Clockwork Perspectives

2022 Carbon Series Part 2: Analysis of Present-Day Carbon Market Funding

In the second of our two-part series on carbon markets, we examine the potential impact that private investing holds on climate mitigation (spoiler: it’s big!) We evaluate which industries within the cleantech space are presently receiving the most private investment, where more funding is required, and how impact investors can make optimal decisions.

As Summer 2022 has thus far demonstrated, heat waves, record-breaking temperatures, and volatile weather patterns have become commonplace the world over. Society's impacts on the climate are increasingly undeniable.

The Paris Climate Agreement solidified global targets

In 2015, negotiators from around the world convened to craft the Paris Climate Agreement, setting ambitious targets to slow the progression of global climate change. Ratified by 194 countries, the accord aimed to suppress the rise of the planet’s average temperature by less than 1.5° celsius by 2050. This goal will be impossible to achieve without reaching carbon-neutral emissions, meaning that the amount of greenhouse gas that is released into the atmosphere must be counterbalanced by the amount reduced.

Paris Agreement

Since the ratification of this accord, we have seen a steady uptick in investments in the cleantech sector. From the years 2016-2021, the vast majority of domestic private funding in this space went into electric vehicles, energy storage, and solar energy at $63B, $36B, and $26B respectively. These investments, however, won’t be nearly enough to reach the targets set in the Paris accord. In order to achieve carbon-neutral emissions, upwards of $2.1T in domestic private funding must be allocated towards low-carbon technologies by 2030.

Resources must go toward emerging technologies

While the aforementioned technologies are certainly important in slowing climate change, there remains a significant lack of funding for emerging technologies that are focused on removing, preserving, and storing carbon at large scales. The main groups of emerging technologies in need of funding are nuclear and hydrogen energy; fuel cells; smart grids; carbon offsets; climate analytics; biofuels; and carbon capture, storage, and management. The International Energy Agency has stated that more than a third of the greenhouse gas reductions must come from these emerging industries, however, they received only ~9% of private funding since 2016. By this logic, upwards of $685B must be funneled into these industries if we are to see a significant impact on climate change mitigation. Given the urgency with which action is needed, investments in these technologies should be viewed both as necessities to alleviate global climate change and opportunities for financial growth.

Investor count increases and investors become more specialized

Fortunately, the number of cleantech investors has increased year-over-year since 2016, and funds within this sector are becoming more specialized. Globally, 106 specialist climate funds are actively investing across 14 niche industries, indicating that cleantech is maturing as an investment category. Through specialization, funds can make more educated investment decisions, given a deeper understanding of their niches. Additionally, they can more easily develop relationships with their portfolio companies, creating transferable value-add by providing industry insights and access to strategic networks.

​​Alternatively, investors can elect to diversify their portfolios, deploying the same amount of capital across a wider range of opportunities within the cleantech sector. Oftentimes, diversification will take the form of more frequent, smaller-sized investments into a variety of technologies. Investors can opt to utilize a variety of different investment vehicles, deploying their capital across both mature and early-stage companies. This approach can spread risk across an investor’s portfolio and increase the likelihood of choosing a winner. In general, climate investing represents such a broad array of opportunities, that many private investors have empirically found the diversification route attractive, as deal volumes within the sector have increased while deal size has decreased since 2016.

Exhibit 3 VCs and PE firms participate in more deals but invest smaller sums

Despite their portfolio preferences, investors should perform thorough, data-centric due diligence to understand the interconnections between the technologies in which they are planning on investing. Above all, investors must consider and understand that many of these emerging technologies are capital-intensive by nature. For these technologies to become commercially viable, investments will require a longer-term investment horizon, more cycles of research and development, and support from policy and regulatory standpoints. Investors must be prepared for turbulence, as these dynamics place constraints and challenges on their operational teams. Challenges aside, the investment community is coming to recognize that playing a vital role in solving the climate crisis can also be financially advantageous.



Bridget Whitlow

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