While European climate tech companies raised a record $13.2 billion in 2022, investment is still nowhere near the level needed to fight climate change, according to a new report from World Fund.

Notably, analysts from the European climate tech VC, in conjunction with Cleantech Group and PwC, have found that investment needs are outpacing investment volumes at an exponentially increasing rate.

The numbers are telling. For the EU to reach its target of reducing emissions by 55% by 2030, an annual investment of €1 trillion would be needed. By the same year, 29% of emissions reductions should come from new technologies, such as batteries and renewable energy. And by 2050, 50% of the emission reductions should come from technologies that have yet to be developed, such as in the case of quantum computing.

The World Fund emphasizes that climate tech startups are emerging in this environment as critical drivers of transformation, but need adequate funding to do so.

“Climate technology startups are more than twice as likely to have a significant hardware component than a typical startup,” Daniel Valenzuela, the report’s author and World Fund’s Head of Impact and IR, told TNW. “This will require significant capital expenditures on R&D and technical infrastructure as they look to scale to the point where they actively remove carbon from our industries and economies.”

Since 2014, the EU has spent more than €58 billion on climate technology R&D from the Horizon Europe programme, with a further €34 billion in funding expected until 2027. This is accompanied by an annual investment of €100 billion from national R&D budgets.

This puts the EU at the forefront of R&D capital allocation globally, providing the technological foundation on which companies can build. But to maintain this leadership position, the report argues that getting follow-on funding to scale up these technologies is critical.

This is where VCs can have a catalytic impact, according to the Global Fund. That’s because they are able to support the rapid technological and commercial risk reduction of innovative climate technology solutions.

Yet climate technology represented only 13% of total venture capital funding in 2022. In particular, the report found that the largest funding gap is seen in later-stage venture capital, which focuses on the commercialization of off-the-shelf technologies. Series B financing accounts for a gap of $13 billion per year.

Valenzuela attributes this to two main factors. “On the one hand, we’ve seen new funds and new managers come in, which are obviously smaller,” he explains. “On the other hand, there was a historical divide in Europe, and the players investing at that stage are more generalists and have only limited capabilities to understand the unique challenges and scientific lenses needed to scale up climate technology.”

But as climate action is expected to create a multi-trillion dollar investment opportunity within a decade, it is high time for both public and private actors to move faster. For VCs in particular, the report points to the growing role of science-based investment decisions in gaining a deep understanding of the underlying climate science of a proposed target. This can range from the impact of decarbonisation to the technological barriers that need to be overcome.

“A well-targeted, science-led approach could generally unlock market dynamics towards climate-effective solutions, generally accelerating the climate transition,” Valenzuela noted.

“Europe has the potential to lead the global climate technology revolution, and while we have lost a lot of time, it is not too late to avoid the worst impacts of the climate crisis. We must harness the full economic and environmental potential of the technological revolution that is unfolding before us,” said Danijel Visevic, Founding Partner at World Fund.

For the VC community, this means “doubling down” in areas such as climate deep tech and solutions to replace carbon-intensive industries, Visevic added.