This article analyses the growth of VC investment in climate tech in Europe since COP21 and calls on investors to pay closer attention to the Built Environment vertical.
It has been 7 years since COP21 when the Paris agreement vowed to limit global warming to 1.5C degrees. Government, society and business agreed to mobilise their forces to fight against climate change. Countries and corporates agreed to limit their CO2 emissions to ‘net zero’ by 2050. However, this landmark agreement proved to be far from “successful” as temperature are estimated to reach 2.7C degrees above pre-industrial level before the end of the century. The COVID outbreak has further damaged world economies and supply chains. Russia's invasion of Ukraine has triggered an unprecedented energy crisis. The world's governments, leading companies, investors and citizens came together again at COP26 in Glasgow and COP27 in Sharm el-Sheikh to accelerate action and develop robust solutions.
Technology has already proven that it can improve our lives by providing convenient applications along with financial returns for investors. Global decision makers are once again betting on technology to save our planet. As Larry Fink, CEO of BlackRock, has commented, the next 1,000 unicorns will be in climate tech.
Should we wait for new marvels?
According to PwC’s 2020 State of Climate Tech, the climate tech market boomed from US$418m globally in 2013 to US$16.3bn in 2019, rising more than 3,750% in only seven years. Nevertheless, in 2021 alone, the value of investments in climate tech skyrocketed to a record of over $111bn raised by startups and scaleups around the world. In that year, climate tech accounted for 15 cents of every VC dollar. 2022 is set to be another year for the books, with investment currently at $73.86bn, representing 16.88% of world venture capital investment.
The number of emerging technology companies tackling the climate crisis has increased nearly 4 times by over 35,000 firms since 2010 to reach 44,595 in 2022. The leading country for climate technology start-ups and scaleups is the United States with 14,300 pioneers. It is followed by the UK and Germany with over 5,200 and 3,600 climate tech start-ups respectively. This enormous growth can be mainly explained through following factors:
1. Political
• Post COP26 pressure on governments by citizens and NGOs
• Artificially created energy crisis through manipulation from Russia
• Understanding and focus on innovation as a primary source to boost the scale and
effectiveness of current global progress towards net zero
• US set new target of 50-52% reduction in U.S. Greenhouse Gas Pollution from
2005 levels in 2030
• EU’s Sustainable Finance Disclosure Regulation: pushing institutional investors to
seek greater exposure to sustainable finance
• EU Fit for 55: extensive legal plan targeting different sectors in order to reduce
GHG by 55% in 2030 compared to 1990
2. Business
• Publicly statements by corporates on the transition to net-zero by 2050
• Corporates went from commitment to action: inclusion of climate actions in corporate strategy, use of sustainable performance metrics, carbon tracking
• Pursuing B Corp status
• Innovative finance: introduction of SPACs, a new tool for start-ups looking to go public and raise large amounts of funding bypassing the IPO route
3. Society
• Dissatisfaction of high prices of conventional energy sources which leads to higher inflation
• Recurrent natural disasters around the world, such as heat waves in Europe or flooding in Pakistan
• Emergency to tackle climate change and natural disasters
The consensus between public consciousness, private markets, and political will has transformed climate technology from a niche social interest into a mainstream movement over the past three years.
Can Europe cope with its global rivals?
Europe is moving in the right direction, but needs quicker and more specific innovations. European start-ups and scale-ups developing climate tech solutions raised a record €11bn in venture capital in 2021, doubling the volume from 2020. European climate tech startups enterprise value was worth over $100bn in 2021. Prior to this year, EU cleantech suffered from a large scale-up funding gap, attracting only 7% of global growth equity funding, compared to 54% in North America and 5% in the UK alone. However, seed and series A stages of VC investments in Europe showed moderate performance, reaching 20% and 16% respectively. From 2018 to 2021, the share of EU clean technology venture capital of global one rose steadily from 6% to 14%, closer to its share of global GDP. Since 2017, climate tech is the fastest growing investment vertical in Europe, second only to fintech overall.
In 2021, two EU climate tech companies were in the list of the top ten global deals by investment amount. Northvolt, Swedish scale-up that produces lithium-ion batteries for electronic vehicles (EV) with clean energy, raised €2.3bn of venture capital from investors such as Volkswagen Group, Goldman Sachs, First Swedish National Pension Fund and others. Another big funding round from Blackrock, €700m, attracted German based start-up, Ionity. Ionity develops high-power charging network for electric vehicles across Europe.
The growth of climate tech in Europe can be explained well through the aforementioned factors. New policy has also been a catalyst such as when the European Commission published the REPowerEU Plan, dated 18 May 2022. It outlines the EU’s path to energy independence from Russian fossil fuels by 2027. Cleantech was named an EU strategic priority. EU set new targets of 45% of renewable energy and 75% of renewable hydrogen by 2030. The plan sounds great, but there is a major challenge. The EU needs to integrate innovation into its grid strategy, if it wants to reach energy security. For example, during 2021-2022, VC investments in grid innovation is 3 times higher in North America than in EU, at €2.2bn and €0.7bn respectively.
Furthermore, EU companies are still unable to raise significant money from IPOs or SPACs. In 2021, less than 7% of global cleantech IPO proceeds were netted by EU companies, compared to 57% by North America. Over the past 5 years, 70% of European climate tech funding comes from local investors, so there is a clear opportunity for international investors and a need for the EU to attract them.
What areas of climate tech are on the rise?
Climate technology includes eight challenge sectors such as Mobility & Transport, Energy, Farming and Food Production, Circular Economy, The Built Environment, Manufacturing, Carbon Accounting & Climate Risk and GHG Removal. The leading area by the highest amount of funding is Mobility and Transport. Of the ten startups that attracted the most investment in H1 2021, eight were in Mobility and Transport. It accounts for 16.2% of global emissions.
The subsegment to receive the most funding is GHG light and heavy vehicles. Lucid Motors, a Silicon Valley start-up that designs, develops and builds luxury EVs, raised US$6.9bn in the H1 2021. The faster-growing subsegment are batteries and fuel innovations, which grew at a rate of 1,722% from 2020 to 2021, peaking at US$5.9bn from just 18 deals. Northvolt, mentioned earlier, is representative of this subsegment.
According to the analysis in PwC's State of Climate Change 21 report, the top five technology segments (out of 15) have the potential to reduce over 80% of future emissions by 2050 with just 25% of recent climate tech investment. This shows, however, that VC flows disproportionally into “hype” areas. Hype areas are widely discussed, provide better exit opportunities and achieve the aim of tackling climate change. But are they really going to reduce global warming and improve our lives?
Hidden champion - Built Environment
Among the eight climate tech areas, only one vertical area—Built Environment— recorded the lowest growth rate, namely 20% growth between 2020 and 2021. During the same period, number of deals decreased, reaching 79 overall. The total value of VC investments was $1.4bn. This appears minor, given that real estate is the largest asset class with a global market of more than $50 trillion. Built environment represents 40% of global GHG emissions, 30% of global energy and40% of raw material consumptions. On top of that, according to the McKinsey study, the built world is the 2nd least digitised sector.
At the end of 2020, the European Union passed its “Renovation Wave” regulations—requiring a 60% reduction of carbon emissions in buildings over the next decade, along with an 18% eduction in heating and cooling demand. Building owners that do not comply will pay substantial fines. Bloomberg New Energy Finance estimates that in Europe alone, this will cost more than $3 trillion. Tenants are keen on more cost-efficient, climate-friendly and tech-savvy buildings. Regulatory requirements are getting stricter. Developers and landlords are willing to change for the sake of long-term profits. Start-ups and venture investors should be wise to become part of the change in the world's largest asset class.
Distributed energy, meaning electrical generation or storage at the local building level, is an effective solution to supplement or replace the existing ones. For instance, VoltStorage is a promising German start-up that develops and produces solar energy storage systems based on the eco-friendly Redox Flow technology to store surplus solar energy by day and use it during periods of low sunshine. Their batteries use iron salt technology instead of lithium and use an iron-based storage medium; iron is a more abundant material. During the period 2020-2022, it raised total of €35m from Bayern Kapital, Cummins and other as part of Series B and C stages.
The use of heating and cooling tech instead of conventional fossil-fuel based space and water heating can eliminate 10% of global emissions, and nearly 33% of all real estate emissions. Air-sourced heat pumps and ground-sourced geothermal heat pumps are two technologies that are expected to lead the charge in the industry. For instance, Dandelion Energy, the US start-up, offers geothermal heating and cooling for $150 monthly payment and $0 installation costs. Its geothermal system replaces your home’s existing air conditioning and heating equipment with a powerful heat pump and safe, underground pipes that move heat between the earth and home.
Big changes are coming but it is early to celebrate
We can see a great rise in investment in climate technology solutions as a result of consensus among political, commercial and social forces. Nevertheless, according to a 2021 International Energy report, $4tn should be invested annually into global clean energy by 2030 for the world to reach net zero by 2050. Hence, the world should continue being united to better our planet and support the growth of climate technology.
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