Climate tech investments from venture-capital and private equity fell 40 percent in 2023 as economic uncertainty and geopolitical conflict dent investor confidence, according to PwC’s 2023 State of Climate Tech report, published on Tuesday.

PwC said in a statement that the report analyzed over 8,000 climate tech start-ups and over 32,000 deals worth more than $490 billion.

Its underlying dataset, PwC’s Climate Tech Investment Index, has been significantly expanded this year, with nearly double the number of start-ups tracked and a broader range of deal types examined compared to last year.

It found that the fall in climate tech investment was significantly smaller than the venture capital and private equity average fall of 50 percent across sectors.

As a result, the share of venture capital and private equity funding going into climate tech continued to rise, accounting for more than 10 percent of private market start-up investments in 2023, up from 7 percent in 2018.

There are also signs that climate tech investment is becoming more mainstream, with seasoned climate investors (who have invested in five or more climate tech deals) taking up a smaller share of the total number engaging in climate tech, as the share of first timers increases.

Meanwhile, for the first time, more deals are happening at the mid-stage than at the early stage.

“The development and scale-up of climate technology is an essential part of meeting the climate challenge,

“So, while it is not surprising that absolute levels of investment in climate tech have fallen along with the market, it is concerning,” said Emma Cox, Global Climate Leader, PwC United Kingdom.

According to her, the good news is that the sector has performed well in relative terms, with investment falling less than in other areas.

“It is also encouraging to see a shift in the balance of investments towards technologies that can cut emissions the most,

“Now we need to see that shift continue, coupled with an increase in the absolute levels of investment in all technologies with the potential to cut emissions,” she added.

It is noted that previous reports have noted that investment is not being allocated in proportion to emissions reduction potential of technologies – with a disproportionate share of investment going to technology with lower potential.

While that pattern is still true, there is an encouraging shift in the right direction.

A notable change has occurred in the industrial sector, which accounts for more emissions than any other sector of the economy (34 percent).

Investors directed just less than eight percent of climate tech venture funding to industrials between 2013 and the third quarter of 2022.

The share of investment into the industrial sector has almost doubled to 14 percent between the fourth quarter of 2022 and the third quarter of 2023.

Although overall investment numbers are down, PwC have seen a rise in the share of climate tech private equity/venture capital and grants that investors are putting into startups working on higher emissions reduction potential technologies.

For example, solar power’s share of investment is proportionally up 24 percent; while green hydrogen is up 64 percent.

Carbon capture, utilisation, and storage is up 39 percent since 2022 although it still represents less than two percent of total climate tech funding.

The proportion of capital going to technologies with relatively lower potential to reduce emissions has fallen, with light-duty battery electric vehicles’ proportional share of investment down 50 percent since 2022, and micromobility down 38 percent; though mobility in its different forms still accounts for 45 percent of investment.

Its analysis has also shown that in recent years investors have steadily shifted away from early-stage deals to mid-stage deals, for reasons including challenges around scaling or implementing capital intensive climate tech, as well as a challenging macroeconomic environment.

Early-stage deals made up over two-thirds of all climate tech deals in 2018 and 2019, dropping to around 47 percent in 2023.

Irrespective of challenging market fundamentals, 2023 also saw a steady influx of first-time climate tech investors, highlighting the industry remains attractive as a whole.

“A challenging macroeconomic environment, sinking valuations, and geopolitical turmoil has seen capital flows to climate tech ventures drop 40 percent at a time when climate tech needs it most,

“But while such industry and macroeconomic dynamics may cloud investor confidence, they also present significant first-mover opportunities for investors to engage in the current dip, as the need for climate tech innovations will only grow stronger,” said Will Jackson-Moore, Global Sustainability Leader, PwC United Kingdom.

PwC defined ‘climate tech investments’ base on a set of criteria: the start-up has an emissions- or net zero–focused strategy; the start-up addresses a challenge area or lever of critical importance to net zero;the start-up could have a first-order impact on emissions; the start-up shows a level of innovation and/or use of technology.

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