Current Trends in Climate Change Technology Investment
As the world grapples with fast-changing weather patterns, wildfires, record-breaking heat, and many other climate-related issues, it is becoming increasingly important to develop the technologies that will help to combat climate change. There is a race to develop new technologies that can capture, remove, and store carbon, create renewable energy, improve energy management and efficiency, and transform energy storage.
The goals of the Biden administration’s National Climate Change Task Force are to reduce greenhouse gas emissions in the U.S. 50–52% below 2005 levels by 2030, to reach 100% carbon pollution-free electricity by 2035, and achieve a net-zero emissions economy by 2050. These are lofty goals that will require some incredible technological innovations to move them forward. And with companies jumping in to help fight climate change, investors are taking notice.
Investors in public and private markets are also seeking more information related to climate risks that affect the companies that they invest in and own. The U.S. Securities and Exchange Commission (SEC) has proposed controversial rulemaking to require companies to include certain climate-related disclosures in their registration statements and periodic reports. Specifically, the SEC proposes to require that public companies disclose climate-related risks that are reasonably likely to have a material impact on their businesses, results of operations, or financial conditions as well as certain climate-related financial statement metrics in a note to their audited financial statements. There are corollary disclosures being proposed for mutual funds and exchange-traded funds that focus on environmental, social, and governance (ESG) principles.
Pending adoption of final rulemaking, current SEC Chair Gary Gensler has directed the agency’s staff in exam reviews to encourage market participation to promote ESG investing to current or prospective clients and investors to evaluate whether their related disclosures, marketing claims, and other public statements are accurate, and consistent with internal firm practices. Meanwhile, the SEC’s Enforcement Division has a task force in place to root out ESG-related misconduct as investors increasingly rely on climate and ESG-related disclosure and investment. The SEC files enforcement cases when, for example, a firm fails to follow policies and procedures involving ESG investments or a firm misstates ESG considerations.
Bottom line is that existing and pending regulatory and enforcement initiatives on climate-related disclosures will force new business for reporting on compliance with these initiatives, and we expect new investment in these areas.
Indeed, according to an article by McKinsey, climate related investment increased significantly in 2022 despite the tremendous economic challenges we saw across the board last year. In fact, they point out, “Climate-related private-market investment far outpaced the broader market in 2022 as measured by deal activity, the amount of capital deployed, and capital flows into dedicated funds.”
The sector is certainly not entirely immune to rising interest rates and difficulty borrowing that have impacted investment overall. While the sector held steady in 2022, it has seen a decline in investment this year. Bloomberg notes that venture capital and private equity investment in the climate sector declined by 12.8% in the first quarter of this year, and CTVC reports $13.1 billion in investment in the sector in the first half of 2023, down 40% from the similar period in 2022, and off 35% from the second half of last year.
However, efforts like the Inflation Reduction Act that allocates $347 million toward mitigating climate change are spurring even more interest in emerging technologies in this area. There has been a surge in the number of climate tech startups addressing various aspects of climate change, from sustainable agriculture to carbon offsetting. Venture capital and private equity firms have been actively supporting these early-stage companies, and there are strong indications this will continue.
One area of great interest is carbon utilization and sequestration (CCUS), which is a technology that allows manufacturing facilities to substantially reduce their greenhouse gas emissions. This is a highly technical process of capturing and converting CO 2 emissions into valuable products (utilization) or capturing and storing CO 2 to prevent its release into the atmosphere (sequestration), both critical strategies for mitigating climate change.
Renewable energy, particularly wind and solar, is a more established area attracting funding. This technology is very well researched and proven in its ability to help in the fight against climate change. This is technology that is also scalable in the sense that it could be anything from large wind farms to residential solar panels, so there is tremendous possibility. In fact, the U.S. Bureau of Labor Statistics cites wind turbine service technicians as the fastest-growing job category in the U.S., and solar photovoltaic installers are not far down on that list.
Energy storage and batteries have also peaked investor interest. In very recent news, KKR & Co. announced it will invest $750 million in UK energy storage company Zenobe Energy, Ltd., a move it says is in support of the private equity firm’s global climate strategy. Energy storage, or grid-scale storage, is thought to be a key to combating climate change. These technologies, particularly batteries, can supply power back to the grid in times it is overloaded, making it more stable, reliable, and even bringing it back online in a blackout. Batteries are commonly used in grid-scale storage, and of course, we have all seen the growing use of batteries in electric cars as well as their popularity expands and charging stations multiply around the world.
Although there has been an increasing interest in investment in this space, substantial opportunity remains. With pending regulatory initiatives and social movements pressing for more action to report and remediate the effects of climate change, we expect investor interest to only continue. We have only scratched the surface of what these technological advances can do, and as more research and development occur and new technologies come online, the spike in even more funding to support these important efforts is sure to follow.
This article was originally published in POWER Magazine on November 3, 2023, and is republished here with permission.
M&A Trends to Watch in 2024: Navigating the Shifting Landscape
Author(s): Louis Lehot Eric Chow
Strengthening the Flow of the Biotech Sector’s M&A Pipeline
Author(s): Louis Lehot, Eric Chow