Climate tech start-up investment has fallen this year. Here's why

Climate technologies that can help cut greenhouse gas emissions are critical for getting the world to net zero by 2050.

To scale and deliver these solutions, investment in climate tech companies is needed. But funding for climate tech start-ups has fallen for a second year in a row, according to the latest State of Climate Tech report from professional services organization PwC.

The report analyses more than 32,000 deals worth more than $490 billion and involving over 8,000 climate tech start-ups.

Funding for climate tech start-ups has dropped by 40.5% this year compared with 2022.

This isn’t as bad as the overall 50.2% fall in all kinds of private equity and venture capital investment in early-stage companies – a drop fuelled by geopolitical turmoil, inflation, rising interest rates and lower company valuations, PwC says.

But the fall in climate tech investment still takes start-up funding in the sector back to where it was five years ago.

Solar and wind start-ups are getting a much smaller share of investment than in the past. This is because the technology and the markets for them already exist, PwC says.

Early-stage investment to drive innovation isn’t what’s needed in these more mature sectors. Instead, they need capital to pay for a big increase in the rollout of their technologies. Banks, governments and other funders typically provide this kind of capital – not the venture capital firms and private investors who back start-ups, PwC explains.

Start-up investment has consequently been shifting to some sectors with high emissions and therefore significant potential to cut emissions, PwC notes. These include carbon capture, utilisation and storage, green hydrogen and alternative foods. However, they are receiving only small shares of start-up investment, PwC says.

Some early-stage climate tech is hard to scale – meaning it is difficult for investors to make a return. And weak financial markets are putting off some start-up founders from raising capital, because their businesses might not be valued as highly as they could be.

Climate tech is still an appealing sector for start-up investors, PwC says.

The need for climate technologies is continuing to climb – and there is a “steady inflow” of first-time investors, it says.

Investment in some regional climate tech sectors is also rising. In North America, for example, industrials – the sector with the highest emissions levels – saw its share of start-up investment almost double from 9% to 16% between 2022 and 2023.

Lower company valuations also mean it’s a potentially good market for investors buying stakes in these start-ups, PwC says – assuming the companies these investors choose go on to be successful.

Early-stage climate tech investors such as venture capital and private equity firms are just part of the funding landscape, the State of Climate Tech report suggests.

“Massive amounts” of growth capital – not just start-up capital – will be needed to mitigate the necessary 25 billion tonnes of CO2 by 2030, investors tell PwC.

PwC’s message to start-ups is to “explore all possible sources of capital”, including government loans and incentive programmes.

Greater collaboration between organizations and changes in standards and policy are also vital.

Failing to mitigate climate change is the leading risk facing the world over the next decade, according to the World Economic Forum’s Global Risks Report 2023.

The second, third and fourth-biggest global risks are also climate-related, including biodiversity loss, natural disasters and extreme weather events.

Against this backdrop, in difficult geopolitical and financial times, investment needs to be channelled to where it will have the most impact.

“By restoring biodiversity in soils, for example, regenerative agriculture has the potential to store large amounts of carbon,” the Forum suggests.

Investing in solutions that address multiple climate risks also makes sense. This could include projects that help communities adapt to climate change while also reducing greenhouse gas emissions.