State of Climate Tech 2021

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.

• 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.