Tailwind convergence and current market conditions make this an unparalleled time for climate technology.
The climate tailwind comes in the form of new government policies and public dollars in support of climate solutions are being announced (and now deployed) at unprecedented levels.
Also, companies now see decarbonization as a necessity and being a leader in the transition as a competitive advantage rather than a cost. This is driven in part by consumer demands, but also by the recognition that most low-carbon solutions are likely to be the cheapest very soon. Combined with government dollars and policy support, as well as business and consumer demand, a revaluation of market valuations, making investing in new climate technology companies even more attractive.
From November 6, the world will come together for COP27: the annual United Nations climate conference. This year’s event is seen as critical to turning past commitments into action and building implementation plans. It will be a litmus test for our collective progress and an opportunity for countries, including Australia, to step up our commitment to the future.
A suitable moment
Despite the slump in markets and concerns about access to capital, there is now more money available for climate technology (at all stages) than ever before. But for investors considering investing now, it’s worth noting that it’s still only a fraction of what it takes to decarbonize the global economy and we’re on the cusp of the largest redistribution of capital in history.
Public perception, mobilization and consumer buying pressure are clearly taking the upper hand and influencing companies and politicians. In response to these drives, international organizations, national and state governments are increasingly adopting standards, policies and legislation that benefit climate technology.
You don’t have to look much beyond this year’s federal election results to see that climate action is at the forefront of Australians. Candidates who were strong on climate were rewarded by voters across the country. The result has led to a new Australian federal government that is more positive for climate technology companies.
Change in regulatory environment
After more than a decade without meaningful climate policy, we are entering a period of catching up in policy and regulation. And indeed, the signs are promising. The recent adoption of clear emissions targets and supportive policy shifts will help accelerate the Australian sector and reduce risk.
Newly signed pacts with the US (Australia – United States Net Zero Technology Acceleration Partnership) and Singapore (Green Economy Agreement) are other examples of the beginnings of this new way of thinking. Furthermore, numerous state government initiatives and programs are setting an irreversible course towards decarbonising our economy and creating or expanding industries that lead to new jobs, services and products. But Australia is not alone in seeing this opportunity.
The U.S. Inflation Reduction Act of 2022 (signed August 16) is the largest investment in climate solutions in U.S. history with $370 billion in climate and clean energy facilities. These include provisions for battery supply chains from US-friendly countries, such as Australia, which is already positively impacting the market here.
This growth in legislation and policy is accompanied by global growth in emission reduction commitments from countries, regions, cities and companies. Until mid-2019, only 16% of global GDP was covered by net-zero commitments, but this has increased to 91% as of June 2022 (representing 83% of greenhouse gas emissions) (Pitchbook, 2022)
This sentiment is also reflected in the private sector – as an increasing number of large companies view decarbonization as a long-term business necessity and others leading transitions will be a competitive advantage (e.g. Uber and Lendlease). This trend will accelerate in the coming years as many other companies are desperate for solutions to meet their net-zero obligations and turn to technology.
The opportunity for new investors
While it’s hard to ignore this year’s market pullback, the reality is that a downturn also creates opportunities for investors. The global market correction and rising interest rates have put us in risk-off territory for many investors. Overhyped tech companies, especially in later stages, have been hit the hardest, but now is actually a good time for investors to bet on funds as valuations slide from their 2021 highs to historic averages.
Similarly, while capital flows into alternative assets, and even ESG as a broad category may slow in the near term, inflows will continue to grow. Historic amounts of capital have already been committed for late-stage VC, PE and infrastructure climate vehicles, so there is more capital than ever for high-performance climate technology companies.
Companies with strong foundations already in place, including solid teams, technology, and market opportunities, will emerge as winners in the space—exactly the type of startups we support at Investible.
Increasing deal activity is consistent with our view that demand for climate technology has increased and will continue to increase as the decarbonization of the global economy accelerates. As of June 2022, climate tech startups had attracted nearly $19 billion in global VC funding across 500 deals.
Perhaps more importantly, the number of deals has continued to rise, supported by significant growth in the number of early-stage deals, which reached 310 in H1 2022, almost double that of the same time last year (Climate Tech VC , July 2022). At Investible we see this in real time, every quarter we have a growing number of climate technology companies looking for investment, now over 1,900 as of the middle of last year.
The demand for climate solutions will only increase every year. As the world moves towards a ‘net zero’ future, climate technologies will give rise to entirely new industries and reinvent the way incumbent companies do business. Now is the time for investors to step in and lead the way.
For any investor looking to make a real impact, this is a unique opportunity to build successful businesses, achieve exorbitant returns ahead of the growing capital realignment, while preserving the quality of life on this planet.
We will follow the results of the COP27 conference with optimism.
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