech 2021
Financial services
Until recently, GHG emission disclosures from financial institutions focused mostly on the direct impacts of their operations. Disclosure of Scope 3 emissions continues to be a challenge, meaning disclosures often omit the most significant source of emissions: their portfolios. This proves a significant gap as financed emissions have been estimated to be on average 700 times higher than direct emissions.
Innovative application of new and existing technology to financial services, creation of new ‘green’ products, and accurate, reliable sources of data can all drive the challenge area to decarbonise.
Consumer demand for green products and investment offerings is increasing. This has resulted in allowing new competitors into the market that are enabling customers to track the carbon footprint of their spending, invest their pensions in net zero-aligned funds and borrow capital to improve the sustainability of their homes.
Source: PwC State of Climate Tech 2021
GHG capture, removal and storage
The recent IPCC report indicates that it is unlikely that we can limit the devastating impacts of climate change without some form of carbon capture and, if society is to stay the course for a 1.5 degree pathway, carbon removal. Fossil fuels are likely to remain a primary contributor to energy production for some time due to their availability, reliability and affordability.
Capturing, storing and reusing GHGs could play an important role in stabilising and reducing greenhouse gas emissions while our energy and industrial systems transition. Carbon sequestration technologies must be developed rapidly and deployed at scale if the world is to continue using fossil fuels as a key energy source.
Source: PwC State of Climate Tech 2021
Climate change management and reporting
This challenge area’s new name in this year’s report (previously Climate and Earth Data Generation) reflects developments in the area as more start-ups emerge to help stakeholders—namely, private companies; investors; and local/regional/national bodies, including governments—to set and deliver on their net zero commitments.
Climate and earth observation, driven by satellite and micro-sensor data collection, is beginning to provide the data necessary to help global decarbonisation efforts, further protect the environment and achieve broader sustainable development aims. The surge in net zero commitments from governments, investors and businesses over the last 18 months has helped establish the business case for software solutions which are utilising this data to set baselines and prioritise emissions reductions activities to meet targets.
Source: PwC State of Climate Tech 2021
Regional investment distribution
- Overall breakdown
- United States
- Europe
- China
Overall breakdown
From H2 2020 to H1 2021, nearly 65% of venture dollars went to climate tech start-ups in the US (US$56.6bn). The second most significant region is Europe at US$18.3bn, with China in third at US$9bn.
Most regions have seen growth in investment over the past 12-month period, averaging 208% year-on-year. Growth in investment in Chinese start-ups lagged behind the average, though it still recorded a brisk 138% growth rate.
Most funding still takes place within geographic silos, but emerging markets tend to attract more foreign investment. Climate tech start-ups in North America and Europe raised about 80% of their funding from investors in the same regions, whilst that decreases to 55% for Chinese start-ups and just 40% for African start-ups.
United States
The US has the highest investment in climate tech (US$56.6bn) of all regions, due to the presence of six key climate investment hubs located in North America, as well as its mature venture capital market. Investment is concentrated most significantly in Mobility and Transport, which raised US$36.4bn between H1 2013 and H1 2021. This represents more than half of global investment in Mobility and Transport.
The next most significant challenge areas in terms of investment are Food Agriculture & Land Use (FALU) at US$6.9bn and Energy at US$4.9bn.
Europe
Europe is now the second largest investor in climate tech (US$18.3bn), having edged ahead of China over the last 12 months. Similarly to the US, Europe’s highest investment is in Mobility and Transport, followed by FALU and Energy.
Mobility and Transport within Europe has seen a 494% increase in total investment in H2 2020 and H1 2021 compared to the previous 12-month period.
China
China is the third largest investor in climate tech between H2 2020 and H1 2020 (US$9bn).
Investment is heavily skewed towards Mobility and Transport. The US$8.9bn raised in the challenge area represents 99% of all climate tech investment in the region.
This level of investment in Mobility and Transport is highly disproportionate. Across the US and Europe, investment is also distributed across other challenge areas.
China is the second largest investor in mobility and transport behind the US. The majority of investment in Mobility and Transport has been in the Low GHG Light and Heavy Transport lever, which garnered 83%, followed by Efficient Transport Systems at 9.3%.
Comparing climate tech investments against climate impact
In this year’s edition of the State of Climate Tech report, we have undertaken new analyses examining the link between technological maturity, proximity to sectoral tipping point, emissions reduction potential and investment volume. The report hones in on a set of 15 climate technology areas and explores whether the solutions with highest potential to remove carbon at speed are getting the funding they need to scale up.
Our analysis finds that there are still significant areas of untapped potential—so-called ‘carbon $5 notes’ lying on the ground. Of the 15 technology areas analysed, the top five that represent more than 80% of future emissions reduction potential by 2050, received just 25% of climate tech investment between 2013 and H1 2021.
Overall findings
- Capital is deployed at scale when business models and climate technologies are both viable, with investor excitement around certain technologies, namely those that support Mobility and Transport, attracting significant capital and receiving funding that outpaces their potential impact on climate change mitigation. Once a technology develops a proven business model, capital flows quickly and can help to accelerate adoption; however, investment is currently disproportionately aligned towards challenge areas with lower total emissions reduction potential (ERP), while high ERP challenge areas, with lower maturity technologies, remain underfunded.
- Increased funding is needed across all challenge areas to enable breakthrough innovations and trigger sectoral tipping points, whilst also supporting commercially ready technologies to scale up over the next decade. Policies are needed to incentivise investors, with clear government action plans, support of a consistent carbon price and Research & Development (R&D) investment needed to accelerate technological innovation. This will enable an increasing scale of rapidly deployed capital into the necessary climate technologies over the next decade and beyond.
- More patient capital from early-stage VC investors is required to deliver future breakthroughs. Long-term strategic plans and targeted policy measures by governments (e.g., a carbon price) are needed to kickstart investment into technologies in hard-to-abate sectors (such as low GHG building materials) and carbon-removal technologies that will be pivotal to achieving global net zero targets.
References
2. Funding data is provided by Dealroom.co, a global data platform gathering information on startups, investors and deals
3. UNFCCC, The Paris Agreement, accessed Dec 9 2021, https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
4. World leaders join UK’s Glasgow Breakthroughs to speed up affordable clean tech worldwide, Nov 2 2021, https://www.gov.uk/government/news/world-leaders-join-uks-glasgow-breakthroughs-to-speed-up-affordable-clean-tech-worldwide
5. Energy Impact Partners (EIP), EIP Climate Tech Index, accessed Dec 9 2021, https://eipclimateindex.com/
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