The presumption that climate technology (climate-tech) is just a hype is outdated. In some regions, investment in climate-tech has risen sharply and ranks well ahead of other sectors in terms of financing. For instance, in 2023, climate tech start-ups in Africa raised over a third of all funds, positioning the sector just behind fintech, a more mature sector (AP). In 2023, climate-tech ranks as the third most funded industry globally and has exhibited a lesser decline compared to the average drop of 38% (Dealroom).
Beyond venture capital and equity-based investment, climate tech companies are securing substantial investments from private equity and financing projects through debt, totaling $116 billion in 2023 (Dealroom).
Despite this growth, there remains a significant gap between actual investments and the funding needed for climate-tech initiatives.
Europe ranks among top regions for climate tech funding
Across Europe, countries are making significant strides in transitioning to a low-carbon economy and reducing reliance on fossil fuels. The European Union’s ambitious climate targets and stringent regulations have spurred investment in renewable energy, energy efficiency, and electric mobility. Countries like Germany, Sweden, UK, and France lead the way in climate-tech investments.
In 2023, start-ups based in the European Union secured a total of $18 billion in funding across various sectors (Sifted). Sweden, in particular, is notable for hosting innovative companies like low-carbon steelmaker H2 Green Steel and battery manufacturer NorthVolt, which collectively raised $3.6 billion across three significant deals (BNEF).
The United States and China are at the forefront of the climate-tech market
In 2023, the United States maintained its position as the large market for climate-tech globally, with start-ups in the region receiving a total of $14.6 billion in funding. China followed closely, witnessing significant activity in clean energy equipment and electric vehicle manufacturing. Despite a 23% decrease compared to 2022, climate-tech start-ups in China still secured $11.7 billion in funding in 2023 (BNEF).
Southeast Asia has huge potential in addressing climate change
According to BCG & Fairatmos report, despite covering less than 1% of the world’s total area, Southeast Asia has the capability to provide approximately 30% of the global carbon-offset supply by 2030. Despite a decline in green energy investments, with US$5.2 billion invested in 2022, a 7% decrease from the previous year, Southeast Asia finds itself at a critical juncture where Nature-based Solutions (NbS) offer a unique opportunity to contribute substantially to the global climate effort.
The region has also seen noticeable commitments from key players: Singapore has allocated US$17 billion for building climate change infrastructure; PTT Group in Thailand plans to allocate US$7 billion to green hydrogen projects, including the construction of a hydrogen plant; and CATL, a Chinese battery manufacturer and technology company, has committed US$6 billion for six electric vehicle battery projects in Indonesia over the next three years (BCG & Fairatmos).
Africa is garnering substantial investments in climate-tech
Climate tech start-ups in Africa have been witnessing a surge in funding from the private sector, amassing over $3.4 billion since 2019 (AP). According to Tech Cabal, in 2023, 1 in every $3 invested into start-ups in Africa went into climate tech. However, the continent still faces a considerable gap, requiring an estimated $277 billion annually to achieve its climate objectives by 2030 (AP).
Regarding the sector, there remains ample opportunity for exploration, investment, and growth. Energy, water, agriculture, and food sectors captured nearly 75% of all funding between 2019 and 2023, leaving other sectors notably attractive for investment, including carbon removal, logistics, transport, EV, land restoration, waste management, and more.
Sector focus: overfunded and underfunded areas
The sector’s focus is still less diverse than expected, highlighting ongoing challenges in achieving urgent and pivotal investment and innovation. The majority of funding was allocated to low-carbon energy and low-carbon transport companies. Low-carbon energy start-ups, which includes solar, wind and storage equipment makers, accounted for 50% of funding in 2023, marking the first year the sector was overfunded relative to its 38% contribution to emissions (BNEF).
On the flip side, low-carbon industry, buildings and agriculture are constantly underfunded relative to their contributions to emissions. In 2023, industrial decarbonization funding increased slightly with several low-carbon steel making companies raising 9-figure deals. Funding for these sectors needs to double to match emissions. Agriculture only received a quarter of the funding needed this past year, following two years of decreases. Low-carbon buildings received 4% of funding in 2023 despite making up 6% of emissions, up from 2% of funding in 2021. Undersubscription in these sectors can be attributed to the lack of economically competitive low-carbon solutions. (BNEF)
According to PwC data spanning from 2013 to 2023, climate technologies with big potential tend to attract little funding. This includes technologies with significant emissions reduction potential, such as food-waste management and green hydrogen, which receive relatively small shares of startup investment. Additionally, environmental aspects beyond carbon removal, such as biodiversity, air and water quality, soil preservation, and reforestation, often suffer from insufficient attention and investment.
Conclusion
Despite the decline in funding in 2023 compared to 2022, the future trajectory of climate tech remains promising. Governments worldwide are increasingly committed to sustainable investments, reflected in their public policies. Additionally, investors are showing a growing interest in climate-focused companies, indicating a positive outlook for the sector.
The global climate-tech sector is experiencing significant growth and investment, with regions like the United States, China, Europe, and Southeast Asia emerging as key players. Despite progress, there are still challenges to address, including funding disparities across different sectors and the need for greater investment diversification. However, with increasing awareness of environmental degradation and a growing commitment to sustainability, there is optimism for continued innovation and investment in climate technologies worldwide.
