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Investing in climate tech: solution or bubble?

November 8, 2021

reading time: 12 minutes

by Peter Firth, guest author

Invest in climate tech

Investors are throwing money at climate tech and decarbonization start-ups again. Will it be different this time?

In the mid-2000s, funding was expanding rapidly for companies developing technologies in everything from wind and solar energy to electric cars and fuel cells. For far-sighted start-ups trying to create solutions to environmental challenges, it was a bonanza. Savvy investors saw an opportunity to clean up.

What followed was the now infamous ‘clean tech bubble’, a unique set of circumstances which led to breath-taking losses for those betting on innovators in the climate space. Of the USD 25 billion they directed towards clean tech between 2006 and 2011, venture capitalists lost more than half, according to professional services firm PwC. Events such as the 2008 financial crash, competition from China (especially in solar), and cheap natural gas had caused a sudden downward spiral in valuations. Money vanished.

Fast forward to 2021, and capital is coursing back into climate tech companies. In the first six months of this year alone, organisations in the climate space drew USD 16 billion from investors, according to research from Climate Tech VC. In the past, the biggest yearly sum was around USD 18 billion, according to Bloomberg. With a second boom in climate tech gathering pace, some are worried: is the sector heading towards another spectacular crash?

Climate change at the centre of consumer demand

Evidence would suggest that it isn’t. Many of the events that contributed to the bubble bursting ten years ago have shifted as new generations, technologies and market conditions have come to the fore.

Climate change investment
Attitudes towards climate change have shifted from apathy and denial, to fear and action. © KEYSTONE/imageBROKER/Nathalie Lieckfeld

For instance, narratives around climate change have changed in recent years, as more have suffered from its effects. Attitudes have shifted from apathy and denial, to fear and action. A global study published in September by Bath University reported that 60% of young people from 10 countries felt ‘very worried’ or ‘extremely worried’ about coming climate crises. Over half said they currently believe humanity to be doomed.

Sophie Purdom is an investor in early-stage climate tech companies, and co-founder of Climate Tech VC, a Substack newsletter with 15’000 subscribers. She observes two new sources of talent pushing the envelope in the sphere. Silicon Valley figures who have migrated from big tech jobs to use their nous to join the climate effort. “The leading motivator for these folks to move into this sphere is witnessing a climate emergency disaster and feeling moved to act,” says Ms. Purdom, “or they have recently had a child and suddenly think differently about the future.” The second she identifies is a younger cohort of Gen Z professionals who have grown up in fear of climate change. “I predict that in the next six months we’ll see a new raft of climate-first investment firms emerging from this scenario,” she adds.

But the talent pouring into the climate tech space – from green asset managers to data scientists – can’t innovate humanity from the brink without policies to incentivise and help them. Aside from plans laid out in the 2015 Paris Agreement to bring CO2 emissions to heel by the middle of the century, more governments than ever are offering subsidies to green businesses and making efforts to decarbonise. In the US, the Biden administration has plans to unfurl around USD 1 trillion for climate specific projects – including USD 174 billion in spending on electric vehicles, USD 165 billion for improving public transport and rail networks, then USD 180 billion to scientific research, according to reports in The Economist.

“Climate change is at the centre of popular interest and consumer demand. But at the same time, you also have governments who are acting like never before,” says Iskander Erzini Vernoit, policy advisor at E3G, a European climate think tank. “This provides an extraordinary amount of clarity to the investor community.”

Investing in climate tech? Avoid the hype

This clarity is further enhanced by the leaps forward in engineering and technical know-how that have emerged since the clean tech bubble of 2006-2011. In the interim, fringe technologies such as artificial intelligence, big data and the internet of things have advanced, creating a new set of tools for climate tech innovators to use in the fight to save the planet. Perhaps the most useful is the proliferation of smartphones.

Consider inventions such as mobile gaming app MyTrees, an app that works in partnership with Conservation international to gamify conservation projects. Players pay a subscription fee that enters them into a weekly cash prize draw. More money pledged means more trees saved, and a greater chance of winning.

Invest clean energy
In 2021, capital is coursing back into climate tech companies. © KEYSTONE/Valentin Flauraud

“The question back in the 2000s was ‘what can I do?’, says Cody Hoffman, founder of MyTrees. “The will to create companies to help the planet might have been there, but the technological breadth was not.”

Hoffman predicts that the coming years will see the lessons learned by the winners of web 2.0 brought to bear in climate change: “In the last twenty years, everyone figured out how to make money. Now it’s about applying a climate lens to these techniques.”

With more companies like MyTrees using digital to approach climate change in novel ways, the industry might avoid the pitfall of too many investors piling into single inventions. But some are still wary of putting their money in ventures that seem more distinct than they really are. Lightrock is a private equity firm with money in companies ranging from energy to vertical farming. Its CEO and managing partner Pal Erik Sjatil thinks that a replay of 2007- 2011 can be averted by ignoring the hype and investing in different verticals.

Pal Erik Sjatil (Pål Erik Sjåtil)
"We consciously try not to become over-excited." Pål Erik Sjåtil, CEO of Lightrock.

“We consciously try not to become over-excited about just one technology,” he says. “Rising attention can drive up prices in a fast-moving space. But it’s imperative to hold fast and look at the fundamentals of a company.”

The climate tech industry looks set to continue its trajectory of unchecked growth. One reason for this is the frequency of climate disasters, each time an event makes the news or leaps into public consciousness, more investment and consumer spending finds its way here.

Those who saw their wealth evaporate during the first climate tech boom might wince at the memory, but their contribution wasn’t in vain. “The work undertaken in that period enabled the current boom,” says Purdom. “It drove down costs of things like solar and wind, which enabled climate tech to branch out into agriculture, chemicals and buildings for instance. The bust left some terrible investment scars. But when you look back at it, the work undertaken during that time was resoundingly positive.”

Title image: © KEYSTONE/Olivier Maire

Invested in green hydrogen technology

In October 2021, global impact investment platform Lightrock has announced its funding of Sunfire, a global leader in the development and production of industrial electrolysers. Lightrock thereby invests in the rapidly growing market for green hydrogen technologies.

Kevin Bone, Partner at Lightrock: “Sunfire’s unique technologies will drive down costs for green hydrogen production, helping to establish a competitive hydrogen value chain and further increasing the range of industries that can economically decarbonize. The many net-zero targets set by businesses and governments cannot be met without a dramatic scaling in green hydrogen production and adoption, which Sunfire will play an integral part in facilitating.”

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